Presenting a live 110 ‐ minute teleconference with interactive Q&A Single ‐ Sales Apportionment: Crafting a Multi ‐ State Strategy Crafting a Multi State Strategy Meeting Tax Compliance and Planning Demands Amid Significant Changes in Sales Weighting THURSDAY, OCTOBER 6, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Kirk Lyda Partner Jones Day Dallas Texas Kirk Lyda, Partner, Jones Day , Dallas, Texas Mark Nachbar, Principal, Ryan , Downers Grove, Ill. Sarah McGahan, Senior Manager, Washington National Tax, KPMG , Los Angeles 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 at1-800-926-7926 ext. 10 .
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Si Single ‐ Sales Apportionment: Crafting a l S l A ti t C fti Multi ‐ State Strategy Seminar Oct. 6, 2011 Kirk Lyda, Jones Day Sarah McGahan, KPMG klyda@jonesday.com smcgahan@kpmg.com Mark Nachbar, Ryan mark.nachbar@ryanco.com
Today’s Program Roots Of The Single-Sales Apportionment Trend Slide 7 – Slide 21 [Kirk Lyda] Concurrent State Trends And Issues With An Impact Slide 22 – Slide 31 [S arah McGahan] Resulting Planning Options To Consider Slide 32 – Slide 39 [Mark Nachbar]
Kirk Lyda, Jones Day ROOTS OF THE SINGLE SALES ROOTS OF THE SINGLE ‐ SALES APPORTIONMENT TREND
T Trend: How Did We Get Here? d H Did W G H ? 1950s and 1960s – State efforts to export tax burden • ― Income tax nexus ― Single-sales apportionment Si l l ti t Congressional/business reaction (1960s and forward) • ― Public Law 86-272 Public Law 86 272 ― Use of other factors History repeats itself (1990s and forward) History repeats itself (1990s and forward) • ― Aggressive income tax nexus ― Single-sales apportionment 8
Northwestern States (1959): Income Tax Nexus 9
Reaction: P.L. 86 ‐ 272 (1959) 10
GM v. DC (1965): Questioning Single ‐ Sales 11
GM v. DC (1965): Questioning Single ‐ Sales (Cont.) 12
Willis Report (1964): Questioning Single ‐ Sales 13
UDITPA Th UDITPA: Three ‐ Factor F 14
Moorman v. Bair (1974): Single Factor Upheld 15
Moorman v. Bair (1974): Single Factor Upheld (Cont.) 16
Si Single ‐ Sales Factor: Implications l S l F I li i An increased weight in the sales factor rewards companies • exporting products from the state. … and taxes more heavily those that produce products and taxes more heavily those that produce products • elsewhere and sell into the state. Source: Federation of Tax Administrators, Revenue Estimating Conference (2004) Conference (2004) 17
Single ‐ Sales Factor: Trend Si l S l F T d 1980s: Roughly 10 states shifted to double-weighted sales • factors. 1990s: Roughly 25 states had shifted to double weighted sales 1990s: Roughly 25 states had shifted to double-weighted sales • factors. 1990s: Roughly five states had shifted to single-sales factors. • 2000 forward: 18-plus states increase weights of sales factors. • 2000 forward: Seven-plus states shift to single-sales factors. • Source: Federation of Tax Administrators, Revenue Estimating Conference (2004) ( ) 18
National Trend: Single ‐ Sales Factor Epidemic 19
National Trend: Single ‐ Sales Factor Epidemic (Cont.) 20
Single ‐ Sales Factor: Recent Converts l l Florida HB 143 (effective with tax years after 2012) • Elective if meet capital contribution requirements ($250M) to qualify • New Jersey SB 2753 • ― Phased in for several years Phased in for several years ― Single-sales factor for privilege periods after Jan. 1, 2014 California (2009) • ― Elective single sales factor ― “Reconsideration” failed Arizona HB 2001 • ― Phased in for several years ― Single-sales factor by 2017 O h Others? ? • 21
Sarah McGahan, KPMG CONCURRENT STATE TRENDS CONCURRENT STATE TRENDS AND ISSUES WITH AN IMPACT
C Cost Of Performance Test Of P f T Traditionally. sales of other than tangible personal property are sourced using an income producing activity (IPA) test. Receipts attributed to state where greater proportion of ece pts att buted to state w e e g eate p opo t o o • IPA occurred, based on cost of performance (COP) Test applied to each item of income What is an item of income? A transaction? An entire • business? Cost of performance Cost of performance Direct costs in accordance with GAAP • What are direct costs? • 23
R Recent Cases C A T&T Corp. v. Dep’t of Revenue (Mass. App. Tax Bd. June 8, 2011) p p f ( pp , ) • The issue before the Board was whether the income-producing activity test applied broadly to the taxpayer’s overall service of providing telecommunications services to Massachusetts customers, or whether it should be applied narrowly to each transaction (i.e., call or data transmission). The Board, rejecting the Revenue Department’s use of a • transactional approach, held that the test must be applied to the t ti l h h ld th t th t t t b li d t th taxpayer’s overall operations. The ATB also held that access fees paid to local exchange carriers • (LECs) were not direct costs included in determining the taxpayer’s (LEC ) t di t t i l d d i d t i i th t ’ costs of performance. Rather, the access fees were for payment of activities • performed on the taxpayer’s behalf by the LECs and were f d th t ’ b h lf b th LEC d therefore excluded. 24
R Recent Cases (Cont.) C (C ) A T&T v. Dep’t of Revenue (Or. Tax Ct. June 28, 2011) • The issue before the court was whether the cost of performance analysis applied to the taxpayer’s overall service of providing interstate and international calls or to each individual call to and from Oregon. The court held that the test narrowly applied on a transactional basis • (i.e., to each call to and from Oregon). • Next, the court held that only direct costs incurred regarding any given phone call should be considered in determining costs of performance. call should be considered in determining costs of performance As such, no general and administrative costs were counted. • • Finally, the court held that costs paid to local exchange carriers (LECs) were “direct costs” counted in determining cost of performance “direct costs” counted in determining cost of performance. An Oregon rule in effect at the time excluded costs performed by • independent contractors “on behalf of” a taxpayer. In the court’s view there was a difference between activities performed In the court s view, there was a difference between activities performed • • “on behalf of,” and performed “for,” a taxpayer. 25
Move To Market ‐ Based Sourcing M T M k B d S i Alabama H.B. 434 (signed June 9, 2011) • Effective for tax years taxable years beginning on or after Dec. 31, 2010, H.B. 434 makes the following changes: Increases the weight of the sales factor to 50% • Replaces the income-producing activity/cost of performance • test with market-based rules for service and intangible receipts test with market based rules for service and intangible receipts Adopts a so-called “throwout” rule • If the taxpayer is not taxable in a state to which receipts • are assigned under the market-based sourcing provisions, or i d d h k b d i i i if the state of assignment cannot be determined or reasonably approximated, then the receipts are excluded entirely from the denominator of the sales factor entirely from the denominator of the sales factor. 26
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