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On March 22, 2012, Utah Governor Gary Herbert signed House Bill 384 (2012) into law, expanding the types of companies that are required to collect and remit Utah sales and use tax. HB 384 requires sellers that hold “substantial ownership interests” in certain “related sellers” to collect and remit Utah sales and use tax. Today, the Utah State Tax Commission released guidance on how to determine whether a business entity’s activities trigger the state’s new affiliate nexus law. The new nexus regulations go into effect on July 1, 2012.

The new affiliate nexus law, Utah Code Ann. § 59-12-107(2)(b), treats a seller as if it is selling tangible personal property, a service, or a product transferred electronically for use in Utah and will be required to collect and remit sales and use taxes if:Continue Reading Utah Quietly Expands Affiliate Nexus Statute

Georgia Governor Nathan Deal signed three bills that will enact a wide range of changes to Georgia’s tax structure and procedure (HB 386, HB 100, and HB 846). These changes include a new sales tax exemption for energy used in manufacturing, an affiliate nexus provision, creation of a new Georgia Tax Tribunal, publication of letter rulings, and changes to the taxation of motor vehicles, among others. The bills are the culmination of the comprehensive tax reform effort started in 2010 by the Tax Reform Council. While the bills fall short of the dramatic changes originally proposed by the Council (which included taxation of services and groceries, and communications tax reform), they nevertheless include a number of taxpayer-friendly changes.Continue Reading Georgia Tax Reform 2.0: Three Bills Signed by Governor

The Washington Department of Revenue (Department) determined that an out-of-state mail order retailer (Taxpayer) had substantial nexus with the state based on the activities of an in-state affiliate (Affiliate), and therefore, upheld an assessment of business and occupation tax (B&O Tax) and sales tax. Determination No. 10-0057 (released Dec. 20, 2011). The Taxpayer sold tangible…

Recently, there has been significant activity in Congress related to sales tax nexus.

  • In July, Sen. Richard Durbin (D-Ill.) introduced the Main Street Fairness Act (the “Durbin Bill”), the first of three bills introduced this year that would allow states to collect sales taxes from remote sellers.
  • On October 13, 2011, Rep. Steve Womack (R-Ark.) and Rep. Jackie Speier (D-Cal.) introduced the Marketplace Equity Act of 2011 (the “Womack Bill”) that would allow states to impose a sales or use tax collection requirement on remote sellers with no physical presence in a state.
  • Yet another bill, the Marketplace Fairness Act, was introduced by Sen. Michael Enzi (R-Wyo.) on November 9 (the “Enzi Bill”). This bill appears to have bipartisan support, as senators on both sides of the aisle are co-sponsors: Sens. Durbin, Lamar Alexander (R-Tenn.) Tim Johnson (D-S.D.), John Boozman (R-Ark.), Jack Reed (D-R.I.), Roy Blunt (R-Miss.), Sheldon Whitehouse (D-R.I.), Bob Corker (R-Tenn.), and Mark Pryor (D-Ark.).
  • In contrast to these bills, Sens. Ron Wyden (D-Ore.) and Kelly Ayotte (R-N.H.) introduced a resolution opposing the enactment of “new burdensome or unfair” tax collection requirements on small Internet sellers. Sen. Res. 309 (Introduced Nov. 2, 2011).

Despite the resolution, Congress will seriously consider the three proposed acts. The three acts attempt to address the same issue through slightly different approaches. All three would allow states to collect tax from remote sellers if certain uniformity requirements are met. The uniformity requirements are similar, for the most part, but with some slight differences as discussed below.Continue Reading Nexus? Who Said Anything about Nexus?: A Summary of the Federal Nexus Bills

The Franchise Tax Board (FTB) recently issued guidance on California’s updated “doing business” provision for California corporate income tax purposes. FTB Notice 2011-06 (Oct. 12, 2011).  This guidance clarifies recent amendments that specify when the Chief Counsel may issue a ruling regarding whether a taxpayer is doing business in the state. 

Effective January 1, 2011…

In shocking similarity to the once-popular Amy Winehouse song “Rehab,” the U.S. Supreme Court denied certiorari in two nexus cases: KFC Corp. v. Iowa, 792 N.W.2d 308 (Iowa Dec. 30, 2010) and Lamtec Corp. v. Wash. Dep’t of Revenue, Docket No. 83579-9, en banc (Wash. Jan. 20, 2011) but left open the possibility to hear DIRECTV, Inc. v. Levin, 128 Ohio St.3d 68 (Ohio Dec. 27, 2010).

KFC is an economic nexus case involving the license of intangibles. KFC did not have any employees or property within Iowa; KFC licensed the use of trademarks and other intangibles to independent franchisees in the state in exchange for royalties. The Iowa Supreme Court held that KFC’s license of the intangibles was the “functional equivalent” of physical presence under Quill and that, in the alternative, physical presence was not required to find substantial nexus for corporate income tax purposes.

The Court also denied certiorari in Lamtec, where the taxpayer’s sole presence in the state was irregular employee visits to customers. The Washington Supreme Court determined that Lamtec had nexus with Washington for Business and Occupation (B&O) tax purposes and raised additional questions regarding how Washington views the physical presence test relating to the B&O tax, stating: “We conclude that to the extent there is a physical presence requirement, it can be satisfied by the presence of activities within the state.” (emphasis added).Continue Reading These Cases Tried to Go to the U.S. Supreme Court, But the Court said “No…No…Oh?”

The Virginia Department of Revenue (i) applied its narrow interpretation of the State’s related member add-back provision to disallow a taxpayer’s factoring company discount losses, and (ii) prohibited the taxpayer and its affiliated factoring company from filing a combined return because the factoring company did not have nexus with the State. Va. Public Document No. 11-162 (Sept. 26, 2011).

The taxpayer sold, or “factored,” its account receivables to a bankruptcy remote affiliate at a discounted price and claimed deductions for its losses on the discounted sales. The taxpayer did not add back its factoring discount losses paid to a related party because the add-back statute provides a “subject to tax” exception from the add-back requirement if the related party was subject to tax in any other state. In this case, the factoring company was subject to tax in one state. Notwithstanding the literal language of the exception, the Department interprets the subject to tax exception narrowly to allow an exception only for the amount actually apportioned to and taxed by other states and, on audit, reduced the taxpayer’s losses accordingly. The Commissioner upheld the auditor’s narrow interpretation of the subject to tax exception, limiting it to post-apportionment amounts, consistent with prior rulings (See Va. Pub. Doc. Nos. 09-49, 09-115).Continue Reading Who Lost the Remote?: Virginia Disallowed Losses and Combined Reporting

The Arizona Department of Revenue (the Department) issued an Individual Income Tax Ruling describing the treatment of Real Estate Mortgage Investment Conduits (REMICs). Ariz. ITR 11-6 (Aug. 8, 2011). The ruling affirms the Department’s longstanding positions regarding the sourcing of income received from REMICs and whether simply holding an interest in an Arizona REMIC creates nexus. Ariz. ITR 91-2 (Apr. 2, 1991). 

For federal tax purposes, the IRS treats REMICs as flow-through entities and does not tax the entity itself on its income. Rather, the REMIC’s interest holders are taxed on the REMIC’s income. Generally, REMICs will have two types of holders: regular interest holders and residual interest holders. Regular interest holders are taxed as if their interests were debt instruments, whereas residual interest holders report the REMIC’s taxable income or loss in proportion to their percentage ownership, similar to partners in a partnership.Continue Reading REMIC – the Remix – Arizona Style

Alabama ALJ Bill Thompson voided a local sales tax assessment asserted against an electronics retailer because the retailer did not have a physical presence in the taxing jurisdictions. Although the retailer sent repairmen into the local taxing jurisdictions, the retailer did not have a physical store or sales representatives in the localities, and therefore lacked…

After nearly 60 years of experimentation with value added and gross receipts taxes, Michigan has now joined the rank-and-file corporate income tax states through its repeal of the Michigan Business Tax (MBT). Governor Snyder signed the tax package (H.B. 4361, H.B. 4362) into law on May 25, 2011. According to the Council on State Taxation, the legislation takes the state from 30th to 16th in the nation in terms of lowest state and local business tax burden.

The new 6% corporate income tax, effective January 1, 2012, retains many of the same features as the Business Income Tax component of the former MBT, including unitary combined reporting, single sales factor apportionment with market sourcing, a Finnigan apportionment rule, and the same tax rate. The MBT factor presence nexus standard is also retained, under which nexus is established if an out-of-state company has physical presence in Michigan for more than one day or actively solicits sales in the state and has Michigan gross receipts of $350,000 or more. The new tax also incorporates the same tax regimes for insurance companies and financial institutions that existed under the MBT. Insurance companies continue to be subject to the greater of a 1.25% tax on gross direct Michigan premiums or the retaliatory tax, and financial institutions will still be subject to tax based on 0.29% of net capital.Continue Reading Michigan’s Tax Roulette Lands on a Corporate Income Tax