The 5th Annual NMTRI Tax Policy Conference May 1-2, 2008 Joe Huddeston, Executive Director Multistate Tax Commission, Washington, DC
Agenda/Contents • MTC Updates • Federal Legislation on State Tax Issues
MTC Update
Multistate Tax Commission: What’s New • New MTC Chair: Omar Davis (Minnesota) • MTC membership update: Georgia, Maryland, and West Virginia become sovereignty members for 2007-08 • Joint audit program: Georgia and Illinois join, and two additional MTC audit staff positions created. Proposed assessments for FY07 total over $62 million. • National nexus program: contracts entered with 81 taxpayers; over $11.9 million collected in FY07. Tom Shimkin as new national nexus program director. • Multistate Voluntary Compliance Program (VCP) for abusive transactions ended October 1, collected $21.8 million for 23 participating states • New “M O U” with the IRS
MTC Uniformity Projects: Adopted Uniformity projects adopted as recommendations to the states in 2006: • Combined Reporting Model Statute - Basis for West Virginia’s 2007 enactment of unitary combined reporting with expanded water’s edge • Related Party Expense Addback Model Statute • Reportable Transactions Disclosure and Voluntary Compliance Program (VCP) Model Statutes • State Filing Position Model Statute; i.e., “Compilation of State Tax Return Data” - Filing method in development
MTC Uniformity Projects: Adopted Uniformity projects adopted as recommendations to the states in 2007: • Third-party Cost of Performance (COP) - Removes language from the definition of “income producing activity” (“IPA”) that requires that the transaction or activity be “directly” engaged in by the taxpayer - IPA includes transactions and activities performed “on behalf of” the taxpayer, such as those conducted on its behalf by an independent contractor - Amends the definition of “cost of performance” to include a taxpayer’s payments to an agent or independent contractor for the performance of “personal services” and “utilization of tangible and intangible property” that give rise to the particular item of income
MTC Uniformity Projects: Adopted • Third-party Cost of Performance (COP) (continued) - Also provides a “hierarchy of rules” with respect to attribution of IPA to a state • Where the taxpayer cannot reasonably determine where the IPA is actually performed, use the location of performance designated in the contract between the taxpayer and the agent/independent contractor • The next default is the location of performance indicated in the contract between the taxpayer and its customer • The final default is the domicile of the taxpayer’s customer - “Throw-out” rule: the IPA of the agent/independent contractor is disregarded if the IPA is in a state in which the taxpayer “is not taxable”
MTC Uniformity Projects: Proposed • Proposed special industry apportionment regulation for “telecommunications and ancillary service providers” - Imports definitions used by the Streamlined Sales and Use Tax Agreement - Generally, attempts to move to a “market” sourcing approach in place of cost of performance - Sticking points include how to apply “market” theory to “wholesale” telecom sales
MTC Uniformity Projects: Proposed • Proposed captive REIT DPD disallowance statute - Requires addback of the dividends paid deduction otherwise allowed by federal law in computing net income of a “captive” real estate investment trust (REIT) - Captive REIT determination based on 50% ownership, where the shares or beneficial interests of the REIT are not regularly traded on an established securities market - Certain exceptions, including ownership by another (non-captive) REIT
MTC and NCCUSL: Potential Overhaul of UDITPA • Although the MTC is pursuing special industry apportionment regulations, it requested that NCCUSL (which drafted UDITPA) review Sec. 17 in its entirety • In response, NCCUSL has established a drafting committee • However, NCCUSL’s review could go much broader, to a complete UDITPA overhaul • The MTC will continue to develop proposed changes to Sec. 17, but will undertake a broader review in conjunction with NCCUSL
Potential MTC Projects for Future Development • Special sourcing/nexus rules for IHCs • Model statute for regulated investment companies (RICs) • Revisions to financial institutions apportionment rules • Amendment of UDITPA Sec. 18 to “expand permissible application of equitable apportionment formulas” • Simplifying telecommunications transaction taxes • Reporting for Federal RARs
MTC Uniformity Projects: Sales Tax • Sales tax projects - Largely deferred in light of ongoing work of Streamlined Sales Tax (e.g., sourcing of services) - Hotel intermediaries - Model statistical sampling statute and regulation
Federal Legislation on State Tax Issues
The 2009 Budget Revenue The 2009 Budget Individual Income Tax $1,260 Social Security $949.40 Corporate Income Tax $339.20 Excise Tax $68.90 $3,000 Customs Duties $29.10 $2,500 Estate and Gift Taxes $26.30 Other $47.90 $2,000 Dollars in Billions $1,500 $1,000 $500 $0 Revenue $47.90 Other $26.30 Estate and Gift Taxes $29.10 Customs Duties $68.90 Excise Tax Corporate Income Tax $339.20 $949.40 Social Security Individual Income Tax $1,260
The 2009 Budget Expenditures Nat'l Defense $670.70 Social $3,000.00 Security $644.00 Medicare $408.00 Other Mandatory $360.00 Interest on $2,500.00 Debt $260.00 Medicare and SCHIP $224.00 Transport ation $81.50 $2,000.00 Education and Training $81.50 Admin. Of $1,500.00 Justice $48.40 Veteran's Benefit $44.40 Foreign Affairs $40.50 Nat'l $1,000.00 Resource s $35.20 Science and Tech. $29.00 Comm. And Reg. $500.00 Devel. $23.50 Gen. Gov $18.70 Agric. $6.10 Energy $4.70 $0.00 Expenditures Energy $4.70 $6.10 Agric. Gen. Gov $18.70 $23.50 Comm. And Reg. Devel. Science and Tech. $29.00 $35.20 Nat'l Resources $40.50 Foreign Affairs Veteran's Benefit $44.40 $48.40 Admin. Of Justice Education and Training $81.50 $81.50 Transportation Medicare and SCHIP $224.00 $260.00 Interest on Debt $360.00 Other Mandatory Medicare $408.00 $644.00 Social Security Nat'l Defense $670.70
Congressional Landscape: 110 th Congress (2007-08) • Democratic majorities in both House and Senate for first time since 1994 elections • Key committee assignments made - Senate Finance: Sen. Baucus (D-MT) is Chairman - Senate Commerce: Sen. Inouye (D-HI) is Chairman - House Judiciary: Rep. Conyers (D-MI) is Chairman • Commercial and Administrative Law Subcommittee: Rep. Sanchez (D-CA) is Chairwoman • New leadership, committee members create need to rebuild support • Loss of committee chairmanships for key proponents / opponents on certain issues • Presidential election year in 2008 produces short time window
Internet Tax Freedom / Nondiscrimination Act • Multiple bills (H.R. 743, H.R. 1077, S. 156, S. 2128) introduced to make the “Internet Tax Freedom Act” (“ITFA”) permanent (bars state and local Internet access taxes and multiple and discriminatory taxes on e- commerce) • Ultimately, compromise legislation (H.R. 3678) was passed by Congress and signed by President Bush on October 31 – one day before the November 1, 2007 scheduled expiration date of ITFA - Seven-year extension, until November 1, 2014 - “Grandfathered” states retain right to tax Internet access - Addresses taxation by some states of telecommunications used to provide Internet access - Amendments to “Internet access” definition - Clarifies which taxes are covered by ITFA
Nexus: Business Activity Tax (“BAT”) • 109th Congress -- H.R. 1956 passed by House Judiciary Committee on 6/28/06, but a House vote scheduled for 7/25/06 was cancelled • 110th Congress - S. 1726 (referred to Finance Committee, 6/28/07) - H.R. 5267 (referred to Judiciary Committee, 2/7/08) - Deletes several of the safe harbors found in the prior legislation, while retaining the core principles of “updating” P.L. 86-272 and “codifying” a physical presence nexus standard
Nexus: Business Activity Tax (“BAT”) • “Update” of P.L. 86-272 - Would extend P.L. 86-272 protections: • To all BAT, not just net income taxes • To all “sales” and “transactions,” not just to sales of TPP • To specified “business activities,” (such as business activities directly related to the taxpayer’s potential or actual purchase of goods or services within the state) • BAT nexus standard codified - “Physical presence,” with a 14-day de minimis threshold (was 21 days under prior legislation) - “Limited or transient business activity” does not count toward the physical presence threshold
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