In a last-minute deal to avert a government shutdown, New Jersey Governor Phil Murphy and the New Jersey Legislature cobbled together a budget with numerous amendments to New Jersey’s tax law.
The New York Legislature passed its 2018-2019 Fiscal Year budget on March 30, 2018, which is expected to be signed into law by Governor Cuomo. The Legislature responded to the Tax Cuts and Jobs Act (TCJA) passed by the United States Congress late last year by excluding IRC § 965 repatriated income from New York taxable income. However, the final budget failed to address other TCJA provisions, such as the tax on global intangible low-taxed income (GILTI) and the interest expense limitation under IRC § 163(j). Thus, New York will conform to these federal tax changes.
Many states require or permit affiliated businesses to report their income to the state in a combined group return. In their article for Bloomberg Tax, Eversheds Sutherland attorneys Maria Todorova, Justin Brown and Samantha Trencs discuss some of the complexities of combined reporting related to the inclusion of foreign entities in a combined group, including trends among states intended to expand the combined group to include additional foreign affiliates.
By Samantha Trencs and Eric Coffill
The Colorado Court of Appeals held that a corporate parent doing business in Colorado was not required to include its subsidiary holding company that held no property or payroll in Colorado or elsewhere in its Colorado unitary combined corporate income tax report. The holding company was not an “includable” corporation under Colorado’s 80/20 test because it did not have more than 20% of its property and payroll assigned to locations in the US. The court also held that even though the holding company and its foreign subsidiaries (which held property and payroll outside of the US only) elected to be treated as a single C corporation on its federal return under the federal check-the-box regulations, Colorado was not bound by this election for state tax purposes. The court also rejected the Department of Revenue’s economic substance argument to include the holding company in the Colorado combined report. Agilent Technologies, Inc. v. Dep’t of Revenue of Colorado, No. 16CA849 (Colo. App. Nov. 2, 2017).
By Samantha Trencs and Carley Roberts
In a private letter ruling, the Colorado Department of Revenue stated that an affiliated group of corporations engaged in distinctly different commercial activities requiring different apportionment methodologies under Colorado law could use the allocation and apportionment methodology set forth in two previous private letter rulings (PLR-11-002 and PLR 15-005) to calculate the group’s combined income tax liability. Under the rulings, the Department set forth the following steps to calculate the affiliated group’s Colorado income tax liability: (1) eliminate all intercompany transactions; (2) separately calculate the modified federal taxable income for each subgroup; (3) separately allocate income and loss and apportion any apportionable business income or loss using the respective apportionment methodology and factors for each subgroup; (4) add together all business income or loss allocated and apportioned to Colorado for each subgroup to produce the aggregated Colorado tax base; and (5) apply the income tax rate to the aggregated tax base. The Department also noted it is in the process of adopting a new methodology via amendment to its administrative rules and that once these rules become effective, the affiliated group must calculate its combined income tax liability consistent with the amendment. Colo. Dep’t. of Rev., PLR-17-001 (Apr. 27, 2017).
By Samantha Trencs and Jeff Friedman
The Minnesota Supreme Court respected a foreign entity’s federal check-the-box election for the purpose of determining which entities were included in the Minnesota combined franchise tax reports. The court held that including the income and apportionment factors of a foreign entity that elects under federal tax law to be disregarded as a separate entity did not violate Minnesota’s water’s edge rule. The court determined that the federal treatment as a disregarded entity also meant that it was disregarded for Minnesota franchise tax purposes, and it was therefore treated as part of its domestic parent. Ashland Inc. v. Minnesota Comm’r of Revenue, No. A16-1257 (Minn. Aug. 2, 2017).
Traditionally, mandatory worldwide combined reporting was the state corporate tax issue of most concern to companies engaged in international business. States are now moving toward a water’s-edge unitary combination method for both US and foreign-based companies.
In his article for the Spring 2017 edition of Partnering Perspectives, Eversheds Sutherland (US) Senior Counsel Eric Coffill covers four trends towards increasing the tax base of a state by expanding the water’s-edge.
The San Diego County Superior Court determined that California’s combined filing regime—which requires interstate taxpayers to use combined reporting but permits intrastate taxpayers to choose between combined or separate reporting—does not violate the US Constitution’s Commerce Clause. The court acknowledged that (1) the interstate and intrastate unitary businesses were being treated differently, and (2) a triable issue of fact existed on whether such differential treatment resulted in discrimination against interstate businesses. The court nevertheless upheld the constitutionality of California’s statute granting intrastate taxpayers the option to file a separate return. The court reasoned that, even if discrimination against interstate taxpayers could be shown, the statute would survive strict scrutiny because the state has a legitimate interest “in preventing the manipulation and hiding of taxable income” by requiring combined reporting “to ensure that all business income from interstate business is accurately accounted for and that it is fairly apportioned.”
The court’s order was issued on remand from a 2015 Court of Appeal opinion that reversed the trial court’s previous order dismissing the taxpayer’s constitutional challenge. The taxpayer has appealed this order, bringing the case back to the Fourth District Court of Appeal for further disposition. Harley Davidson, Inc. v. California Franchise Tax Board, Minute Order, Case No. 37-2011-00100846-CU-MC-CTL (Oct. 31, 2016), on remand from, 187 Cal. Rptr. 3d 672 (Cal. App. 4th 2015), appeal docketed, Case No. D071669 (Cal. App. 4th Dec. 27, 2016).
The Massachusetts Appellate Tax Board (ATB) upheld the Commissioner’s assessment, resulting from a denial of a subsidiary’s securities corporation classification for corporate excise tax purposes. Companies classified as securities corporations receive favorable excise tax treatment under G.L. c. 63, § 38B(a), including not being subject to inclusion in the parent’s combined group. The ATB found that classification required either submitting an application before the end of the taxable year or having a classification from the Commissioner from a previous taxable year. The Commissioner denied the classification because the company did not file the required application. The ATB determined that the Commissioner’s prior acceptance of returns without audit did not constitute acquiescence to the classification. Without the classification, the subsidiary should have been included in the parent’s combined reporting group, which resulted in a higher tax liability for both the subsidiary and its parent. Techtarget, Inc. v. Commissioner of Revenue, No. C314725, ATB 2016-481 (Mass. App. Tax Bd. Nov. 18, 2016).
The California Court of Appeal upheld Comcast’s $2.8 million franchise tax refund. The court determined that: (1) Comcast and its subsidiary QVC were not unitary, such that QVC was properly excluded from Comcast’s combined group, and (2) a termination fee Comcast received from a failed merger constitutes apportionable business income. Comcast and QVC were not unitary because Mobil Oil’s three hallmarks of a unitary relationship—centralized management, functional integration and economies of scale—were not present. The court concluded that because QVC’s day-to-day operations were conducted by QVC’s management independently from Comcast a non-unitary finding was justified. On the second issue, the court held that a merger termination fee satisfied California’s transactional test for business income. Sutherland represented the taxpayer in this matter. ComCon Prod. Serv. I Inc. v. Franchise Tax Bd., No. B259619 (Cal. Ct. App. 2016).