The Illinois Tax Tribunal issued an order denying PepsiCo Inc. and Affiliates’ (“PepsiCo”) motion for summary judgment and found that PepsiCo’s subsidiary, Frito-Lay North America, Inc. (“FLNA”), was not an excluded 80/20 company and must be include in the PepsiCo Illinois unitary group corporate income tax return.[1] As originally filed, PepsiCo excluded FNLA from its returns for 2011-2013 based on the state’s 80/20 rules. The Department issued audit adjustments that denied this treatment, included Frito-Lay in the unitary return, and included approximately $2.5B of additional income in the return for each year.

Illinois adopts the water’s edge combined apportionment method and allows exclusion of unitary members if the taxpayer can demonstrate that 80% of the business of such member fall outside the United States. Illinois determines whether 80% of the business is outside the US based on the worldwide property and payroll factors of the member. The member shall be excluded if the average of its worldwide payroll and property factors is 80% or more outside the US.[2] While PepsiCo argued that the 80/20 determination is a straightforward mechanical calculation, the Tribunal reasoned that the Department may analyze the underlying facts that go into the calculation. In calculating the 80/20 property factor, PepsiCo included the payroll costs reported by PepsiCo Global Mobility, LLC (PGM), a disregarded single member limited liability company owned by FLNA, as compensation paid to expatriate employees. PepsiCo argued that the expatriate employees who were transferred to related foreign host companies through secondment agreements should be considered employees of  FLNA through PGM.

The court determined that as part of its global reorganization, PepsiCo created PGM in 2011 to reduce its overall tax liability. PGM had no assets, no capitalization, no management or supervisory employees, and no offices. When PepsiCo created PGM, it swapped PGM’s name on the expatriates’ secondment documents. The Tribunal determined that PGM was nothing but a “shell corporation” and that “it must be disregarded for having no economic substance or valid business purpose.” The Department also argued that the expatriates should not be considered the employees of PGM. The Tribunal considered common law factors in determining whether the expatriates were employees of PGM including that PGM did not provide work tools to expatriates, PGM had no investment in foreign work facilities, had no ability to assign projects to expatriates, had no ability to dictate the timing and length of work assignments, and that PGM did not pay the expatriates because the foreign host companies reimbursed PGM. The Tribunal determined that PepsiCo failed in its burden to show that PGM was the true employer of the expatriates and thus PGM’s tax regarded owner, FLNA, was not he true employer of the expatriates. This changed the payroll apportionment calculation of FLNA for the 80/20 test. As a result, the Tribunal concluded that FLNA could not be considered an 80/20 company and must be considered a company conducting business within the United States and included in the PepsiCo Illinois unitary combined corporate income tax return.

Eversheds Sutherland observation: Many states employ an 80/20 test that can result in the exclusion of domestic entities from the return or the inclusion of foreign entities into the return. Many of these states determine exclusion or inclusion based on the member’s property and payroll ratios. For example, if the ratio of US property and payroll to worldwide property and payroll falls below 20% for a domestic entity, that entity will be removed from the unitary combined group. While the 80/20 test is a mechanical calculation, the calculation of the property and payroll ratio for purposes of the 80/20 test is subject to audit and adjustment just as apportionment factors are. Based on a company’s business operations and structure it may have a domestic entity with sufficient amounts of foreign property and payroll to meet the 80/20 test and exclusion from the combined return. However, taxpayers should ensure that they have the proper information and documentation to substantiate the determination of foreign property and payroll amounts for those entities excluded under the 80/20 rules.

[1] Pepsico Inc. and Affiliates v. Illinois Department of Revenue, Ill. Tax. Trib., 16 TT 82; 17 TT 16 (2021)

[2] 35 ILCS 5/1501(a)(27); 86 Ill. Adm. Code 100.9700(c)

In this episode of the SALT Shaker Podcast, Eversheds Sutherland attorneys Nikki Dobay and Chris Lee discuss a recent Oregon Tax Court decision addressing whether Subpart F income and dividend income included in the Oregon income base should also be included in the Oregon apportionment sales factor. They also discuss how this decision may impact the apportionment treatment of Section 965 deemed repatriation income and GILTI.

For a link to the case discussed in the episode, click here.

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Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which year did the U.S. Congressional Special Subcommittee on State Taxation of Interstate Commerce release the final series of its four-volume study, referred to as the Willis Commission Report, on issues pertaining to multistate taxation?

E-mail your response to

The prize for the first response to today’s question is a $25 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

In a prior SALT@Work column for the Journal of Multistate Taxation and Incentives, Eversheds Sutherland attorneys Charlie Kearns and Alexandra Louderback discussed the localization of work rules that determine where an employer will be subject to state unemployment insurance (UI) registration, reporting and taxes when an employee works in multiple states.

Shortly after that column published, two states, California and Massachusetts, issued or updated guidance pertinent to the localization rules that apply to UI and other employment taxes. In a new column,  they summarize that guidance and discuss its relevance among the other state employment tax regimes during the COVID-19 pandemic.

The New York State Department of Taxation and Finance issued an advisory opinion determining that the fee paid for an information technology support service was not subject to sales and use tax because the taxable component of the service was delivered outside of New York. The taxpayer provided investment advice to its customers and as part of the service, it conveyed significant data through its website. To deliver this service the taxpayer used servers and other information technology assets located outside of New York. The taxpayer hired a New York based company to manage these assets and to provide IT services. The advisory opinion determined that the management of the IT system including security audits, providing anti-virus software, routing emails through anti-spam platform, and managing the taxpayer’s domain name system, constituted a taxable protective service under New York statute. However, because the computer assets and data being protected were located outside of New York, this service was not subject to New York sales tax.

On April 12, 2021, the Florida legislature presented S.B. 50 to Governor DeSantis, which would require sales tax collection from a person whose remote sales to Florida exceed $100,000 per year. It states that a person whose “taxable remote sales in the previous calendar year” exceed $100,000 has a “substantial number of remote sales” and is therefore a “dealer.” The bill also requires a collection by a “marketplace provider,” defined as a person who facilitates retail sales by listing or advertising for sale in a marketplace and directly or indirectly collects payment from the customer. The bill provides an exclusion from this rule for travel agency services, delivery network companies, and payment processor businesses. These requirements apply to remote sales made or facilitated on or after July 1, 2021, by a person who made or facilitated a substantial number of remote sales in calendar year 2020. A marketplace seller shall consider only those sales made outside a marketplace to determine whether it made a substantial number of remote sales. Starting April 1, 2022, marketplace providers are also required to collect and remit the E911 fee, waste tire fee, and lead-acid battery fee.

Maryland had previously enacted two important – and troubling – sets of tax changes: a new tax on digital advertising and a substantial expansion of its sales tax to digital products and services.  As a result of several significant problems with both tax changes, the Maryland legislature just passed Senate Bill 787.

  • S.B. 787 amends Maryland’s Digital Advertising Gross Revenues Tax by: (1) delaying the start date to January 1, 2022; (2) exempting broadcast and news media entities’ digital advertisement services, and (3) prohibiting the pass-through of the tax via a separate charge.
  • S.B. 787 also amends Maryland’s sales and use tax expansion on digital products by: (1) exempting a limited number of digital services, including live-streamed school instruction; (2) expanding the custom computer software exemption; and (3) making various technical corrections.

Maryland Governor Larry Hogan is expected to neither sign nor veto the bill, which would allow S.B. 787 to become law in 30 days.

Read the full Legal Alert here.

New Jersey’s Appellate Division concluded that a Jersey City payroll tax violated the dormant Commerce Clause because there was no mechanism to resolve disputes if two taxing entities, in different states, impose a payroll tax on the same employee.  The lower court had previously dismissed the case, ruling that the Jersey City payroll tax was not prohibited by federal or state constitutions.

The payroll tax was enacted for the stated purpose “to establish a payroll tax on the payrolls of Non-Jersey City residents for the benefit of Jersey City school.  “Payroll” includes the total remuneration paid by employers to employees for services performed within the city or performed outside of the city but supervised in the city.”  Plaintiffs, a group of business owners, real estate developers, labor unions and trade associations, challenged the state and federal constitutionality of the payroll tax.  After disposing of the state constitutional challenges, the Court also rejected Plaintiffs’ argument that the payroll tax was unconstitutionally discriminatory, as it applies equally to all employers whether in state or out of state, and upheld the provision that exempted payroll paid to Jersey City residents from taxation.  However, the Court concluded that neither the applicable statute nor the Ordinance provide a mechanism to resolve disputes if two taxing entities, in different states, impose a payroll tax on the same employee, resulting in a violation of Commerce Clause internal consistency and thus the second “fairly apportioned” prong of the Complete Audit.  The Court remanded the case to the lower court to determine the remedy for the discrimination.

The New York State Department of Taxation and Finance issued an advisory opinion, determining the taxability of two online services sold by a taxpayer relating to government requests for proposal: (1) the procurement service was nontaxable; but (2) the notification service was a taxable information service. The procurement service allowed government customers to create RFPs via the website and release them for distribution to potential bidders. Contractors would then submit proposals through the website. The Department concluded that this service was not taxable because providing customers with the ability to distribute their RFPs is not an enumerated service. The notification service allowed the contractors to identify and respond to more bid opportunities by: (1) constantly monitoring all known government RFP releases; (2) inputting them into its database; and (3) notifying the customers of potentially applicable RFPs. The Department concluded that this service was a taxable information service and the “personal or individual” information exclusion did not apply because the information was derived from a common database.

In this episode of the SALT Shaker Podcast policy series, Carol Portman, President of the Taxpayers’ Federation of Illinois, joins Breen Schiller, Partner in the Chicago office of Eversheds Sutherland, and host Nikki Dobay for an insightful discussion about the 2021 Illinois legislative session.

They discuss the Legislature’s COVID-19 procedures, whether a handful of bills that would change the way in which Illinois taxes foreign source income have legs, the yet-to-be finalized budget and select bills that Illinois taxpayers should have on their radar.

The Eversheds Sutherland State and Local Tax team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on state and local tax policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

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