By Sahang-Hee Hahn and Timothy Gustafson

The Indiana Department of Revenue required an out-of-state clothing company and its subsidiary to file a combined Indiana corporate income tax return, determining that the taxpayer’s transfer pricing study was insufficient to establish that its intercompany transactions were conducted at arm’s length. The taxpayer was the parent of a multistate, multinational business that sold premium-priced clothing and fashion accessories. The taxpayer’s subsidiary operated a distribution and consumer service facility outside of Indiana, shipping the taxpayer’s products to the taxpayer’s own branded stores, other department stores and directly to consumers. The subsidiary owned all domestic trademarks used by the taxpayer in its stores and licensed the use of the trademark names to its parent. The Department found the taxpayer and its subsidiary had a “unitary relationship” because the taxpayer was involved in all transactions both before and after goods were sold to the subsidiary; the taxpayer was involved in the design of all products sold by both entities; and all corporate-wide decisions, including all corporate marketing, payroll, tax and technology-related decisions, were made solely by the taxpayer. The Department relied upon Ind. Code § 6-3-2-2(l) for its position. This statutory provision authorizes the Department to correct the inaccurate reflection of a taxpayer’s Indiana source income by requiring, if reasonable, separate accounting, the exclusion or inclusion of one or more factors, or any other method to equitably allocate and apportion the taxpayer’s income. As additional support for its position, the Department cited Ind. Code § 6-3-2-2(l), a statute modeled on IRC § 482 that allows for adjustments by the Department to fairly reflect income derived from sources within Indiana. The taxpayer argued unsuccessfully that Ind. Code § 6-3-2-2(p) limits the Department’s authority to require a taxpayer to file a combined report to instances where the Department is “unable to fairly reflect the taxpayer’s Indiana source income using any other method allowable under” the provisions cited by the Department. In support, the taxpayer produced a 12-year-old transfer pricing study to establish that its intercompany transactions were conducted at arm’s length. The Department disregarded the study, however, finding it was dated and limited in scope, did not account for brand value, and did not analyze proper or sufficient comparable business enterprises. In its analysis, the Department did not cite to IRC § 482 or apply an analysis consistent with federal tax principles. While acknowledging the transfer pricing study “may have had a certain, limited value at the time it was first issued and which may have assisted the parties in better understanding the financial and organizational relationship between the affected parties,” the study was “insufficient to establish the [Department] acted outside its statutory authority in requiring Taxpayer and [its subsidiary] file combined income tax returns.” Indiana Dep’t of Revenue, Ltr. of Findings No. 02-20130155 (Feb. 26, 2014).

The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address how the Budget implements unitary combined reporting and expands the use of economic presence nexus.

Continue Reading New York Tax Reform Made Easy: Unitary Combined Reporting and Nexus

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The Sutherland SALT Team will release commentary on the revamped New York State corporate tax system that was reformed as part of the recently enacted Budget Legislation (“Budget”). By way of background, Governor Andrew Cuomo signed into law the tax provisions of the Budget on March 31. The changes will affect nearly every New York State corporate taxpayer and should be considered in preparing financial statements for the first quarter of 2014.

In the coming days, Sutherland will release targeted, concise commentary on each of the most significant aspects of the Budget, including:

  • Mandatory Unitary Combined Filing
  • Economic Presence Nexus
  • Income Tax Base Changes
  • Sourcing/Apportionment (market-based approach)
  • Net Operating Losses (NOLs) and other Tax Attributes
  • Rate Changes
  • Capital Base Changes
  • Financial and Insurance Industry Impact

By Ted Friedman and Prentiss Willson

The Indiana Department of Revenue determined that affiliated entities of an out-of-state manufacturing corporation were not unitary. The corporation conducted marketing operations as one business segment and production operations as a second business segment. The corporation included its marketing entities in its Indiana consolidated return. On audit, Department staff included the production entities in a combined Indiana return. In considering the corporation’s protest, the Department stated that, in order to require related entities to file a combined return to fairly reflect income, the Department must: (1) find that the entities form a unitary group; (2) make a finding that the corporation’s own method of filing distorts the corporation’s Indiana income or expenses; and (3) be unable to fairly reflect Indiana income using other methods before requiring the combined-filing method. The Department determined that the corporation had established that the production and marketing entities conducted inter-divisional transactions on an arms-length basis, that the transactions were financially and competitively market driven, and that the entities were separately managed. The Department also determined the inter‑divisional transactions were not self-serving and were not structured simply as a means of minimizing state tax obligations. Accordingly, the Department concluded that the marketing and production entities were not unitary and that the corporation had met its burden of establishing that the Department erred in requiring the corporation and its affiliates to file a combined return. Supplemental Letter of Findings, 02-20120008 (Ind. Dep’t of Revenue Mar. 26, 2014).

By Stephanie Do and Andrew Appleby

The Indiana Department of Revenue determined that an out-of-state wireless communications equipment wholesaler’s in-state business activities were protected by P.L. 86-272, and therefore, the wholesaler did not have nexus for Indiana corporate income tax purposes. The wholesaler’s in-state activities were limited to shipping products to Indiana customers by common carrier and a sales employee who worked from his home office. The sales employee only solicited sales orders of the wholesaler’s products, not any services offered by the wholesaler. The sales orders were approved and fulfilled out-of-state. The Department evaluated the totality of the wholesaler’s business activities to determine whether its in-state activities were within the protection of P.L. 86-272. The Department reasoned that the wholesaler’s business activities were protected as either activities related to soliciting tangible personal property orders or as activities that did not rise above the de minimis level. Ind. Dep’t of Revenue, Letter of Findings No. 02-20130167 (Mar. 26, 2014).

By Nicole Boutros and Pilar Mata

The Texas Comptroller determined that a taxpayer’s “digitizing” services provided to oil and gas industry clients were taxable data processing services for Texas sales and use tax purposes. The services at issue consisted of taking well log data from the client; analyzing, manipulating and interpreting such data; and providing the output of the data. The taxpayer argued such services were not taxable because they fell under an exception that excludes the use of a computer to facilitate “the application of the knowledge of the physical sciences…E.G., the use of a computer to provide interpretive or enhancement geophysical services” from the definition of taxable data processing. The Comptroller, however, disagreed and held that the taxpayer was processing client data for the purpose of providing the data to its client in a requested format and that such data extraction, manipulation, storage and conversion constituted a taxable data processing service under Texas law. Tex. Comp. Dec. 108,154 (Dec. 12, 2013).  

Click here to read our March 2014 posts or read each article by clicking on the title. A printable PDF is also available here. To read our commentary on the latest state and local tax developments as they are published, be sure to download the Sutherland SALT Shaker mobile app.

We hope you enjoy this very special edition of the Sutherland SALT Shaker newsletter.

In this issue:

  • Colorado Considering New “Bummer Taxes” on Transactions Related to Consumption of Marijuana
  • BOE Rules that P.L. 86-272 Is Not Applicable in California
  • Maryland Proposes a “Relative Tax”
  • Blow the WhISTLE! Proposed Legislation Startles State Tax Community
  • New York Amends False Claims Act to Encourage Tax Directors to Report Employees Who Make Errors on Returns
  • MTC “Super-Audits” to Become the Norm in 2014
  • SALT Pet of the Month: Sparkles the Unicorn!

Read the full April 1, 2014 Sutherland SALT Shaker newsletter.