New York State Governor Andrew Cuomo released his Fiscal Year 2020 budget and accompanying legislation on January 15, 2019 (the Budget Bill). Among other things, the Budget Bill proposes statutory revisions to respond to the Tax Cut and Jobs Act of 2017 (TCJA) and to impose a sales tax collection obligation on “marketplace providers.”

Read the full legal alert here.

In a Technical Advice Memorandum issued on December 4, 2018, the California Franchise Tax Board (FTB) concluded that delivery of tangible personal property via private truck is a protected activity under P.L. 86-272. However, any activity that goes beyond the scope of delivery, such as backhauling, is not protected. The FTB explained that Congress, when it enacted P.L. 86-272 in 1959, chose not to limit P.L. 86-272 protection to shipments by common or contract carrier. The FTB further noted that Congress intended to broadly protect activities “by or on behalf of” an out-of-state company, including “shipment or delivery” from out-of-state. Cal. FTB Tech. Adv. Mem. No. 2018-3 (Dec. 4, 2018).

The New York State Department of Taxation and Finance released guidance in the form of tax return instructions addressing how it will account for global intangible low-taxed income (referred to as GILTI) for apportionment purposes. These instructions allow a taxpayer to include its net GILTI amount (rather than the total receipts related to the generation of GILTI) in the denominator of its apportionment factor, but do not require a taxpayer to include any amount related to GILTI in its numerator.

Read the full Legal Alert here.

On December 31, 2018, District of Columbia Mayor Muriel Bowser signed B22-1070, the Internet Sales Tax Emergency Amendment Act of 2018 (Emergency Act). As of January 1, 2019, the District of Columbia now subjects digital goods to the 6% sales tax rate and imposes Wayfair-style economic nexus sales tax collection requirements. As of April 1, 2019, the District also will require marketplace facilitators to collect sales tax on behalf of their marketplace sellers.

Read the full Legal Alert here.

The District provides a variety of tax benefits to QHTCs, including sales and use tax1 and personal property tax exemptions,2 as well as a reduced corporation franchise tax rate.3 In order to qualify as a QHTC, a business must:

  • Be an individual or entity organized for profit;
  • Lease or own an office in the District;
  • Have two or more qualified employees within the District;
  • Derive at least 51% of its gross revenues earned in the District from certain high technology-type activities; and
  • Be registered with the District Government as a business.

Previously, to obtain QHTC benefits each year, the Office of Tax and Revenue (OTR) required QHTCs to attach to their tax returns or claims for refund a QHTC-CERT form. The QHTC-CERT form is a certification that the taxpayer meets all of the conditions required of a QHTC.

Read the full Legal Alert here.

As 2018 drew to a close, many of us took a moment to express gratitude for the wonderful things in our lives and made plans to live a little better in the coming year.

In looking ahead, we can all learn from Ben the bulldog. He sent Eversheds Sutherland SALT his list of 2019 resolutions via Chris Kmak, Director, State and Local Tax, at Intel Corporation. As you will see, Ben is a terrific model of a life well-lived.

Ben’s 2019 New Year’s Resolutions

  1. Honor Family – Ben is named after his dad. Chris and his brother called each other “Ben” as children.
  2. Be Authentic – Chris says that he chose Ben because he had the “same dissatisfied look in his eye” as the late beloved Riley (a white pit bull).
  3. Eat Well, Make Friends and Share – According to Chris, “Ben is a foodie and regularly sits with us for his second dinner (whatever I have cooked for us). However, he does have a particular love for pizza. When the p-word is uttered, he gets very excited as he knows his taste buds will be satisfied soon. When the delivery phone call rings, he insists on rushing with me to greet his favorite guest (the delivery person). When we return, he takes his rightful spot on the couch between his mother and I and expects a bite of pizza for each one we take in turn.”
  4. Be a Boss – Due to some knee issues, Ben had occasion to use a stroller which is now his preferred mode of transport. He also has a standing order at his two favorite local restaurants – over easy eggs and a side of bacon at Good Morning, and beer and German sausages at Bierhaus in downtown Mountain View.
  5. Learn New Tricks – Having completed three years of puppy school, Ben is “an educated man.” At nearly 12 years old, Ben has retired his reportedly excellent “bang bang, play dead” trick. However, he has perfected a new one where he acts like he needs to go out but when the family has gathered their shoes, coats and leash, he walks them directly to the kitchen.

Ben plans to keep learning and training his family in 2019. We are so happy to feature him as our December Pet of the Month.

 

On December 21, the New Jersey Division of Taxation released Technical Bulletin TB-85, which addresses how the Division will expect taxpayers to calculate the amount of so-called global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) that are taxable for New Jersey corporation business tax (CBT) purposes.

Background: GILTI and FDII under Federal Tax Law

The Federal Tax Cuts and Jobs Act (TCJA) created a new category of income under Internal Revenue Code (IRC) section 951A, known as GILTI.  This provision imposes a tax on U.S. shareholders based on income from controlled foreign corporations (CFCs), to the extent that this income is in excess of a nominal 10% return on the tangible assets of the CFCs.  GILTI is taxed at the regular federal tax rates, but a deduction is generally allowed for 50% of the amount of GILTI included in a taxpayer’s federal gross income under IRC section 250(a)(1)(B). Additionally, foreign tax credits are available to offset the federal income tax imposed on GILTI, with credits limited to 80% of the amount of foreign taxes paid.

The TCJA also identified a new category of income, FDII, which calculates an amount similar to GILTI (i.e., a proxy for intangible income based on an assumed 10% return on tangible depreciable asset basis) and multiplies that amount by the fraction of the income earned in the United States that is attributable to property sold or licensed to a non-U.S. person for foreign use or to services provided outside the United States.  Under IRC section 250(a)(1)(A), taxpayers are generally permitted a deduction from income equal to 37.5% of FDII.

New Jersey Treatment of GILTI and FDII

New Jersey Legislation

New Jersey legislation has confirmed that a corporate taxpayer must include the amount of GILTI calculated under IRC section 951A in its taxable income base for CBT purposes, but also may take the deductions related to both GILTI and FDII under IRC section 250(a).  New Jersey law does not provide for any offset of CBT with foreign tax credits.

In a signing statement released in conjunction with October amendments to the CBT, Governor Murphy acknowledged that taxing GILTI “may disproportionately impact certain New Jersey taxpayers.”  Governor Murphy added that he had been assured that the Division “maintains the discretion under existing law to provide relief to individual CBT taxpayers when appropriate to ensure the taxpayer’s CBT obligation fairly reflects its liability”—leaving many to believe that a corporation taxable in New Jersey would be able to request some form of individualized alternative apportionment relief based on its specific circumstances.  Thereafter, Director John Ficara called apportionment relief a “big issue” and said that the Division would provide its “factor relief approach” in public guidance.

The Technical Bulletin

Although Governor Murphy’s signing statement suggested that the Division would take an individualized approach to provide companies with apportionment relief, the Technical Bulletin instead states that all corporations filing a CBT-100 (the general return for most CBT filers) or BFC-1 (the return for banking and financial corporations) will be expected to calculate the amounts of GILTI and FDII taxable for CBT purposes “based on a separate special accounting method.”  Specifically, taxable GILTI and FDII (net of the deductions under IRC section 250(a)) will be calculated using an allocation ratio that is separate from a taxpayer’s generally applicable CBT ratio, and which is “equal to the ratio of New Jersey’s gross domestic product (GDP) over the total GDP of every U.S. state (and the District of Columbia) in which the taxpayer has economic nexus.”  Thus, a taxpayer will have two apportionment factors—one applicable to its entire net income base, and one applicable to its taxable GILTI and FDII.

As an example, the Technical Bulletin states that because the current New Jersey GDP ratio is approximately 3.1%, and corporations currently receive a deduction of 50% of the GILTI inclusion, a corporation with nexus in all states and the District of Columbia would pay CBT on approximately 1.6% of its gross income calculated under IRC section 951A.  The Technical Bulletin’s example does not take FDII into consideration.

Taxable GILTI and FDII will be calculated on a new Schedule A-6.

Potential Considerations

Below is a summary of some of the issues raised by the Technical Bulletin.

  • Lack of Individualized Apportionment Relief:  While the Technical Bulletin suggests that all corporations will calculate the amount of GILTI subject to tax under a single approach, future guidance may be necessary to identify circumstances where, consistent with Governor Murphy’s signing statement, “individual CBT taxpayers” may request another approach to the taxation of GILTI.
    • Eversheds Sutherland Observation:  A taxpayer who is adversely affected by the separate allocation ratio outlined in the Technical Bulletin may have a constitutional argument that the use of U.S. (and U.S. state) GDP data is arbitrary and does not bear a rational relationship to the taxpayer’s activities in New Jersey.
      • Although the Division has taken the position that GILTI is a “hybrid of different income items that largely constitutes displaced U.S. income,” many taxpayers earn GILTI from non‑U.S. activities with little or no connection to New Jersey.  The allocation of GILTI based on U.S. (and U.S. state) GDP figures may not properly address issues of factor representation, and thus may cause unconstitutional distortion.
      • States generally apply the unitary business principle to require a taxpayer to apportion all of its unitary business income to the state using one single apportionment method for all of the activities of the unitary business.  To the extent that GILTI is earned from activities of a single unitary business, New Jersey’s requirement that a taxpayer allocate GILTI to the state using a separate and different allocation ratio may raise issues under the unitary business principle as outlined by the U.S. Supreme Court.
  • Calculation of the Allocation Ratio:  The amount of GILTI allocated to New Jersey will depend on the states in which a taxpayer has “economic nexus.”  However, New Jersey law does not provide a bright line economic nexus standard for CBT purposes, and the Technical Bulletin does not address how a taxpayer should determine whether or not it has economic nexus in a particular state.
    • Eversheds Sutherland Observation:  In Lorillard Licensing Company LLC v. Dir., Div. of Taxation, the New Jersey Superior Court, Appellate Division held that New Jersey’s economic nexus standard must be applied to determine whether a taxpayer is “subject to tax” in other jurisdictions for purposes of New Jersey’s (now repealed) Throw-Out Rule.  29 N.J. Tax 275 (App. Div. 2015), certif. denied, 226 N.J. 212 (2016).  Further, the court held that it is irrelevant whether the taxpayer actually filed returns in or paid tax to those other jurisdictions.  This judicial authority may be applicable when determining the states in which a taxpayer has economic nexus for purposes of calculating its GILTI allocation ratio.
  • Combined Reporting:  New Jersey has adopted a combined reporting regime for tax years ending on or after July 31, 2019.  The Technical Bulletin does not address whether an entity filing a combined return may calculate a single allocation ratio based on the total number of states in which any group member has economic nexus (or if each group member with GILTI will have to calculate an allocation ratio separately).
  • Winners and Losers:  New Jersey’s proposed approach, requiring all corporations to allocate GILTI using a ratio based on U.S. (and U.S. state) GDP, will have a disparate impact on taxpayers.  Under the Division’s approach, taxpayers with nexus in numerous states, but having a relatively higher “general” New Jersey apportionment factor, will be treated more favorably than taxpayers conducting business in a small number of states and having a relatively smaller “general” New Jersey apportionment factor.  For instance, based on U.S state GDP data, a taxpayer that is only conducting business in New Jersey, New York, and Connecticut would have a GILTI allocation ratio of approximately 24.7%.  However, it is possible that the taxpayer’s standard New Jersey apportionment factor is much less (or much higher) than 24.7%, depending on its business.
    • Eversheds Sutherland Observation:  Including a rule in future draft regulations to allow a taxpayer to use the lesser of its separately calculated GILTI allocation ratio or its standard New Jersey apportionment factor to allocate its GILTI inclusion would prevent this unfair result.

Conclusion

The Division intends to promulgate regulations addressing the allocation of GILTI and FDII consistent with the approach outlined in the Technical Bulletin.  Under New Jersey law, the Division will prepare draft regulations, and take comments on such draft regulations, prior to issuing regulations in final form.  As such, New Jersey taxpayers who are especially disadvantaged by New Jersey’s current approach to taxing GILTI and FDII may want to consider preparing comments, either now or shortly after draft regulations are released, outlining their concerns.

On November 2, 2018, the Chief Counsel of the California Franchise Tax Board issued Chief Counsel Ruling No. 2018-01, determining: (1) that a taxpayer servicing mortgages was not a financial corporation for purposes of the corporation franchise tax; and (2) gains from interest rate hedging contracts are general income, not money or moneyed capital. Although the taxpayer earned origination income, interest income and net gains from sales of mortgages, its primary revenue was from servicing the mortgage loans.

Among other differences, California taxes financial corporations at a higher corporation franchise tax rate than general corporations.

First, the Chief Counsel determined that the taxpayer was not a financial corporation because it derives more than 50% of its total gross income from servicing mortgages. A financial corporation is a corporation that predominantly deals in money or moneyed capital in substantial competition with the business of national banks. While originating and selling mortgage loans constitutes dealing in moneyed capital, servicing loans does not. Rather, servicing loans generates income from a service activity. Because the taxpayer predominantly engaged in service activities instead of dealing in money or moneyed capital, it was not a financial corporation.

Second, the Chief Counsel determined that gains from interest rate hedging contracts are general income, not money or moneyed capital. The hedging contracts are not specifically listed as money or moneyed capital, nor are they similar to the listed examples. Thus, the hedging contracts would not qualify the taxpayer as a financial corporation.


Chief Counsel Ruling No. 2018-01, California Franchise Tax Board (Nov. 2, 2018).

The California Court of Appeal affirmed a trial court decision finding that transactions involving an Internet retailer headquartered in Brisbane, California, were subject to local use tax, rather than local sales tax, because title in the transactions at issue passed outside California. The court explained that when a retail seller delivers goods to a common carrier at an out-of-state warehouse for shipment to a customer in California, title will pass to the buyer at the time and place that the retailer delivers the goods to the carrier, absent an agreement to the contrary.


City of Brisbane v. Cal. Dep’t of Tax & Fee Admin., No. A151168 (Cal. Ct. App. Nov. 14, 2018) (unpublished).

The November 26, 2018, release by the Internal Revenue Service of proposed regulations (REG-106089-18) related to IRC § 163(j) has provided some clarity for federal income taxpayers. But the regulations’ treatment of federal consolidated groups gives rise to complexities and questions as to how the limitation will operate at the state level.
This Bottom Line videocast includes:

  • an overview of IRC § 163(j)
  • key elements of the proposed regulations
  • important SALT considerations