Colorado Adopts Factor Presence Nexus Standard for Income Tax

Colorado recently adopted a new income tax nexus standard which takes effect on April 30th (today).

The standard is based on the Multistate Tax Commission (MTC)'s "factor presence" nexus standard.

The standard says:

A corporation is doing business in Colorado for income tax purposes whenever the minimum standards of Public Law 86-272 (15 U.S.C. 381) are exceeded, and it has substantial nexus with this state.

The Substantial Nexus Standard is described as follows:

1. Business entities that are organized or commercially domiciled in this State have substantial nexus with this State.
2. Business entities organized outside the State are doing business in this State, have substantial nexus, and are subject to Colorado filing requirements and, if applicable, Colorado income tax imposed by Article 22 of Title 39 when in any tax period the property, payroll or sales of the business in the State, exceed the following thresholds during the tax period: $50,000 of property; or $50,000 of payroll; or $500,000 of sales; or twenty-five percent of total property, total payroll or total sales.

For all of the details, please go to Reg. 39-22-301.1.

So What?

If your company exceeds those thresholds and you have never filed an income tax return in Colorado, please contact me at brian.strahle@bakertilly.com to determine your next step.

Washington: Exemptions Eliminated, New Nexus Standards Enacted, PLUS MORE!

Washington has enacted numerous changes affecting its Business and Occupation (B&O) tax laws, sales tax laws, etc. via the passing and signing of SB 6143.

In regards to the B&O tax changes, here are a few highlights:

1. Sec. 101 imposes a single-sales apportionment factor for royalty and service income.
2. Sec. 102 states any person with substantial nexus in any tax year is deemed to have substantial nexus with the state for the following tax year.
3. Sec. 103 creates an economic nexus standard. Service providers and companies receiving intangible income will want to review this standard closely.
4. Sec. 104 creates a "factor presence" nexus standard. Meaning, a nonresident individual or business is deemed to have "substantial nexus" if it has more than $50,000 of property in the state, more than $50,000 of payroll in the state, and more than $250,000 of receipts from the state, OR at least 25% of the person's total property, total payroll or total receipts is in the state.
5. Sec. 201 discusses how the Washington DOR will disregard or disallow certain types of tax avoidance transactions or arrangements based on economic substance. You may want to look this section over if you have been involved in any Washington tax planning over the years.
6. Sec. 401 eliminates the direct seller representative exemption for out-of-state sellers. The bill also retroactively limits the exemption to consumer products for periods prior to May 1, 2010. Due to the Dot Foods case, Washington felt it was necessary to reinforce the intent of the legislature in enacting this exemption was to provide a narrow exemption for out-of-state businesses engaged in direct sales of consumer products, typically accomplished through in-home parties or door-to-door selling.
7. Sec. 701 clarifies that amounts received by an individual from a corporation as compensation for serving as a member of the corporation's board of directors are subject to B&O tax under the services classification. One of the major business and occupation tax exemptions is provided in RCW 82.04.360 for income earned as an employee or servant as distinguished from income earned as an independent contractor. The legislature's intent in providing this exemption was to exempt employee wages from the business and occupation tax, but not to exempt income earned as an independent contractor. The legislature finds that corporate directors are not employees or servants of the corporation whose board they serve on, and therefore, are not entitled to a business and occupation tax exemption under RCW 82.04.360.

OTHER CHANGES

The bill also creates other changes related to sales tax, real estate excise tax, the first mortgage B&O tax deduction, B&O tax preferences for certain agricultural products, etc., etc., etc. For all of the details, go to the Bill.

EFFECTIVE DATE

Most provisions are effective May 1, 2010 or June 1, 2010.


Please contact me at brian.strahle@bakertilly.com for assistance in determining how these changes impact your company.

Question: How Do You Choose a State and Local Tax Consultant?

Who do you call when you have a state and local tax issue, question or problem? How do you select that person or consultant?

Is your decision based on relationships? Have you known the person very long? Is your selection based on past experience with the consultant where they did a good job at a reasonable price (or just the opposite)? How do you know you are getting the best professional (for your situation), and the best service at the best price for you? How do you know who is right for you?

With state and local tax laws changing rapidly, small firms can't keep up without in-house state and local tax resources. Large firms have more resources, but may not have the right resource for you at the moment.

State and local tax professionals move from firm to firm (change jobs) quite a bit. How do you know if you are getting the best professional when you choose based on the firm, and not the individual? Does the firm's reputation mean more than the talent of the individual?

Large firms may be focused on the "big fish;" therefore, you may not get the service and attention you deserve.

NOTE: Firms, whether big or small, know they don't have the best state and local tax person in every state. Did they tell you that?

Are you really hiring "the firm" or "the person?"

Personal Thoughts:

Whatever your answers are to the above questions, personally, I want to make the state and local tax profession stronger, technically and ethically. I want clients to have a sound, reliable, technical resource. I want the state and local tax profession to be more personal, and less ego. I want a firm to treat people (clients and employees) like they treat profits. Truly listen and seek to understand.

Nexus: Where it All Begins!

“Got Nexus”? Of course you do. You just don’t know it.

If you are asking yourself, what am I talking about? I am talking about having a “taxable presence” in a state for state tax purposes, whether it be sales tax, income tax, gross receipts tax, margin tax, business tax, commercial activities tax, minimum taxes, limited liability entity taxes, LLC fees, and the list goes on.

If you didn’t know, basically if you "sneeze or spit" in a state, you’ve got nexus. There are all kinds of nexus, such as: affiliate nexus, agency nexus, economic nexus and my favorite of all, “Amazon Nexus.” All of these are diversions from the “old time” nexus we like to call “physical presence” nexus. You know, the old days when a company had to have a physical presence in a state to have nexus. Another old time nexus principal is “substantial nexus.” Often times, a company might have “due process” nexus or de minimus nexus, but not “commerce clause” nexus (“substantial nexus”).

Economic Nexus = The New Bright Line

Another point I would like to make, seems like the new bright line test for nexus or the desire of many states, is economic nexus. Meaning, if you make a sale into a state, “BOOM,” you have manipulated the market in the state and received benefits from the state (legal protection, right to sue, etc.) that require you to pay tax on that sale (whether it be income tax, sales tax, etc.) Yeah, yeah, I know, the Quill case is supposed to require physical presence in a state for a state to charge sales tax. But what the heck is “Amazon” nexus? “Amazon” nexus, in simple terms, is catching nexus from services provided to your customer by an unrelated third party. Supposedly the third party is doing so much for you, that the third party is acting as your agent or on your behalf. Therefore, it is like “they are you, and you are them.”

Questions and Answers

My questions are: what taxpayers or companies in a state are receiving the most benefit from the state? What taxpayers or companies are using more of the resources of the state? What taxpayers or companies are driving on the roads, polluting the air, etc.? IN-STATE taxpayers. I know I am crazy, but there I said it. Out-of-state taxpayers and internet-sellers may travel into the state a little, or not at all. However, most states want to tax the out-of-state taxpayer more and the in-state taxpayer less. Hmmmm, why do you think that is?

Economic Incentives (Single-Sales Factor and Economic Nexus)

Every state wants to provide economic incentive for companies to build, expand and base their operations in their state by creating credits and incentives, but also going to a single-sales factor apportionment factor and imposing economic nexus on out-of-state taxpayers. With a single-sales factor, obviously the out-of-state taxpayer ends up paying more to the state and the in-state taxpayer pays less. The “old time” apportionment factor was three-factor (property, payroll and sales). I believe 10 or less states still use a three factor formula today.

So WHAT?

So, what’s next? Expansion of P.L. 86-272 to protect more in-state activities by out-of-state taxpayers; OR economic nexus so everyone is taxable for "sneezing or spitting" in a state? Unfortunately, I think we are headed toward economic nexus thresholds in every state. We'll see.

Please contact me at brian.strahle@bakertilly.com to discuss your nexus position and how you can proactively determine and resolve your growing liability.

Nonresident Withholding: A "Maze" of Notices?

If you or your client operates within a pass-through entity such as a S corporation, partnership or limited liability company, then you know what nonresident withholding is.

In basic terms, "nonresident withholding" is when a state requires a pass-through entity to withhold state income tax (or make a state tax payment) on a nonresident shareholder's pro rata share of the pass-through entity's income sourced to the specific state. In other words, it is a mechanism for states to better ensure that state tax will be paid by nonresident shareholders.

Now, if you or your client operates within a multi-tiered structure of pass-through entities, then nonresident withholding can become a compliance "nightmare" for both you and state taxing authorities. Most states have difficulty tracking nonresident withholding when it passes through multiple layers before it gets to the ultimate taxpayer. Therefore, state tax notices upon state tax notices can become an unwelcome, but familiar friend.
With that said, here are a few tips or questions to ask when dealing with nonresident withholding in multi-tiered structures:

1) Does the state require quarterly nonresident withholding on "actual payments/distributions" or on "allocated income"? To put it simply, some states only require quarterly nonresident withholding if a cash payment is actually made to a shareholder. If states don't require quarterly nonresident withholding, most, if not all states require annual nonresident withholding on "allocated income" whether a distribution is actually paid or not.

2) Is nonresident withholding required to be done for all nonresident shareholders regardless of the type of shareholder? Meaning, is withholding required for C corp, S corp, partnership, LLCs, individual and/or trust shareholders?

3) Does the state allow or have a mechanism for nonresident shareholders to obtain a waiver or exemption from nonresident withholding? Meaning, can a nonresident shareholder provide the pass-through entity or the state with a document to keep the pass-through entity from withholding on its share of the state's source income?

4) Is the nonresident withholding required to be done on a quarterly basis? Or can it be paid one time a year?

5) In a multi-tiered pass-through entity structure, at what level is nonresident withholding required to be done? Meaning, is the lowest entity required to do the withholding or does the state only require the entity before the ultimate taxpayer to do the withholding? This is a key question, because if it is done at the wrong level, it can cause great confusion and an explosion of notices between the state and the taxpayer.

Some of the top "problem states" when dealing with nonresident withholding are: California, Colorado, Indiana, Iowa, and Kansas. These are just a few. As I stated earlier, in a multi-tiered structure, nonresident withholding is a "tracking nightmare" for both the taxpayer and the state. Obviously, it requires meticulous record keeping to get it right.

Hawaii: Vacation Friendly; NOT Voluntary Disclosure Friendly?

Hawaii is known as a great vacation spot. However, if you find out you have had state tax nexus in Hawaii for several years, but have not filed returns, what are your options?

Like most states, Hawaii has a Voluntary Disclosure Agreement (VDA) Program. However, unlike most states, the program is "informal" and is done with phone correspondence and a letter. So what's the problem?

The problem is, Hawaii does not limit the look-back period. What? For example, if you become aware that you have had nexus in Hawaii since 1992, but haven't filed returns, you would have to file returns all the way back to 1992, even under a VDA program. So what's the benefit of coming forward under Hawaii's VDA program?

Well, you can obtain a waiver of all penalties, and it won't be considered fraud or willful evasion of tax. In addition, you can be in compliance on a prospective basis without the concern that Hawaii will learn of your previous nexus infractions, and issue a large assessment which includes tax, interest and penalties.

If you are concerned if you have nexus or a tax filing obligation in Hawaii, please contact me at brian.strahle@bakertilly.com to proactively resolve your growing liability.

Free-Report on Minnesota's New "Angel Investment Tax Credit"

Opportunities may exist for venture capital firms and start-up companies to obtain a Minnesota tax credit equal to 25% of a qualified investment.

The business and investor must meet several criteria and deadlines to take advantage of this credit.

Please contact me at brian.strahle@bakertilly.com for a FREE-REPORT explaining this new credit.

Lease Syndication Transactions: How Do You Do It?

Do you or your clients buy blocks of leases that were originated by brokers or other equipment lessors?

In many cases, parties in these transactions wish to retain servicing of the sold leases, and maintain what is known in the industry as "blind" status with their customers/lessees (i.e....the lessees don't know that their lease has been sold or assigned).

At the same time, state and local departments of revenue and their in-house and out-sourced auditors, are being very aggressive in regards to sales and use tax and personal property tax assessments.

NEED YOUR INPUT

In the interest of gathering best practices for managing SALT-related risk in this area, otherwise known as "lease syndication" transactions, I would like to gather input from others to determine if there is a generally accepted way of transferring sales and use tax and/or personal property tax filing obligations from a seller to a buyer in a lease syndication transaction.

By "generally accepted" I mean a method that is: 1) commonly used within the industry, and 2) consistently accepted by state and local taxing jurisdictions.

In the absence of such a generally accepted method, how do equipment leasing companies quantify and manage the tax risk they assume by either taking on or assigning away filing responsibilities?

Please respond to this post by either sending me an e-mail at brian.strahle@bakertilly.com or by posting a comment to this blog post.

Thank you.

Nevada Enacts Tax Amnesty!

According to budget legislation signed into law, Nevada will offer tax amnesty for all taxes beginning July 1, 2010 until October 1, 2010.

Amnesty May Save Penalties and Interest

Section 64 of Assembly Bill 6, enacted March 12, 2010, requires the Department of Taxation to allow a person who on July 1, 2010, is delinquent in the payment of a tax, fee or assessment to pay the amount due without any penalty or interest in certain circumstances.

This amnesty program will apply only to a person who files a request for relief and pays the amount due between July 1, 2010, and October 1, 2010.

Amnesty does not apply to any person who has entered into:

1. A compromise or settlement agreement with the Department of Taxation regarding the unpaid tax, fee or assessment; or
2. A compromise with the Nevada Tax Commission regarding the unpaid tax, fee or assessment pursuant to NRS 360.263.

May Still Be Audited

A person who requests or receives relief pursuant to this section may be selected for an audit and audited by the Department of Taxation in the same manner as a person who does not request or receive relief pursuant to this section.

Contact for Assistance

If you would like assistance in determining if you or your client should take advantage of this amnesty program, please contact me at brian.strahle@bakertilly.com.

California Proposes A Nexus Presumption Standard and Burdensome Notification Requirements!

A California Assembly Bill (AB 2078) has been introduced that would enact a sales tax nexus presumption standard, and burdensome notification requirements on retailers that sell into California, but are not required to collect sales tax. Sound familiar?

This proposal is very similar to what Colorado recently enacted. See COLORADO for details on Colorado's new laws which took effect March 1, 2010.

The following is a brief summary of what the bill proposes:

1. This bill would provide a rebuttable presumption that any retailer that is part of a controlled group of corporations, and that controlled group of corporations has a component member that is a retailer engaged in business in this state, as described, is presumed to be a retailer engaged in business in this state.
2. This bill would also require each retailer that is not required to collect use tax to provide notification on its retail Internet Web site or catalogue that tax is imposed on the storage, use, or other consumption in this state of the tangible personal property purchased from the retailer that is not exempt, and is required to be paid by the purchaser, as provided.
3. This bill would add the following language or authority: The Sales and Use Tax Law also authorizes, in administration of the use tax, the State Board of Equalization to require the filing of reports by any person or class of persons having in his or their possession or custody information relating to sales of tangible personal property the storage, use, or other consumption of which is subject to the tax.
4. This bill would require every person who sells tangible personal property the storage, use, or other consumption of which is subject to use tax, who is not registered with the board, to file with the board, on or before the last day of the calendar month following each quarterly period of three months, a report that sets forth the names and addresses of purchasers of the tangible personal property, the sales price of the property, the date of sale, and such other information as the board may require. The bill states this requirement would NOT apply to a person whose receipts from sales described above are less than one hundred thousand dollars ($100,000) in the prior year, and are reasonably expected to be less than one hundred thousand dollars ($100,000) in the current year.

So What?

This bill has only been proposed and is going through the California legislative process. With that said, since Colorado recently passed laws that are very similar, I could see this bill moving forward and getting signed into law. However, we could also see lawsuits filed against Colorado's laws which may alter the California bill.

Thank You For Attending the Webinar - "State of Confusion: Sales Tax in an Electronic World"

Thanks to everyone who attended our WEBINAR yesterday. We had a great turnout, and have received some excellent feedback.

We will be following up with those who attended to continue the conversation and answer any questions you may have.

Also, all attendees should receive an e-mail soon along with access to the powerpoint slides.

In the meantime, if you have any questions, please contact me at brian.strahle@bakertilly.com. Also, feel free to connect with me on LinkedIn.

Thanks again!

Practical Tips for Navigating the Sales Tax "Minefield" of "Cloud Computing"

If you are in business, then most likely, you are a buyer or seller of software/services that is considered "cloud computing." See previous posts for more details on "cloud computing."

If you are impacted by "cloud computing," you may be interested in learning what practical steps or strategy you can follow to help you navigate the sales tax "minefield" of "cloud computing." The following is a list of questions or items that you should take into consideration when buying or selling "cloud computing" services/software.

1. What state is the buyer located? What state is the seller located? What state is the server located?
2. Does the seller have nexus in the state where the customer is located? Where the server is located?
3. Does the customer receive a copy or have access to the software?
4. Who is "using" the software? (i.e., is the seller using the software to provide a service OR is the seller licensing software to the purchaser for the purchaser's use?)
5. Pay careful attention to the language in the sales contract. This will help determine or control if the sale is a license of software or a service agreement.
6. Be careful how the product/service is marketed.
7. Are you selling/purchasing software or expertise? (i.e., what is the primary purpose or objective of the transaction?)
8. Is it possible to source the transaction to a nontaxable jurisdiction?
9. How is the service or software taxed in the states where the buyer, seller and server are located?
10. Does it help or hurt to bundle the service and software pieces of the sale?

If you have any questions, please contact me.

Michigan "Kmart Fix" Legislation Signed by Governor

In previous posts I discussed the Kmart case and Michigan's guidance which affected companies operating in Michigan who own or utilize a disregarded entity such as a single member limited liability company or a qualified subchapter S subsidiary.

Since Michigan released its NOTICE to taxpayers regarding KMART Michigan Property Services, LLC, there has been a big push to alleviate the pain it was causing or going to cause. Therefore, a legislative fix was proposed. That legislative fix, House Bill 5937, was passed by the House and Senate, and signed by the Governor.

SUMMARY OF LEGISLATION

The legislation amends the revenue Act to give direction to the Department of Treasury regarding the treatment of a taxpayer that filed a Single Business Tax return that included an entity disregarded for Federal income tax purposes, and the treatment of the disregarded entity.

Specifically, for a taxpayer that filed a tax return under the former Single Business Tax Act that included an entity disregarded for Federal income tax purposes under the Internal Revenue Code, both of the following apply:

1. The Department of Treasury cannot assess the taxpayer an additional tax or reduce an overpayment because the taxpayer included the disregarded entity on its SBT return.
2. The Department cannot require the disregarded entity to file a separate tax return. In addition, if a taxpayer filed an SBT return that included an entity disregarded for Federal income tax purposes, the taxpayer cannot claim a refund based on the disregarded entity's filing a separate return as a distinct taxpayer.

The legislation is curative, and retroactive. It is intended to correct any misinterpretation concerning the treatment of an entity disregarded for federal income tax purposes under the internal revenue code under former 1975 PA 228 that may have been caused by the decision of the Michigan court of appeals in Kmart Michigan Property Services v Michigan Department of Treasury, No. 282058, May 12, 2009.

However, the legislation is not intended to affect a refund resulting from a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted prior to February 12, 2010 to a taxpayer who is a party to that proceeding.

SO WHAT?

Based on this legislative fix, companies who filed Michigan single business tax returns that included disregarded entities are no longer required to retroactively file separate tax returns for the disregarded entity. This eliminates the compliance burden and additional tax that would have been paid. However, it also eliminates the opportunity to file amended returns for the parent company, which may have resulted in refunds.

Minnesota Research and Development Credit: NOW Applies to Pass-Through Entities and is REFUNDABLE!

Minnesota Governor Signs “Jobs Bill” into Law Today!

As stated in an earlier post, on Monday, March 29, 2010, the Minnesota House and Senate both passed HF 2695. Today, Governor Pawlenty signed it into law.

The bill includes several credits and incentives; however, perhaps the most broadly applicable change involves enhancements to the Minnesota research and development credit.

Major changes to the MN R&D Credit:

1. Effective for taxable years beginning after December 31, 2009, partners in a partnership and shareholders in a S corporation may now take the R&D credit (previously, only C corporations could take the credit).
2. The tax credit is now equal to 10% (was 5%) of the first $2,000,000 of the excess (if any) of the qualified research expenses for the taxable year, over the base amount; and 2.5% on all of such excess expenses over $2,000,000.
3. The credit for taxable years beginning after December 31, 2009 is refundable (previously, was not refundable).

ACTION ITEMS

All pass-through entities should seek to take advantage of the Minnesota research and development credit for the first time in 2010.

In addition, all companies that have had losses for several years, and have never taken a Minnesota R&D credit, should seek to take advantage of the credit in 2010 to obtain a refund.

Please contact me at brian.strahle@bakertilly.com to conduct a research and development credit study to not only determine if you qualify for a credit, but also to gather the information, and documentation to support and quantify your credit (which can now be turned into cash even if your company has net operating losses).