Presenting a live 110-minute teleconference with interactive Q&A Mandatory Combined Reporting for State Income Taxes Improving Tax Compliance to Manage Conflicting State Rules WEDNESDAY, MAY 22, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Robert Rosato, Manager of State Income-Franchise Tax, Ryan , Pittsburgh Jeffrey Reed, Attorney, Mayer Brown , New York Mike Shaikh, Reed Smith , Los Angeles Robert Porcelli, Partner, State and Local Tax Group, PricewaterhouseCoopers , Tyson’s Corner, Va. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Mandatory Combined Reporting for State Income Taxes Seminar May 22, 2013 Robert Rosato, Ryan Mike Shaikh, Reed Smith bob.rosato@ryan.com mshaikh@reedsmith.com Jeffrey Reed, Mayer Brown Robert Porcelli, PricewaterhouseCoopers jreed@mayerbrown.com robert.m.porcelli@us.pwc.com
Today’s Program Overview Of Background Concepts And Trends Slide 8 – Slide 25 [Robert Rosato] Slide 26 – Slide 45 Mandatory Unitary Combined Reporting States [Mike Shaikh, Jeffrey Reed and Robert Porcelli] Discretionary Combined Reporting States Slide 46 – Slide 52 [Jeffrey Reed and Mike Shaikh] Next States Likely To Act Slide 53 – Slide 65 [Robert Porcelli]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7
Robert Rosato, Ryan OVERVIEW OF BACKGROUND CONCEPTS AND TRENDS
State Filing Methodologies Separate company reporting – Individual entity basis, with income of affiliates excluded Consolidated reporting – Common ownership, usually 80% or more – Some states require that a federal consolidated return be filed as a prerequisite to filing a state consolidated return. – Single return filed for the affiliated group Combined reporting – Common ownership, usually 50% or more – Usually same trade or business Evidenced by functional integration, centralized management and economies of scale 9
Separate Company Reporting Filing separately – The parent company and its affiliates are treated separately when determining taxable income. – Nexus is analyzed with regard to each company's contacts with the state. LLCs are treated as taxable entities by some states. – Separate company reporting is not common among the states. Some remaining separate reporting states have proposals to shift away from this methodology. 10
Consolidated Vs. Combined Reporting Consolidated reporting – Similar basis of composition to federal filing group – Generally, the affiliated group is treated as a single taxpayer. – Focuses on ownership relationship between entities Usually, 80% common ownership requirement – Business income often determined by post-apportionment Combined reporting – Affiliates that are unitary are included in the group. Usually, 50% common ownership requirement 11
Combined Reporting Types of combined filing – Mandatory combined reporting Roughly 20 jurisdictions require a unitary business to file a combined report. Unitary members are forced by statute to file a combined report. – Elective/discretionary combined reporting Generally, these states also allow separate company returns. State requires or permits taxpayer to elect to file a combined report, if certain conditions are met. Combined report is used to accurately reflect group’s income earned in the state. – Nexus combination reporting All members with nexus in the state are included in return. States vary regarding pre- and post-apportionment of income. 12
Combined Reporting (Cont.) Pre-apportionment – Members of the group combine income and losses before apportioning income. – The combined business income of the entire group is multiplied using the entire group’s aggregate apportionment percentage. Post-apportionment – The income and losses of each member of the group are apportioned using each member’s individual apportionment percentage. – Each entity’s apportioned income is aggregated afterward to determine the taxable income of the group. 13
Combined Reporting (Cont.) Unitary business – States are limited by the U.S. Constitution when determining which entities are unitary. – Fact-dependent analysis, often evidenced by factors including centralized management, functional integration and economies of Scale – Determining which entities are unitary MTC regulations Three unities test Contribution and dependency test Flow of value test Factors of profitability test 14
Who Is The Taxpayer? Questions to consider: – Who is ultimately included in the combined group? – Whose apportionment factors are included in the combined group? – Who can utilize the net operating losses generated within the combined group? – Who can utilize credits generated within the combined group? 15
Who Is The Taxpayer? (Cont.) Worldwide reporting – Combined return includes income from all foreign and domestic entities in the unitary group. – Upheld by the U.S. Supreme Court in Container Corporation of America v. Franchise Tax Board , 103 S. Ct. 2933 (1983) Water’s edge election – Taxpayer may exclude foreign members of the combined group that are not organized in the U.S. 16
Who Is The Taxpayer? (Cont.) Joyce v. Finnigan – Appeal of Joyce, Inc., No. 66 SBE 069 (Cal. SBE Nov. 11, 1966) A shoe company was unitary with a subsidiary in California but had no nexus in California. A unitary member without nexus to the taxing jurisdiction must remove its sales from the sales numerator, for apportionment purposes. A unitary member with nexus must throw back sales to jurisdictions where the member has no nexus. – Appeal of Finnigan Corp., Cal. St. Bd. of Equal., August 25, 1988 Two taxpayers with nexus to California had sales outside California to a taxing jurisdiction where only one entity had nexus, All members of the unitary group include in-state sales in the apportionment numerator of a Finnigan state, Nexus based on the entire group: Sales by a member without individual nexus are not thrown back, because nexus was established by the entire group. 17
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