28th Annual Tuesday & Wednesday, January 29‐30, 2019 Hya� Regency Columbus, Columbus, Ohio Workshop J Major Emerging State & Local Tax Issues Arising from Federal Tax Reform Tuesday, January 29, 2019 3:00 p.m. to 4:00 p.m.
Biographical Information Diann L. Smith, Counsel, McDermott Will & Emery 500 N. Capitol St. NW Washington, DC 20001 dlsmith@mwe.com 202.756.8241 Fax 202.756.8087 Diann Smith is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office. Diann focuses her practice on state and local taxation with an emphasis on tax challenges relating to compliance, controversy, planning and legislative activity. Diann has experience representing clients in nexus, tax base, business and non-business income classification, apportionment and FIN 48 compliance issues. She has also counseled clients on multi-state unclaimed property compliance and voluntary disclosure opportunities. Diann has represented clients from a broad range of industries, including retail, insurance and communications services. Diann has significant experience representing clients before the Multistate Tax Commission (MTC). Prior to joining McDermott, Diann was counsel at another international law firm, where she also focused on state and local taxation. She also previously served as general counsel for the Council on State Taxation (COST). While at COST, Diann worked on nearly every major state and local tax issue confronting multi-state businesses. From 1998 to 2005, Diann was an adjunct professor at Georgetown University Law Center for the LL.M. in taxation program. Diann received her J.D. from the Georgetown University Law Center, where she was an editor of the Georgetown Law Journal. She received her B.A. from Miami University. Diann served as a law clerk to the Honorable Alan E. Norris of the U.S. Court of Appeals for the Sixth Circuit in 1991 and 1992. Diann is admitted to practice in the District of Columbia, Ohio and New York. Nikki E. Dobay, Senior Tax Counsel, Council on State Taxation (COST) 122 C Street NW Ste. 330, Washington, DC 20001-2109 (202) 484-5221 NDobay@cost.org Nikki E. Dobay is Senior Tax Counsel of the Council on State Taxation (COST). COST, with a membership of nearly 600 multistate corporations, is dedicated to preserving and promoting equitable and nondiscriminatory state taxation of multi-jurisdictional entities. Prior to joining COST, Nikki was Manager at PwC, where she focused on state and local tax matters. Nikki consults on sophisticated Oregon state and local income matters, multistate tax issues, consequences and planning opportunities related to corporate M&A transactions, and has experience consulting and advising on multistate income, excise and property tax incentives related to renewable energy projects. Nikki assists with Oregon tax controversy matters, including audits and proceedings in the Oregon Tax Court. In addition, she represented taxpayers in negotiations with the Oregon Department of Revenue and City Revenue Bureau, which administers the Multnomah County and Portland City Business Taxes. As a member of the Oregon State Bar Laws Committee, Nikki monitors and provides comments on Oregon state tax legislation and regulations. Prior to working at PwC, Nikki was an associate at Stoel Rives where she focused on international, federal and state and local tax matters. Specifically, Nikki consulted and advised on a variety of federal income and excise tax matters relating to corporate M&A transactions, partnership formation, renewable and other energy related transactions and assisted with tax controversy work.
Biographical Information Ian E. Boccaccio, Principal and Income Tax Practice Leader Ryan, LLC, Three Galleria Tower, 13155 Noel Road, Dallas, TX 75240 469.399.4545 Fax: 972.960.0613 Ian.Boccaccio@ryan.com Ian Boccaccio is a Principal and Income Tax Practice Leader at Ryan, responsible for leading a global service team of highly skilled professionals coupled with cutting-edge technologies to make substantive and long-term differences to an organization’s profitability. Prior to Ryan, Ian was a Partner at a global tax and business advisory services firm in New York, NY. Ian has extensive experience in servicing the income tax needs of the most complicated organizations in the world. In addition to his experience earned over twenty years of practice, Ian has taught these specialized areas of taxation at various seminars around the world. Ian has spent much of the past few years assisting his clients in readying the organization for US Tax Reform. In addition to serving his clients, Ian has been a consistent thought leader on US Tax Reform, through both industry seminars, as well as in written publication. Recent publications include: October 26, 2017 – “What’s That Thumping? The Repatriation Boogeyman is Back!” published by Global Tax Weekly; February 23, 2017 – “The Repatriation Boogeyman” published by Global Tax Weekly; March 24, 2016 – “Repatriation Readiness: Now is the Time” published by Global Tax Weekly; and October 15, 2015 – “A Blind Spot for CFOs: How Global Companies Can Successfully Address Threats to Withholding Tax Compliance” published by Global Tax Weekly
Major Emerging State & Local Tax Issues Arising from Federal Tax Reform (Tax Cut & Jobs Act of 2017) 28 th Annual Ohio Tax Conference January 29, 2019 Nikki Dobay , Senior Tax Counsel, Council On State Taxation Diann Smith , Counsel, McDermott Will & Emery Ian Boccaccio , Principal & Income Tax Practice Leader, Ryan LLC
Agenda – Overview of State Tax Conformity with the Tax Cuts and Jobs Act – Key International Tax Provisions Impacting the States – Key Domestic Corporate Tax Issues Impacting the States 2
Overview of State Tax Conformity with the Tax Cuts and Jobs Act
Key Tax Law Changes in the TCJA and Differences from the Tax Reform Act of 1986 – Revenue Neutral vs. Deficit Financed The Tax Reform Act of 1986 provided for about $120 billion of PIT cuts financed by about $120 billion of CIT increases. The Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) provides for $6 trillion over 10 years of tax cuts and only $4.5 trillion over 10 years of tax increases. – Transformational Changes 40 percent corporate tax rate cut to sync up with OECD norms. Lower PIT rate – and pass-through deduction for individuals. Broad new limitations on the interest deductions. Bonus depreciation and immediate expensing. $10k limitation on state and local tax deductions for individuals. – International Tax Reform Moves the U.S. from a worldwide to a quasi-territorial tax system consistent with U.S. trading partners. New foreign source tax provisions intended to raise revenues (to offset tax cuts) and tilt the playing field to favor domestic commerce over foreign 4 commerce (e.g. GILTI; BEAT, FDII).
State Partial Conformity with the TCJA – Impact of the TCJA on Corporations: A federal tax cut of about 10%. A state tax increase of about 12%. • COST/ EY study “The Impact of Federal Tax Reform on State Corporate Income Taxes” (based on 2018 update and pre-federal tax reform (FTR) linkage to IRC). – This outcome is inadvertent and arbitrary : If states simply conform to the TCJA, either automatically or by updating the conformity date, and do nothing more they will link to federal corporate base-broadening measures, but not to federal tax rate reduction. 5
Top Increases and Decreases in Federal Corporate Tax Base with TCJA and Potential State Conformity Business Tax Provision State Conformity % Change in Federal Corporate Tax Base One-time transition tax on unrepatriated foreign Partial conformity (but typically of + 9 % earnings 25% or less) Net interest expense limitation (30% of ATI) + 6.4% Mostly conformity Global intangible low-taxed income (GILTI) + 5.5 % (gross) Mixed conformity Modification of net operating loss deduction + 5.3% States have own provisions Base Erosion and Anti-Abuse Tax (BEAT) + 4.0% Non-conformity Amortization of research and experimental + 2.9% Conformity expenditures Repeal of domestic production activities deduction + 1.9% Partial conformity Mixed conformity (but § 250 issue) Foreign derived intangible income (FDII) deduction - 1.7% Expensing provided under Section 168(k) bonus - 1.8% Limited conformity depreciation Global intangible low-taxed income (GILTI) - 2.6% Mixed conformity (but § 250 issue) deduction 100% foreign DRD - 5.9% States have own provisions 6
State Tax Budget Considerations – Anticipated state tax revenue increases from the Wayfair decision, conformity with the TCJA, and a sustained economic recovery $8 billion to $33 billion estimated annual sales tax revenue increase (cited in SCOTUS Wayfair decision) $6 to $8 billion estimated annual state corporate income tax revenue increase from state conformity with the TCJA (COST/EY study) – The federal limitation on the state and local tax deduction is a significant concern for many states, particularly those along both coasts. – Looming federal deficit/debt crisis may limit federal revenue sharing with the states in the long-term The CBO projects the federal debt will increase to $33 trillion in 2028, a higher level than any point since just after WWII. 33% of all state and local revenue comes from federal funds. – Some states have structural budget gaps arising from pension liabilities, infrastructure needs and rising health care costs 7
Key International Tax Provisions Impacting the States
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