In the midst of a budget showdown between New Jersey’s Legislature and Governor Murphy, on June 25, 2018, the Legislature passed a replacement bill that seeks to raise revenue with a temporary Corporation Business Tax “surtax” on corporations meeting certain income thresholds and by limiting New Jersey’s dividend exclusion. The Legislature also responded to the Tax Cuts and Jobs Act (TCJA) passed by the United States Congress late last year by decoupling from the IRC § 199A qualified business income deduction. However, the current version of the bill fails to address other TCJA provisions, such as the tax on global intangible low-taxed income and the foreign-derived intangible income deduction. With the Governor threatening to veto the bill, the Legislature and the Governor are expected to continue negotiations over the next few days as the end of June deadline for the budget approaches.
State Tax Reform Roundtables
The Tax Executives Institute’s (TEI) State and Local Tax Committee is holding a series of State Tax Reform Roundtables to enable SALT professionals to stay abreast of state tax developments associated with the Tax Cuts and Jobs Act, to engage with subject-matter experts, and to hear from peers regarding their “boots on the ground” knowledge and experience.
This series of calls will create a platform for all members to learn, share and engage about issues of interest. Each call will highlight a particular topic and will provide a general update of state tax reform developments. Partners Jeff Friedman, Eric Tresh and Todd Lard will present on the roundtable calls, and details of their presentations are below.
IRC 965, BEAT, GILTI and FDII – Through the Lens of a SALT Professional + Recent Developments
June 21, 2018
Presenter: Jeff Friedman
Legislative Roundup – What are the States Doing + Recent Developments
July 19, 2018
Presenters: Eric Tresh and Todd Lard
IRC Sec 118, Credits and Incentives – What To Do With All That “New Cash” + Recent Developments
August 9, 2018
Presenter: Todd Lard
Join the roundtable community now!
Giving Credit Where It Isn’t Due: Arkansas Office of Hearings and Appeals Treats Sales of Tax Credits as Business Income
On June 13, 2018, an Arkansas Administrative Law Judge concluded that a taxpayer’s proceeds from dispositions of tax credits were apportionable business income. In Arkansas, business income arises from either: (1) transactions and activity in the regular course of the taxpayer’s business (the transactional test); or (2) income from the acquisition, management and disposition of property that constitutes integral parts of the taxpayer’s regular business (the functional test). The ALJ followed the Commissioner’s interpretation of the term “integral” and concluded that the taxpayer’s sales of credits “contributed to and were identifiable with (i.e. ‘integral parts of’) the Taxpayer’s trade or business operations.” The taxpayer routinely sold tax credits and had previously lost an appeal on the same issue because its tax credit depositions generated the majority of its federal taxable income. The taxpayer argued that the years at issue in this appeal were different because tax credits no longer constituted the majority of the taxpayer’s federal taxable income. The ALJ rejected this argument, concluding that the proceeds from the dispositions of the credits were integral and business income under the functional test. Dkt. Nos. 18-232, 18-405, Ark. Dep’t of Fin. & Admin., Office of Hearings & Appeals (Jun. 13, 2018).
US Supreme Court Overrules Physical Presence Standard, Leaves Plenty of Questions
In a 5-4 decision, the US Supreme Court today overruled its landmark decisions in Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois, disposing of the “physical presence” rule that has served as the bright-line standard for whether remote sellers are required to collect state sales taxes. Although the Court made clear its criticisms of the physical presence standard—referring to it as “arbitrary,” “artificial,” and a “judicially created tax shelter”—it was less clear in describing a new standard to replace it.
View the full legal alert.
South Dakota v. Wayfair – Insights and Analysis
On June 21, 2018, the US Supreme Court struck down the “physical presence rule” of Quill and National Bellas Hess which barred states from imposing sales tax collection requirements on certain out-of-state sellers. This decision is expected to have a significant impact on online sales across the country.
The case, South Dakota v. Wayfair, is the first sales tax jurisdiction case heard by the US Supreme Court in 25 years.
The physical presence rule challenged in this case has long been criticized as giving out-of-state sellers an advantage. In its opinion, the Supreme Court held that over time, the physical presence rule became further removed from economic reality and resulted in significant revenue losses to the States. Additionally, the court held that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.
Read the Wayfair Opinion
Read the full opinion in South Dakota v. Wayfair here. Additional insight and analysis will be added to this post throughout the week.
About the Case
- Title: South Dakota v. Wayfair, Inc., et al.
- Supreme Court Decision: No. 17–494.
- Decision Below: State v. Wayfair Inc., 901 N.W.2d 754 (2018) (PDF)
- Listen: Oral Argument Audio.
The Wayfair case re-examines the Supreme Court’s 1992 holding of Quill v. North Dakota, in which the court ruled that states could not require mail order retailers that lack a physical presence in the state to collect sales tax from their customers. The Quill decision protects Internet retailers that lack physical presence from being forced to collect tax on online sales.
Post-Wayfair Oral Argument Webcast
On April 18, 2018, the Tax Executives Institute (TEI) and Thomson Reuters hosted a two-hour webcast entitled “South Dakota v. Wayfair – Insights on the Oral Argument.” Eversheds Sutherland Partner Jeff Friedman was among the panelists who addressed the issues raised by Wayfair and provided commentary on the oral arguments.
View Details and listen to the webcast replay now.
Wayfair Case Background
Prior Cases
In 1967, the US Supreme Court held that the Commerce Clause prohibits a state from requiring catalog retailers to collect sales taxes on sales unless the retailer has a physical presence there. Nat’l Bellas Hess v. Dep’t of Rev. of Ill., 386 U.S. 753 (1967).
In 1992, the US Supreme Court declined to overrule the physical presence requirement of Bellas Hess in a state sales tax case involving a mail-order catalog seller. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Wayfair, South Dakota has brought a similar case against three online sellers – Wayfair Inc., Overstock.com, Inc., and Newegg Inc.
More: See the Supreme Court docket for complete case filings.
Photos from Oral Arguments
Media Coverage:
- Politico, A taxing case on the Supreme Court’s docket“.” Bernie Becker. (April, 17, 2018)
- Tax Notes, “South Dakota Slams Physical Presence Rule as ‘Unworkable and Indefensible.” Jad Chamseddine. (April 10, 2018) (Subscription.)
- Bloomberg, “South Dakota Rebuffs E-retailer Concerns in Last High Court Brief.” Ryan Prete. (April 9, 2018)
- Reuters, “U.S. Supreme Court takes up state online sales tax dispute.” Lawrence Hurley. (Jan. 12, 2018)
About Eversheds Sutherland SALT:
As state and local jurisdictions in the US evolve their tax systems and engage in increasingly sophisticated enforcement and litigation strategies, businesses need sound state and local tax (SALT) advice more than ever before. Eversheds Sutherland’s SALT practice is committed to delivering innovative solutions that meet the needs of your business. Read more.
Submit your pet to be featured as a SALT Pet of the Month!
The Eversheds Sutherland SALT Team is always excited to see what kind of pets our clients and friends have. Our team features a different pet at the end of every month, and we want to feature YOURS! Featured pets will receive a fun prize from the SALT Team.
To submit your pet to be featured, visit the Eversheds Sutherland SALT Shaker App, click “Pet of the Month” in the drop-down, then click “Submit A Pet.”
Don’t have the app? It is available for download in the Apple App Store, Google Play and the Amazon Appstore.
The Sales Taxation of Virtual Currency
Bitcoin and other virtual currencies may be the most controversial financial assets on the market right now and are certainly the most discussed.
In their article for Bloomberg BNA, Eversheds Sutherland attorneys Jonathan Feldman and Christopher Beaudro examine the state sales tax implications of selling virtual currency.
View the full article.
New York Bill Introduced to Exempt GILTI
On June 11, 2018, Senate Bill 8991 was introduced by New York Senate Majority Leader John Flanagan. The Bill would decouple from the federal treatment of Global Intangible Low-Taxed Income (GILTI).
View the full legal alert.
New Jersey Court Holds That Taxpayer Not Entitled to Exception to State’s Interest Add-Back Requirement
In Kraft Foods Global, Inc. v. Director, Division of Taxation, 2018 WL 2247356 (May 17, 2018), the New Jersey Superior Court, Appellate Division, recently upheld a New Jersey Tax Court decision denying a taxpayer an exception to the state’s interest add-back requirement in determining the taxpayer’s corporate net income subject to New Jersey’s corporation business tax (CBT). This case highlights the unintended tax consequences that may result from financing arrangements between related entities.
Like many states, New Jersey uses federal taxable income as a starting point for the CBT and then has several modifications to federal taxable income to arrive at New Jersey taxable income. One of these modifications is the related party interest add-back provision, which provides that “[e]ntire net income shall be determined without the exclusion, deduction or credit of … [i]nterest paid, accrued or incurred for the privilege period to a related member….” N.J.S.A. 54:10A–4(k)(2)(I).
There are five statutory exceptions to the interest add-back requirement. In Kraft Foods, the only exception relied upon by the taxpayer was the “Unreasonable Exception,” which requires the taxpayer to establish “by clear and convincing evidence, as determined by the director, that the disallowance of a deduction is unreasonable.” In support of its argument, the taxpayer argued that its parent company simply “pushed down” loans from bondholders because the parent company could secure a better interest rate on the open market than the taxpayer.
The appellate court upheld the determination of the Tax Court that the taxpayer did not qualify for the Unreasonable Exception. While acknowledging that legislative history supported the taxpayer’s contention that the Unreasonable Exception may apply to a “pushed down” loan, even in the absence of a guarantee of the third-party debt, the appellate court found that the taxpayer did not meet its evidentiary burden. According to the court, the taxpayer produced no document suggesting that it was ultimately responsible for the third-party debt. The taxpayer’s promise to pay its parent company did not contain a guarantee to the third-party bondholders, nor did the promissory notes the taxpayer signed on behalf of its parent contain payment terms or a schedule for principal payments. Thus, according to the appellate court, it was reasonable for the Director to determine that the parent’s debt to the bondholders “was not, legally or effectively, ‘pushed down’” to the taxpayer. Kraft Foods Global, Inc. v. Director, Division of Taxation, 2018 WL 2247356 (May 17, 2018).
Happy Birthday to Jeff Friedman!
Happy Birthday to Jeff Friedman, SALT lawyer, Tax Chair and yes, Yankees fan.
