Workshop Q Tax Advice for Companies Doing Business in Pennsylvania - - PDF document

28th Annual

Tuesday & Wednesday, January 29‐30, 2019

Hya Regency Columbus, Columbus, Ohio

Workshop Q

Tax Advice for Companies Doing Business in Pennsylvania & New Jersey

Tuesday, January 29, 2019 3 p.m. to 4 p.m.

Biographical Information Holly B. Hykes, Manager, State Income Tax The Wendy’s Company One Dave Thomas Blvd, Dublin, OH 43017 614-764-8438 Holly.Hykes@wendys.com Holly started her career with PricewaterhouseCoopers, LLP in Columbus, Ohio in 2007 working on a wide range of clients, both in audit and tax. She joined The Wendy’s Company in Dublin, Ohio in 2012. Her primary responsibilities include managing state and local income and franchise tax compliance and audits. Holly is a graduate of The University of Kentucky and has been licensed as a Certified Public Accountant in the state of Ohio since 2007. Timothy D. Adams, Shareholder State and Local Tax Schneider Downs & Co., Inc. One PPG Place, Suite 1700, Pittsburgh, PA 15222 (412) 697-5250 Fax (412) 261-4876 tadams@schneiderdowns.com Tim has more than 20 years of experience in public accounting, including more than 10 years with a national accounting firm. His focus is in state and local tax matters, including multi-state income and franchise tax, sales and use tax, gross receipts tax, incentives/credits and unclaimed property. Tim has successfully represented or assisted clients in state and local tax matters in nearly every state across the country, including audit representation and appeals, refund reviews, and multi-state consulting and planning that have yielded significant value to his clients.  Member- PICPA State Tax Committee  The Ohio Society of CPAs - Ohio Tax Reform Task Force  Member – American and Pennsylvania Institutes of Certified Public Accountants  Board Member – National Aviary  Past Chair – Western Pennsylvania Tax Conference Committee  Executive Committee Member – PICPA Pittsburgh Chapter  Past President – Economic Club of Pittsburgh Tim is a graduate of Grove City College with a B.S. in Accounting.

Biographical Information Paul Melniczak, Partner, Reed Smith LLP 1717 Arch Street, Suite 3100, Philadelphia, PA 19103 215 851 8853 pmelniczak@reedsmith.com Paul joined Reed Smith in 2010 and is a partner in the State Tax Group. Paul assists clients with income, sales, and gross receipts tax issues around the country, including Pennsylvania, Ohio, and New Jersey. Paul is a leader in Reed Smith’s Ohio Tax Practice, which represents numerous taxpayers on a wide-range of Ohio CAT, FIT, and sales tax issues at audit and through the Board of Tax Appeals and Ohio Supreme Court. Paul is a member of the Ohio Bar and is active in the Ohio Chamber of Commerce Tax Committee, as well as the Ohio Tax Conference planning committee. Paul earned his undergraduate degree from Liberty University and his law school degree from Duke University School of Law. He is admitted to practice law in Pennsylvania and Ohio. Prior to joining Reed Smith, Paul worked at another international law firm where he was a member of the firm’s federal tax group. Ashley Rivera, Associate, Reed Smith LLP 1717 Arch Street, Suite 3100, Philadelphia, PA 19103 215 851 8867 arivera@reedsmith.com Ashley joined Reed Smith’s State Tax Group in 2016. She represents multinational companies in matters of state and local tax controversy. Her practice focuses primarily on sales and use taxes, as well as gross receipts taxes, in Pennsylvania and her home state of Washington. Prior to joining Reed Smith, Ashley worked on state tax matters at a Big 4 accounting firm. There, she focused on multistate credit and incentive

• pportunities from the site selection process to the post-award compliance period.

Ashley earned her undergraduate degree from the University of Washington and her law degree and LL.M. from Temple University Beasley School of Law. Ashley has also been a volunteer for the IRS’s Volunteer Income Tax Assistance program for the last 10 years and assists in training other volunteers at Temple Law each year.

Ohio Tax Conference – January 29, 2019

Regional Update: Tax Advice for Companies Doing Business in Pennsylvania and New Jersey

Timothy D. Adams, Schneider Downs & Co. Holly Hykes, The Wendy’s Company Paul E. Melniczak, Reed Smith Ashley R. Rivera, Reed Smith

Polling Question

• Is your primary area of focus income or sales/use tax?

A. Income tax B. Sales/use tax C. That’s what this presentation is about? 

RESULTS

Agenda

• Income Tax
• Federal tax reform
• Pennsylvania overview
• New Jersey tax reform
• New Jersey litigation
• Sales and Use Tax
• Wayfair
• Pennsylvania
• New Jersey

Polling Question

• Did the Tax Cuts and Jobs Act help your business?

A. Yes, very much B. Yes, a bit C. Neutral D. Not at all, it was a detriment

RESULTS

Federal Tax Reform ‐ New Jersey

• Highlights
• Legislation permits localities to establish charitable funds that will function

as workarounds for SALT cap

• Clarifications set forth for state consequences resulting from:
• Federal deemed repatriation rules and taxpayer reporting requirements of IRC
• Sec. 965
• Repeal of federal domestic production activities deduction (DPAD)

Federal Tax Reform ‐ Pennsylvania

• Highlights
• Clarifications set forth for state consequences resulting from:
• Federal deemed repatriation rules and taxpayer reporting requirements of IRC
• Sec. 965
• Disallowance of depreciation deduction of qualified property under IRC Sec.

168(k)

• Legislation permits depreciation under IRC Secs. 167 and 168 as amended

(except for 168(k))

Pennsylvania NOL Cap

• Nextel
• Court severs flat cap, leaves percentage cap
• Results in no refund for Nextel in 2007
• But, still not uniform ‐ small taxpayers got benefit of flat cap, statute closed
• Open years? Department will not assess.
• Remaining question: Does lack of remedy violate due process (McKesson)?
• Current litigation
• Dates to remember
• ~February 11: Appeal BOA decisions
• April 15: File refund claim

Polling Question

• Does your company have NOLs in Pennsylvania?

A. Yes, and we have a pending NOL cap appeal B. Yes, but we haven’t filed an appeal C. No D. N/A, I’m not an industry professional

RESULTS

Pennsylvania Sourcing

• Pre‐2014: COP for “all other receipts”
• But, inconsistent application for in‐state vs. out‐of‐state taxpayers
• 2014‐forward: Market for services, still COP for all other receipts
• Service or intangible?
• Hedging: Exclude from factor?

New Jersey Legislative Developments

• Amnesty
• It’s over!
• Additional 5% penalty (i.e., a non‐participation penalty) will be

added to any tax liabilities not satisfied during the amnesty period

New Jersey Legislative Developments

• Dividends Received Deduction (“DRD”)
• For tax years beginning after 12/31/16, DRD is reduced from 100%

to 95% for 80%‐owned subsidiaries

• Relative to deemed dividends included in entire net income

resulting from the new DRD provisions, taxpayers should use the lower of their three‐year average apportionment factor (2015‐ 2017) or 3.5%

New Jersey Legislative Developments

• Corporation Business Taxes Surtax
• For tax years 2018 and 2019, a 2.5% surtax will be imposed on CBT

taxpayers with entire net income greater than $1 million; and

• For tax years 2020 and 2021, a 1.5% surtax will be imposed.

New Jersey Legislative Developments

• Mandatory Unitary Combined Reporting
• Effective for tax years beginning on or after 1/1/19
• Combined group is defined as a group of companies with 50% common
• wnership engaged in a unitary business
• A water’s‐edge group election will be the default position unless a world‐

wide unitary or federal affiliated group election is made on the original return

New Jersey Legislative Developments

• Market‐Based Sourcing
• Beginning 1/1/19, sales of services will be sourced to New Jersey if the

benefit of the service is received in New Jersey;

• If the benefit is received inside and outside New Jersey, gross receipts will

be sourced based on reasonable approximation of benefit received in as compared to outside New Jersey.

New Jersey Legislative Developments

• Market‐Based Sourcing
• If benefit cannot be determined:
• Receipts are sourced to the billing address of an individual customer; or
• For a business customer, receipts are sourced to the location where the

customer ordered the services, if known, or the customer’s billing address.

• Existing sourcing rules relative to intangibles will continue to apply

New Jersey CBT Case Update

• Sourcing: Market or COP?
• Pre‐2019: “performed within state”
• 2019‐forward: Market sourcing
• Current regulations: 25:50:25 for certain services
• Xpedite: 25:50:25 broadly applied
• Bank of America: Benefit received
• UPS: Location of equipment
• Addback
• Unreasonable Exception: look to totality of circumstances

(Beneficial/Morgan Stanley)

• Payee pays tax on income stream
• Economic substance/credible non‐tax reasons
• Duplicative taxation
• Constitutionality
• BMC Software: Arm’s length/similarity to third‐party agreements?
• Kraft: Pushdown of debt ‐ look to ultimate rate and whether guarantor of

third‐party debt

New Jersey CBT Case Update

• Consolidated rules apply to separate company return
• MCI: Statute requires “separate basis” return, yet Court applies

consolidated return rules in requiring reduction of tax attributes resulting from Chapter 11 CODI

• Where else might consolidated return rules apply?
• Defer intercompany gain
• Increase basis in stock of subsidiary after disposition
• 163(j) business interest limitation
• Foreign‐source income not taxable
• Line 28 is starting point in NJ
• Infosys: No addback of foreign source income excluded under a treaty
• Tax benefit rule
• Toyota: Depreciation in prior loss years did not produce a tax benefit;

phantom income on ultimate sale

• Result: Increase basis by amount of depreciation that didn’t produce tax benefit

Sales Tax

Polling Question

• How prepared is your business for the impact of Wayfair?

A. Very B. Somewhat C. Not at all D. N/A, Wayfair does not impact my business

RESULTS

Wayfair

• States’ reactions:

1. Codified physical presence (including cookie nexus) 2. Legislation adopting economic nexus 3. Rolling conformity/long arm statutes

• Pennsylvania
• Sales and Use Tax Bulletin 2019‐01
• Effective 7/1/19
• Generally follows SD
• PA: Substantial economic nexus satisfies the TRC’s definition of maintaining a place of

business

• New Jersey
• Remote Sellers: Economic nexus effective 11/1/18
• $100,000 of NJ sales or 200 NJ transactions (same as SD)
• Marketplace facilitator required to collect

Pennsylvania Sales Tax Issues

• Evolving definition of tangible personal property
• Legislative expansion (Act 84 of 2016)
• Effective 8/1/16, TPP includes electronically delivered items such as digital downloads

(apps, games, books), video streaming, and canned software, “including maintenance, updates and support”

• Aggressive DOR interpretation (PA Letter Ruling SUT‐17‐001)
• Ruling concluded standalone charges for help desk and call center support services were

taxable software “support” under Act 84

• Legislature reins in DOR (Act 43 of 2017)
• “Separately invoiced help desk or call center support” excluded from definition of TPP
• What’s next: How do you define “separately invoiced”? Do your billing requirements

need to change?

Pennsylvania Sales Tax Issues

• Software highlights
• Intellectual property as tangible personal property?
• Downs Racing: Taxpayer purchased video poker machines as well as the

software and IP needed to operate the machines, all from the same vendor.

• Commonwealth Court held that the video poker machines were useless without

the IP and therefore the IP was TPP.

• Pennsylvania Supreme Court reversed, finding that the IP payments “did not

involve, nor were they ancillary to” the purchase of TPP.

• Can taxpayers separately negotiate software source code and IP costs to

reduce tax?

• Sourcing
• Remotely‐accessed canned software is taxable in PA when the end‐user is

located in the state. To determine user location, the default rule is ship to/bill to address on invoice.

• Burden of showing a different allocation is on taxpayer.
• Can the servers be sourced based on end‐user location too?

Polling Question

• How does your company determine where to pay tax on

purchases of software used in multiple states?

A. Based on the location of the software users B. Based on the invoice’s bill to/ship to C. We just pay whatever the vendor says D. N/A, I’m not involved in SUT decisions

RESULTS

Pennsylvania Sales Tax Issues

• Manufacturing
• What are your contractors doing?
• Dozens of claims are filed by contractors at the Board of Finance and Revenue seeking

refunds.

• Check your services contracts—confirm that contractors are passing along any refunds
• Confirm that your contractor isn’t creating “bad precedent” describing your operations
• When does the manufacturing process begin?
• Polyglass USA: Heated storage silos for incoming hot asphalt not taxable, but one Board

member dissented.

Equipment and process testing Raw material

• ffloading

Primary packaging materials loaded On‐site warehousing To distribution center Raw material storage Raw materials injected into process Batch processing tanks Inject catalysts or additives Batch complete, start intermediate transport Case former Case packer and sealer Palletizer PENNSYLVANIA (& NJ) OHIO Product closures attached (lids, etc.)

Pennsylvania Sales Tax Issues

• Other issues
• Help supply: Full cost is taxable unless you can show how much of a

markup your vendor charged.

• “Special” Resale: Purchasing multiple items of TPP for shipment to

Pennsylvania for incorporation are not taxable to the extent they are then sent out of state.

• Administrative changes
• Remand‐for‐audit process introduced (SUT Bulletin 2017‐01)
• At its discretion, the Board of Appeals is now issuing decisions that remand refund

claims for a field audit. At least one such order has been appealed to Commonwealth Court.

• Reduced administrative appeal deadlines
• 60‐day deadline applies despite DOR notices that say 90 days

New Jersey Sales Tax Issues

• Software highlights
• Electronically delivered software used exclusively in the conduct of

purchaser’s business not taxable

• Consider: Invoice to a New Jersey location, request that invoice specify

electronic delivery, accrue use tax in other states as applicable

• Taxability of software‐related services:

New Jersey Sales Tax Issues

• Other issues
• Sourcing
• Spirit Halloween Superstores: Taxpayer purchased printed materials for use in its retail

stores nationwide. The invoices listed taxpayer’s New Jersey headquarters as “ship to” location, but a common carrier picked up the materials from the vendor in New Jersey for delivery to taxpayer’s stores.

• Division argues tax became due when the materials were picked up in New Jersey.
• The Tax Court has denied motions for summary judgment from both parties. The case

remains pending.

• Audit methodologies: What is extraordinary?
• Statewide Commercial Cleaning: Taxpayer purchased restoration services for a New Jersey

beach house that was damaged by tenants. After the purchase was assessed at audit, the taxpayer argued that it should have been excluded from the block sample as extraordinary.

• In ruling against the Division’s motion for summary judgment, the Tax Court found that

while New Jersey does not have guidance on the meaning of “extraordinary,” it is possible that the purchase should have been excluded if “guideposts” similar to those used by California were applied.

• Guidance forthcoming? The case was argued in March 2018.

Questions?

Timothy D. Adams (614) 586‐7023 tadams@schneiderdowns.com Holly Hykes (614) 764‐8438 holly.hykes@wendys.com Paul E. Melniczak (215) 851‐8853 pmelniczak@reedsmith.com Ashley R. Rivera (215) 851‐8867 arivera@reedsmith.com