Policy and Legislation

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Maryland Tax Court holds that Maryland’s limitation of interest on refunds resulting from the US Supreme Court’s decision in Comptroller of the Treasury of Maryland v. Wynne violates the US Constitution.

  • In 2014, the Maryland legislature passed a law to retroactively limit the statutory interest rate on refunds related to the Comptroller of the Treasury of Maryland v. Wynne decision.
  • The Tax Court held that the same rationale used by the Supreme Court in finding the law at issue in Wynne was in violation of the dormant commerce clause also applies to the limited interest rate on Wynne refunds.
  • The limited interest on Wynne refunds is also the subject of a separate class action lawsuit filed in the Circuit Court of Baltimore City, which had previously been dismissed due to Plaintiff’s failure to exhaust administrative remedies.

View the full legal alert.

The IRS intends to issue regulations pertaining to states’ attempts to subvert the state and local tax deduction cap.

  • The Tax Cuts and Jobs Act imposed a $10,000 ($5,000 for married individuals filing separately) limit on state and local tax deductions for federal income tax purposes.
  • Certain states, including New York, New Jersey, and Connecticut, have enacted legislation to allow taxpayers to claim a federal tax deduction in excess of the SALT cap.
  • The pending regulations will emphasize that federal income tax substance-over-form principles, not state laws, dictate the characterization of the charitable contributions.

View the full legal alert.

On May 14, 2018, Indiana Governor Eric Holcomb signed into law H.B 1316 (the Bill). The Bill provides a number of changes to Indiana’s tax laws, including responding to provisions of the federal Tax Cuts and Jobs Act. Some notable provisions of the Bill include:

  • updating Indiana’s conformity to the Internal Revenue Code from January 1, 2016 to February 11, 2018, effective for taxable years beginning on or after January 1, 2018;
  • specifying that any IRC amendments made by an act passed by Congress prior to February 11, 2018, other than the 21st Century Cures Act or the Disaster Tax Relief and Airport and Airway Extension Act, that is effective for a taxable year that begins before February 11, 2018 and affects corporate taxable income, is also effective for the same taxable year for purposes of determining Indiana adjusted gross income.
  • specifying that amounts under IRC 951A (GILTI) are treated as foreign source dividends for Indiana purposes, which means that Indiana’s Dividends Received Deduction for foreign source income under Ind. Code § 6-3-2-12 will apply to GILTI;
  • providing for similar treatment of amounts under IRC 965 Repatriation Transition Tax;
  • specifying that to the extent any amounts from the Repatriation Transition Tax or GILTI are included in Indiana income, these receipts will be included in the Indiana apportionment factor and sourced based on the rules for dividends from investments;
  • decoupling from the limitation on interest expenses under IRC 163(j); and
  • decoupling from the federal unlimited NOL carryforward period under IRC §172 and instead providing for a carryforward period of 20 years.
Eversheds Sutherland Observation: Indiana’s treatment of GILTI as a “foreign source dividend” puts GILTI on equal footing with Subpart F income (including the Repatriation Transition Tax) for Indiana corporate tax purposes. Under Indiana Code § 6-3-2-12, a 100% DRD is allowed for foreign source dividends from 80% owned corporations. The DRD is reduced to 85% for dividends from corporations in which the US shareholder owns a 50-80% interest, and further reduced to 50% for dividends from corporations in which the ownership percentage is 50% or less. Indiana’s treatment of GILTI under the Bill is similar to certain other states’ treatment of GILTI including Georgia, which exempts both GILTI and Subpart F income from state taxation, and Illinois, which has a foreign dividend subtraction that applies to both GILTI as well as Subpart F income.

Read more here: Indiana H.B. 1316

The Tax Cuts and Jobs Act, P.L. 115-97,[1] made sweeping changes to the Internal Revenue Code, and will have far-reaching implications for state tax systems that broadly conform to the IRC.

In this article for Law360, Eversheds Sutherland attorneys Jeffrey Friedman, Eric Tresh, Todd Lard and Todd Betor focus on the major state income tax implications of the TCJA’s international tax provisions, including:

  • The transition tax imposed by revised IRC § 965;
  • The foreign-source dividends received deduction, or DRD, allowed by new IRC § 245A;
  • The tax on global intangible low-taxed income, or GILTI, in new IRC § 951A and related deduction in IRC § 250;
  • The deduction allowed for foreign-derived intangible income, or FDII, in new IRC § 250; and
  • The base erosion anti-abuse tax, or BEAT, imposed under new IRC § 59A.

View the full article.

In another of the so-called “Compact” cases, the Oregon Supreme Court affirmed the decision of the Oregon Tax Court and held that: (1) the 1967 Oregon Legislature, in enacting Oregon Statute Section 305.655, did not clearly and unmistakably intend for Oregon to enter into a binding contract that would bind the states under the Oregon and federal contract clauses, and (2) the 1993 Legislature’s repeal of part of Oregon Statute Section 305.655 did not violate the Oregon Constitution by not setting out the text of that statute. In reaching the first part of its holding, the court considered the text, context and legislative history of Section 305.655. The court found that functionally, the terms of the statute did not resemble a contract, because the Multistate Tax Commission did not permit member states to do anything collectively that each state could not do unilaterally. The context of the statute was consistent with the adoption of a uniform law instead of an interstate compact. While the legislative history supports the position that the Oregon legislature understood that it was entering into an interstate compact, the history also supports that the compact would require congressional approval before the compact could go into operation. In reaching its second holding, and relying on one of its prior decisions, the court found that the amendment of Section 305.655 by the 1993 Legislature reflected a complete and perfect legislative choice to replace one set of apportionment formulas with another. In a concurring opinion, three judges reached a different conclusion, finding that the 1967 Oregon Legislature, in enacting Section 305.655, intended to enter into a binding contract, although it ultimately agreed with the majority that the taxpayer did not have a contractual right to enforce Section 305.655. Health Net, Inc. v. Department of Revenue, 362 Or. 700 (2018).

It is more complicated to determine an in-state sale regarding the provision of multistate services or licenses of intangibles. Historically, states looked to a taxpayer’s costs of performing the service or licensing the intangible. Some states have become critical of this cost-of-performance method and replaced it with a market-based method of computing in-state sales.

In this edition of A Pinch of SALT, Eversheds Sutherland Partner Jeffrey Friedman discusses the recent amendments to the Multistate Tax Commission’s (MTC) Model General Allocation and Apportionment Regulations; how the model regulations can be further improved; how states are responding to the model regulations; and what is next for the MTC.

View the full article.

On April 24, Maryland Governor Larry Hogan signed Senate Bill 1090 and House Bill 1794, which adds Maryland to the growing list of states that are moving towards a single sales factor formula to apportion corporate net income.

  • Under prior Maryland law, most corporations generally used a three-factor formula based on in-state property, payroll and a double-weighted sales factor.
  • The newly enacted Bills provide a four-year phase-in period to transition from Maryland’s current three-factor formula to a single sales factor formula by tax year 2022.
  • Interestingly, the Bills also allow certain “Worldwide Headquartered Companies” to elect to use the current three-factor formula rather than the new single sales factor formula.

View the full Legal Alert.

What are the State Tax Implications of International Tax Reform? Jeff Friedman and others outline the key points at the COST 2018 Spring Audit Session/Income Tax Conference in snowy Boston, Massachusetts.

These issues were also addressed in a recent article, “Waiting for the Other Shoe to Drop: State and Local Tax Implications of Federal Tax Reform – International Tax Provisions,” in Bloomberg Tax – Daily Tax Report: State by Jeff Friedman, Todd Betor and Michael Spencer.

        

On April 10, 2018, and April 13, 2018, Oregon Governor Kate Brown signed into law S.B. 1529 and S.B. 1528 (the Bills), respectively, which provide a series of changes to Oregon’s income tax laws in response to recent federal tax changes as part of the federal Tax Cuts and Jobs Act. Most notably, the Bills: (i) update the state’s IRC conformity date to December 31, 2017; (ii) decouple from the federal temporary dividend received deduction with respect to the transition tax under IRC § 965 by requiring an addback of the federal deduction allowed under IRC § 965(c); (iii) provide relief from double taxation of repatriated income for taxpayers subject to Oregon tax under the state’s tax haven legislation by allowing a credit equal to the lessor of any taxes paid attributable to the tax haven addback for years beginning on or after January 1, 2014, and before January 1, 2017, or the amount of Oregon tax attributable to income reported under IRC § 965 for tax years beginning on or after January 1, 2017, and before January 1, 2018; and (iv) establish a state Opportunity Grant Fund and provide individual and corporate income tax credits for contributions made to this fund. Although taxpayers are required to addback the amounts deducted under IRC § 965(c), the Oregon Department of Revenue has issued guidance stating their position that the transition tax’s income inclusion is eligible for the state’s dividends received deduction under ORS 317.267(2)(b), which provides an 80% deduction for dividends received from a 20% owned corporation and a 70% deduction for all other dividends.

The Bills also repeal the tax haven addback found under Oregon Revised Statutes section 317.716 and require the Department of Revenue to evaluate the efficacy of including global intangible low-taxed income (GILTI) under IRC § 951A in the state tax base in comparison to Oregon’s now-repealed tax haven addback, with a report to be issued on or before December 1, 2020.

Read more here:  Oregon Senate Bill 1528; Oregon Senate Bill 1529; Oregon Corporation Excise/Income Tax Update