On April 1, 2019, the Arkansas Office of Hearings and Appeals held that a taxpayer could not deduct interest expense for long-term debt used to finance a cash dividend as a non-business expense allocable to Arkansas because there was no corresponding non-business income allocable to the state.

The taxpayer was a corporation based in Arkansas that separated from its parent company. In connection with the separation, the taxpayer obtained third-party long-term debt to finance a cash dividend, which resulted in interest expense for the taxpayer. The taxpayer argued the interest expense should be classified as non-business expense allocable to Arkansas because it satisfied the transactional and functional tests under the Uniform Division for Income Tax Purposes Act (UDITPA). The administrative law judge held, however, that UDITPA’s business and non-business classifications only apply to income and there is no independent characterization of expenses apart from income. Thus, parsing of expenses occurs only after business and non-business income is determined. Here, because the interest expense was not linked to the generation of non-business income directly sourced to Arkansas, the interest expense could not be characterized as a non-business expense allocated to the state. Administrative Decision Nos. 19-185 & 19-186, Ark. Dep’t of Fin. & Admin. (Apr. 1, 2019).

The New Jersey Tax Court held that a parent corporation was not required to add back to its corporation business tax base any amount of royalty payments it made to a subsidiary. The parent company and subsidiary company each filed a New Jersey CBT return. The parent deducted the royalty payment, and the subsidiary included the royalty in its CBT base. New Jersey law generally requires taxpayers to add back federal deductions for royalties paid to related parties except in the case where the taxpayer can show by clear and convincing evidence as determined by the Division of Taxation that the addback is unreasonable. In this case, because the subsidiary’s allocation factor was lower than the parent’s, the Division of Taxation argued that the parent corporation was only entitled to a partial exception from the addback for royalties paid. The Tax Court disagreed and determined that the taxpayer was not required to add back any amount of royalties because the full amount of the royalties had been reported on the subsidiary’s CBT return, and the subsidiary paid tax on the royalties allocated to New Jersey. The court was “hard-pressed to accept Taxation’s argument that there was a mismatch of income and expense solely due to the difference in the unchallenged allocation factors of Parent and Subsidiary” and, accordingly, held that an addback of any amount on the parent’s return would be unreasonable.

Lorillard Tobacco Co. v. Dir., Div. of Taxation, No. 008305-2007 (NJ Tax Ct. Feb. 27, 2019).

The California research and development credit is frequently a high-ticket item for taxpayers. Indeed, according to the California Franchise Tax Board’s (FTB) 2017 Annual Report, $1,440,103,626 of corporation tax research credits were allowed in 2016, which was 72.5% of total corporation tax credits allowed for that year.

In his article for the Journal of Multistate Taxation and Incentives, Eversheds Sutherland Senior Counsel Eric Coffill provides an overview of the major provisions and common issues regarding claiming and defending the research credit on audit.

Read the full article here.

On April 17, 2019, the Maryland Comptroller of the Treasury issued Tax Alert 04-19, “Maryland guidance on the reporting and taxation of IRC Section 951A global intangible low taxed income,” further cementing the state’s tax climate as one that is bad for business.

Alert 04-19 describes the Comptroller’s treatment of GILTI. In their article published in Law360, Eversheds Sutherland attorneys Jeffrey Friedman and Todd Betor criticize Maryland’s guidance that requires the inclusion of GILTI as Maryland taxable income, the inapplicability of Maryland’s dividend subtraction, and Maryland’s unique apportionment factor representation.

Read the full article here.

In this article for Bloomberg Tax, Eversheds Sutherland attorneys Jeffrey Friedman, Stephanie Do and Michael Hilkin discuss the topics covered at the April 25 Multistate Tax Commission Uniformity Committee meeting in Denver, including revisions to the model combined reporting statute, potential revisions to the MTC’s Public Law 86-272 guidance applicable to businesses engaging in activities over the Internet, and sales tax issues post-Wayfair.

Read the full article here.

Meet Oscar, a dachshund mix belonging to Jeff Langer, Senior Tax Manager at The Home Depot. Jeff recruited Oscar to head up his “Squirrel Patrol” in November 2017 from the Atlanta Humane Society. Now at three years old and weighing 19 pounds he takes the job very seriously, watching out the windows and alerting Jeff to the first sign of a critter invading the yard. When Oscar’s workday is over, he lays around the kitchen trying to look adorable so he can get paid (in food.)

Not content to be just a watchdog, Oscar also has been known to be a Meyer Wiener on occasion. However, the job he takes most seriously is being the cutest companion to Jeff, who concluded Oscar’s glowing annual review with “his life goal is to just be near me, whether it’s on top of me, next to me, or simply having one paw on me.” We think Oscar deserves a raise and we are proud to have him as our April Pet of the Month.

This is the first edition of the Eversheds Sutherland SALT Scoreboard for 2019. Since 2016, we have tallied the results of what we deem to be significant taxpayer wins and losses and analyzed those results. This edition of the SALT Scoreboard includes insights regarding Virginia’s costs of performance sourcing, New Jersey’s addbacks of intercompany expenses, and a spotlight on sales and use tax cases.

View our Eversheds Sutherland SALT Scoreboard results from the first quarter of 2019!

Have you ever wondered what goes on behind the bench? At this year’s State and Local Tax Controversy Program, our panel of distinguished judges, moderated by Professor Rick Pomp, will discuss state tax controversies from their perspective.

Session: All Rise for a Peek Behind the Bench – State Tax Tribunal

This session will feature the following state tax judges:

Bradford Delapena, Minnesota Tax Court

Robert T. Manicke, Oregon Tax Court

Roberta Moseley Nero, New York Tax Appeals

Eversheds Sutherland is proud to sponsor the two-day State and Local Tax Controversy portion of TEI’s Audits and Appeals Seminar. The conference is scheduled to take place in  Minneapolis, Minnesota:

May 20-21 – Federal Tax and Transfer Pricing Controversy

May 22-23 – State and Local Tax Controversy, sponsored by Eversheds Sutherland

You are invited to register for the entire four-day seminar or the two days devoted to state and local tax controversy, or whichever combination meets your individual needs.

 

Congratulations to Alisa Margolis, Director of AWS Tax at Amazon for serving on the dinner host committee for a successful gala benefiting the Friendship Circle of Washington. The Seattle-based non-profit promotes disability inclusion and friendship through programs that offer much-needed respite and fun for children with special needs and their families. The organization’s 14th Annual Heroes Gala, held March 28, raised over $500,000 to support these activities in the community.  We applaud Alisa, pictured here with Eversheds Sutherland tax partner, Michele Borens, and the Friendship Circle of Washington!