State Taxation of Qualified Therapeutic Discovery Project Grant/Credit?

The Patient Protection and Affordable Care Act, Public Law 111-148, and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152, were signed into law by the President on March 23 and 30, 2010, respectively. These two Acts are referred to as the “Affordable Care Act.”

ISSUE

The Affordable Care Act created an new credit or grant entitled, the Qualified Therapeutic Discovery Project Grant/Credit.  The credit is in the Internal Revenue Code (IRC) as Section 48D.  The credit is a federal tax credit or grant.  Meaning, when it comes to state income tax, each taxpayer must determine whether or not the state they are filing in conforms to the IRC and will exclude the grant from federal taxable income.  OR, will the state require the taxpayer to add back the grant to taxable income.

Most states have not specifically addressed how they will treat the grant or credit.  California is one of the few states that has specifically addressed it, and said it does not conform to the Act, and taxes the grant.

SOLUTION

In cases where a state has not specifically addressed it, it is necessary to review the applicable state's general conformity to the IRC.  If you need assistance in determining your state's treatment, please contact me.

Colorado Repealing Notification Requirements?

Two bills have been introduced in Colorado which would impact Internet and remote retailers that do not collect Colorado sales tax.

Use Tax Exemption

SB56 exempts from use tax the storage, use, or consumption of any tangible personal property purchased by Colorado purchasers from an out-of-state retailer that does not collect Colorado sales tax.

Notification Requirements Repeal

SB73 repeals multiple bills that were enacted last year regarding sales tax credits, software, etc.  Most importantly for Internet and remote retailers that do not collect sales tax, the bill would repeal the notification requirements enacted last year. 

To check the status of these bills in the future, go to Colorado bill status.

STOP! Don't Comply With Colorado Notification and Reporting Requirements!!

A United States District Court Judge in Colorado issued a preliminary injunction against the enforcement of Colorado's notification and reporting requirements for noncollecting retailers.  This injunction is a result of the Direct Marketing Association's lawsuit filed in August, 2010.

The website Colorado created as a tool and resource for noncollecting retailers, has been replaced with the following:

Pursuant to the order for a preliminary injunction of the Federal District Court for the District of Colorado (Judge Blackburn), enforcement of the reporting requirements for non-collecting retailers that you are attempting to access has been preliminarily enjoined.

Until further action by the court in this matter, you are not required to comply with these reporting requirements.

The court's decision does not affect a Colorado customer's liability for the tax on any purchase on which sales tax was not collected. Although non-collecting vendors are temporarily not required to give customers summaries of their purchases, customers are still required to file a Consumers Use Tax Return and pay the tax due. Please see our Consumers Use Tax Web page for more information and instructions on how to file.

What Does This Mean?

It means that, for the moment, noncollecting retailers do not have to comply with the Colorado notification and reporting requirements.  Therefore, nothing is due January 31, 2011 as previously thought.

Stay tuned.  The DMA will continue its lawsuit and see if the Colorado requirements can be proven to be unconstitutional and permanently revoked or repealed.

Will Michigan Repeal the Michigan Business Tax?

Last week, the Michigan Governor stated he wanted to eliminate the Michigan Business Tax (MBT) with a 6% corporate net income tax.

In conjunction with the Governor's State of the State address, two bills were introduced that would repeal the MBT.

Michigan HB 4047

Michigan SB 1

Will it happen?  Wait and see.

Minnesota Angel Investment Credit - Annual Report Due February 1, 2011!

REMINDER!!

Investors and funds that made 2010 investments and businesses that received 2010 investments under the Angel Tax Credit program must file an annual report by February 1, 2011.

To download a report form, go to: MN Angel Credit Annual Report.

Connecticut Introduces Three Bills to Tax Internet Sales

The Connecticut General Assembly introduced three bills last week, which, if enacted, would impact Internet retailers. 

HB 5543 proposes that the Department of Revenue Services study the current laws and cases concerning the imposition of the duty to collect and remit sales tax on retailers that sell electronically, and make recommendations on how Connecticut can best address this issue to the joint standing committee of the General Assembly having cognizance of matters relating to finance, revenue and bonding.

The purpose of the study would be to work toward putting in place an effective system to collect sales tax from retailers who sell via the Internet or the cloud.

HB 5545 proposes that section 12-407 of the general statutes be amended to require that, if a retailer has entered into an agreement with a resident of this state to refer customers to that retailer by means of a link on such resident's Internet web site, such retailer shall be presumed to be soliciting business within this state and shall be liable for the sales tax due on all purchases made from the retailer by residents of this state.

SB 259 proposes that the general statutes be amended to require Internet retailers to collect and remit sales tax.

We'll have to wait and see what happens to these bills.  To check the status of these bills in the future, go to CT legislation tracking.

California Takes Aim at Remote Retailers!

The California Assembly introduced two bills this week aimed at remote retailers. 

Amazon.com Nexus - AB153

One bill (AB 153) is an Amazon.com nexus bill similar to New York, Rhode Island and North Carolina.  It is also similar to bills introduced in Illinois, Mississippi and New Mexico this year.

The bill changes the definition of a retailer engaged in business in this state to include:

any retailer entering into agreements under which a person in this state, for a commission or other consideration, directly or indirectly refers potential purchasers, whether by an Internet-based link or an Internet Web site, or otherwise, to the retailer, provided the total cumulative sales price from all sales by the retailer to purchasers in this state that are referred pursuant to these agreements is in excess of $10,000 within the preceding 12 months, except as specified.

The bill would further provide that a retailer entering specified agreements to purchase advertising is not a retailer engaged in business in this state.

Nexus Presumption and Notification Requirements - AB155

The other bill (AB155) would impose nexus presumption standards for members of commonly controlled groups, and impose notification requirements similar to those currently in effect and adopted last year by Colorado.

The bill would revise the definition of "retailer engaged in business in this state" to mean any retailer that has a substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon which federal law permits this state to impose a use tax collection duty. The bill would also include specified retailers as retailers engaged in business in this state and would eliminate an exclusion.

The bill would also require each retailer that is not required to collect use tax to provide notification on its retail Internet Web site and any catalog that tax is imposed on the storage, use, or other consumption in this state of the tangible personal property purchased from the retailer and is required to be paid by the purchaser, as provided.

The bill would require every person not required to register with the board that sells tangible personal property the storage, use, or other consumption of which is subject to use tax to file a report with the board regarding those sales, as specified. The bill would also require those persons to annually send a notice to each purchaser showing the total amount of purchases made by that purchaser in the prior calendar year and informing the purchaser of the obligation to file the appropriate use tax returns, as prescribed. The bill would impose specified monetary penalties for failure to comply, while excluding from these requirements persons whose receipts from those sales do not exceed a specified amount.

What's Next?

Its only January 21st, and we have had four states introduce Amazon.com legislation (IL, MS, NM and CA).  The "use tax" gap is a problem in every state, and Amazon.com nexus is an easy target as a solution.  Amazon.com nexus is just a way of collecting use tax that is already due to the state.  Unfortunately, there are negative side effects that occur for individuals and businesses that operate in affiliate programs. 

With states budgets in crisis mode, states will be looking at cutting expenses, increasing taxes and increasing incentives for businesses to expand in their state and/or create jobs. If budget pressures continue to increase, new governors and state legislators may have no choice but to overlook protests from individuals and businesses that operate in affiliate programs, and adopt Amazon.com nexus standards. 

Keep watching to see what's next.

New Mexico Introduces Amazon.com Nexus Bill!

New Mexico is following Illinois and Mississippi in 2011 by introducing an Amazon.com nexus or "click-through" nexus bill (SB 95). 

The language in the bill is:

A person with a business with no physical presence in New Mexico is presumed to be engaging in business in New Mexico and has nexus with the state for purposes of due process and interstate commerce if:

1. that person enters into an agreement with an affiliate physically present in New Mexico, for a commission or other consideration, to directly or indirectly refer potential customers, whether by link or an Internet web site or otherwise, to that person; and
2. the cumulative gross receipts from sales by that person to customers physically present in New Mexico who are referred to that person by all affiliates with an agreement described in this subsection are in excess of ten thousand dollars ($10,000) during the preceding twelve-month period ending on June 30 of any year.

The presumption of nexus established by SB 95 may be rebutted by proof that the affiliate made no solicitation in the state that would satisfy the nexus requirements of the United States constitution on behalf of the person presumed to be engaging in business in New Mexico.

For all of the details, please check out the bill, SB 95.

Just like Illinois and Mississippi, we will have to wait and see if it gets enacted.

Illinois Tax Increases Become Law!

Illinois Gov. Pat Quinn signed legislation (SB2505) last Thursday that temporarily raises Illinois income taxes by two-thirds.

The personal income tax rate immediately rises to 5 percent, up from 3 percent. The corporate income tax rate rises immediately to 7 percent, up from 4.8 percent. The increases are at that level for four years and then are scheduled to decline. For example, the personal tax rate drops to 3.75 percent in 2015 and eventually to 3.25 percent a decade after that.

The increases are retroactive to Jan. 1, 2011.

According to news reports, the state budget deficit was projected to hit $15 billion in the coming year, endangering government's ability to pay employees, provide money it owes to schools and local governments and reimburse the businesses and charities that work for the state. Quinn's office estimates the tax increase will generate about $6.8 billion a year, enough to balance the annual budget and begin chipping away at the state's backlog of about $8.5 billion in unpaid bills.

To view the actual bill, go to SB2505.

Internet Sales / Non-Collecting Retailers: January 31 Deadline Fast Approaching!

The January 31, 2011 notification to purchasers requirement is fast approaching.

All retailers that meet the following requirements are required to notify purchasers by January 31, 2011 that they are required to self-assess use tax and pay it to Colorado:

• Do not have nexus in Colorado
• Do not collect sales tax on sales to Colorado purchasers
• Have $100,000 or more in Colorado sales

The notification is required to ONLY be sent to customers with more than $500 in annual purchases from the non-collecting retailer.

Background

Out-of-state retailers that are not required to collect Colorado sales or use tax and choose not to collect Colorado sales or use tax and have total annual gross sales in Colorado of $100,000 for customers that have more than $500 in annual purchases must:

Provide notice with each purchase

The notice must:

• State that the retailer does not collect Colorado sales or use tax.
• State that the purchase is not exempt from Colorado sales or use tax merely because it is made over the Internet or by other remote means.
• State that State of Colorado requires Colorado purchasers to file a sales or use tax return at the end of the year for all taxable Colorado purchases that were not taxed, and pay tax on those purchases
• The notice must be easily seen and located near the total price.

The notice may also state that the retailer will provide an end-of-year summary of Colorado purchases to the customer, and that the retailer is required by law to provide the Colorado Department of Revenue with an annual report of the total dollar amount of the customers Colorado purchases at the end of the year. (Details of how and when to file may be found at the Colorado Department of Revenue's Web site at http://www.taxcolorado.com/)

The notice will be sufficient if it appears on each invoice, or if no invoice is provided, if it is given as part of the sale, either immediately before, as part of, or immediately after the sale.

In addition, the retailer cannot display or imply that no tax is due. For example, a summary of the transaction including a line designated for “Sales Tax” cannot show the sales tax as “zero” or “0.00” because it would imply that no sales tax is due.

Provide an annual invoice to Colorado customers

The annual invoice must:

• Be sent by first class mail to the last known address by January 31 of the following year in an envelope prominently marked with the words “Important Tax Document Enclosed.”
• Summarize the date(s) of purchase(s), a description of the item(s) and the dollar amount(s) of the purchase(s).
• State that the State of Colorado requires that the consumer file a sales or use tax return at the end of every year and pay the tax on Colorado purchases that did not include tax. Details of how to file this return may be found on the Web site http://www.taxcolorado.com/
• Indicate that the retailer is required by law to provide the Colorado Department of Revenue the total dollar amount for of purchases made by Colorado consumers.

Out-of-state retailers that are not collecting the tax and have annual gross sales in Colorado of more than $100,000 must provide the information listed above electronically.

Colorado has created a webpage on their website for “Internet Sales / Non-Collecting Retailers.”

The site includes submission guidelines, templates for transactional notice, and sample annual customer notice.

Illinois Legislation Approves 66% Tax Increase!

Both the Illinois House and Senate have passed legislation that would increase income tax rates in Illinois.

Individual income tax rates would rise to 5 percent from its current rate of 3 percent.

Corporate taxes would rise to 7 percent from its current rate of 4.8 percent.

For more information check out the New York Times article.

Mississippi Introduces Amazon Nexus Bill! (again)

In the Mississippi House of Representatives, an Amazon.com nexus or "click-through" nexus bill has been introduced (HB363).

The key parts of the bill that describe the changes are:

a "remote sale" is a sale of tangible personal property or specified digital products, ordered by mail or other means as described in subsection (2)(e), to a purchaser who is in this state at the time the order is remitted, from a person who receives the order in another state of the United States, or in a commonwealth, territory or other area under the jurisdiction of the United States, and which person transports the property or products or causes the property or products to be transported, whether or not by mail, from any jurisdiction of the United States, including this state, to the purchaser in this state who ordered the property or products or to another person in this state for whom the purchaser ordered the property. For purposes of this definition, it will be presumed that every purchaser resident in this state who remits an order shall have been in this state at the time the order was remitted.

Every person doing business in this state who makes a remote sale is subject to the power of this state to levy and collect the tax imposed by this article when:

The person solicits or transacts business in this state by employees, independent contractors, agents or other representatives, whether the remote sales thus subject to taxation by this state result from or are related in any other way to such solicitation or transaction of business. A person is presumed to be soliciting or transacting business by an independent contractor, agent, or other representative if the person enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet website or otherwise, to the person. This presumption may be rebutted by proof that the resident with whom the person has an agreement did not engage in any solicitation in the state on behalf of the person that would satisfy the nexus requirement of the United States Constitution;

For more information on the bill, go to MSHB363.

Mississippi introduced a similar bill in 2010 and it did not pass.  We will have to wait and see if this bill makes it to the finish line.  As written, this bill would become effective July 1, 2011.

Illinois Houses Pass Amazon Nexus Law!

Illinois has joined the "Amazon" nexus bandwagon in 2011.  This week, HB3659 and Amendment 3 passed both Houses of Congress.  It is now up to the Governor to sign.

If the Governor signs it into law, Illinois would join New York, North Carolina, and Rhode Island in imposing sales tax nexus and collection responsibilities on Internet retailers with unrelated in-state affiliates that have a link on their website to the Internet retailer.  See earlier posts for details.

The specific details in Amendment 3 and HB3659 are as follows:

Amazon Nexus Law

Beginning July 1, 2011, a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link on the person's Internet website. The provisions of this paragraph shall apply only if the cumulative gross receipts from sales of tangible personal property by the retailer to customers who are referred to the retailer by all persons in this State under such contracts exceed $10,000 during the preceding 4 quarterly periods ending on the last day of  March, June, September, and December. 

Commissioned Agent / Similar Products Nexus Law

Beginning July 1, 2011, a retailer having a contract with a person located in this State under which: the retailer sells the same or substantially similar line of products as the person located in this State and does so using an identical or substantially similar name, trade name, or trademark as the person located in this State; and the retailer provides a commission or other consideration to the person located in this State based upon the sale of tangible personal property by the retailer. The provisions of this paragraph shall apply only if the cumulative gross receipts from sales of tangible personal property by the retailer to customers in this State under all such contracts exceed $10,000 during the preceding 4 quarterly periods ending on the last day of  March, June, September, and December.

For a complete copy of Amendment 3 to HB3659 goto ILLINOIS AMAZON LAW.

Maryland Business Tax Reform Commission Completes Study

The Maryland Business Tax Reform Commission has completed its work and made the following recommendations in its final report to the Governor and Maryland General Assembly:

1. Do not implement combined reporting in the 2011 legislative session;
2. Make no substantive changes to economic development incentives at this time, but establish a workgroup to work with the General Assembly, taxpayers, and other stakeholders to ensure that incentives are measurable and cost effective;
3. The State of Maryland should continue the policy of supporting the Streamlined Sales & Use Tax Agreement, and  join the compact and make necessary legislative changes when Congress authorizes a national streamlined sales tax.

Background

The Maryland Business Tax Reform Commission was created by Chapter 3 of the 2007 Special Session.  The Commission was charged with reviewing and evaluating the State’s current business tax structure in order to make specific recommendations for changes to “provide for fair and equitable taxation for all corporations and other business entities doing business in the State.” The Commission was charged with reviewing and evaluating the imposition of combined reporting for the corporate income tax, the imposition of other types of business taxes, and improved methods for evaluating the effectiveness and efficiency of economic development tax incentives.

The Commission's Full Report can be found at Maryland Business Tax Reform Commission.

Iowa Says: No Physical Presence? No Problem.

In a recent Iowa Policy Letter (10240041) dated December 16, 2010, the Iowa Department of Revenue made some interesting statements regarding nexus. 

Before I describe those statements, remember a "policy letter" is an informal opinion of the author and is only applicable to the factual situation referenced and to the statutes in existence at the time of issuance. Because of this, the Department could, in the future, take a position contrary to that stated in the letter. Any oral or written advice or opinion rendered to members of the public by Department personnel that is not pursuant to a Petition for Declaratory Order under 701 IAC 7.56 is not binding upon the Department.

Facts

The taxpayer, an LLC, is a registered agent service which provides services to clients in all fifty states. Services include providing a physical address to clients where a process server could deliver a lawsuit on the client's behalf. The  LLC subcontracts with a local law firm, and this law firm scans documents if necessary. All property and employees of the LLC are located in Idaho. The LLC is registered with the Iowa Secretary of State's office.

Department's Opinion 

The Department contends that physical presence is not required to establish corporation income tax nexus. A number of courts have determined that physical presence is not required for corporation income tax. See Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E. 2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993); Kmart Properties Inc. v Taxation & Revenue Department of New Mexico, 131 P. 3d 27 (N.M. Ct. App. 2001), rev'd on other issues, 131 P. 3d 22 (N.M. 2005);Secretary, Department of Revenue v. Gap (Apparel), Inc., 886 So. 2d 459 (La.Ct.App. 2004) , A & F Trademark v. Tolson, 605 S. E. 2d 187 (N.C.App. 2004), cert denied 126 S.Ct. 353 (2005); Lanco, Inc. v. Director, Division of Taxation, 879 A. 2d 1234 (N.J.Super.A.D. 2005), aff'd, 908 A.2d 176 (N.J. 2006) (per curiam), cert denied 127 S. Ct. 2974 (June 18, 2007), and Geoffrey Inc. v. Oklahoma Tax Commission, 132 P. 3d 632 (Okla. Ct. Civ. App. 2005), cert denied (Mar. 20, 2006), as corrected (Apr. 12, 2006); and FIA Card Services, Inc. v. Tax Comm'r, 640 S.E.2d 226 (W. Va. 2006), cert. denied, 127 S. Ct. 2997 (June 18, 2007).

As noted above, the United States Supreme Court declined to review several of these state court decisions, which results in the Department's contention that physical presence is not required for corporation income tax. It should be noted that Iowa Code § 422.33 was amended in 1995 to state that corporations having income from intangible property located or having a situs in Iowa are required to file Iowa corporation income tax returns.

Finally, the FIA Card Services case stated that a corporation's intentional exploitation of a state's market was sufficient to create nexus consistent with the Commerce Clause of the United States Constitution.

In addition, Iowa Administrative Rule 701 IAC 54.6 states the following related to the sourcing of income from services:

701—54.6(422) Apportionment of income derived from business other than the manufacture or sale of tangible personal property. Income derived from business other than the manufacture or sale of tangible personal property shall be attributed to Iowa in the proportion which the Iowa gross receipts bear to the total gross receipts. Gross receipts are includable in the numerator of the apportionment factor in the proportion which the recipient of the service receives benefit of the service in this state.

Therefore, the Department contends that the LLC is subject to Iowa income tax since physical presence is not required to assert nexus for Iowa, and the LLC is exploiting the Iowa market. In addition, any receipts received where the benefit of the service is received in Iowa would be considered an Iowa receipt.

So What?

Well, as I stated earlier, this opinion or "policy letter" is not binding on the Iowa DOR.  However, it does provide insight into how the Iowa DOR may make nexus determinations in regards to other taxpayers.  In other words, physical presence appears to NOT be required.  Simply an "exploitation of the Iowa market" is required. 

It is advisable that companies review their activities in Iowa to determine if any action is necessary to minimize tax exposure.  

State IRC. Section 382 Limitations on Net Operating Losses: Do They Exist?

Ownership Changes and IRC. Sec. 382

Under the Internal Revenue Code (IRC), various federal income tax attributes of an acquired corporation can be used, assuming certain statutory conditions are met, by the acquiring or successor corporations following a tax-free reorganization. (IRC Sec. 381 and Sec. 382)

In general, Sec. 381 establishes the circumstances under which a corporation can succeed to the tax attributes of another corporation when it acquires the assets of that corporation, and Sec. 382 limits a corporation's ability to claim a net operating loss carryover following a change of ownership. (i.e., a stock acquisition)

State Perspective

From a state income or franchise tax perspective, the tax attribute of most significance is generally the net operating loss (NOL) carryover. Capital loss carryovers, tax credits and excess charitable contribution carryovers are also potentially impacted by state limitations on the use of acquired tax attributes.

The states have adopted various approaches to the succession of net operating loss carryovers following a reorganization. Some states, either through express provision or by their general adoption of federal taxable income as the starting point for their tax base, follow the federal rules. Other states employ their own rules or otherwise limit the carryover.

Most states do not provide detailed statutory or administrative guidance on their treatment of IRC Sec. 382. Massachusetts and Minnesota specifically adjust the federal IRC Sec. 382 annual limitations to be consistent with state computed post-apportionment NOLs. The vast majority of other states are silent with respect to how IRC Sec. 382 applies for state purposes even though this code section is explicitly or implicitly adopted in defining their income tax base.
 
It is possible that on audit, a state without specific guidance could challenge a corporation’s use of the entire federal IRC Sec. 382 limitation. A logical assertion would be that the federal limit ought to be apportioned to reflect its application to state NOL carryforwards that are often determined on a post-apportionment basis. Some states, like Wisconsin, have acknowledged in administrative releases that their annual cap on acquired NOL carryover deductions is equal to the federally computed IRC Sec. 382 limitation. However, this situation is uncommon.

Another area of uncertainty is exactly how states with combined or consolidated returns apply IRC Sec. 382. For U.S. income tax purposes, the annual limitation is computed at the affiliated group level as part of the consolidated return filing. In some states, a taxpayer’s unitary group included in a combined return might not be the same as its federal affiliated group. Additionally, some states only permit combination or consolidation of affiliates that have state nexus.

So What?

If your company has an ownership change that "triggers" the Federal IRC. Section 382 rules, remember to review the rules in the applicable states to accurately determine the State IRC Sec. 382 limits.