Insights 2015 - State and Local Tax Traps for the Unwary - Tim Clancy

State and Local Tax Traps for the Unwary

Tim Clancy & Ned Lenhart

Income Tax

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Nexus – What causes it? Historical perspective– Physical presence – Public Law 86-272– Sales of Services

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Nexus – Other StandardsBright line nexus

– Factor presence test under Multistate Tax Commission• Sales > $500,000• Payroll > $50,000• Property > $50,000• Greater than 25% test

– Indexing and other threshold levels used by states– Application to income, franchise, gross receipts tax

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Nexus – Other StandardsEconomic nexus

– Licensing, use of intangibles, financial, software• “Lanco” “Geoffrey” • “KFC” “MBNA”

– Physical presence is not required “Quill”

– Application to income, franchise,and gross receipts tax

DEPT OF REVENUE

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Nexus – Traps for the Unwary

• Fulfillment activities• Warranties• Remote employees• Independent contractors

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Nexus – Traps for the Unwary

• Investments in pass through entities• Internet activities • Digital goods• Intangible property

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Nexus – Traps for the Unwary

Non-filing of returns• Unpaid taxes• Interest• Penalties

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Nexus – Opportunities• State by state analysis of laws and court

cases• Preventative measures by taxpayers• Review of includible apportionment factors

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Nexus – Opportunities• State by state analysis of laws and court

cases• Preventative measures by taxpayers• Review of includible apportionment factors• Voluntary disclosure agreements vs amnesty

programs• Credit for taxes paid to another state

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Apportionment – Sales of Services

Methods of sourcing service revenue– Cost of performance– Proportionate– Market

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Sales of Services Traps/Opportunities

Cost of performance (“COP”)– Income producing activity– Costs included– Use of independent contractors– Application of “COP-ish” rules or fair

reflection of income

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Sales of ServicesTraps/Opportunities

Market based sourcing– Georgia laws– Inconsistent state laws– Cascading rules

• Delivery• Receipt• Benefit• Use• Reasonable approximation

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Occasional TransactionsSale of LLC Interest

• Business vs. non-business income• Apportionment of income • Beware of tiered entities!!!!

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Occasional TransactionsSales under IRC §338(h)(10)

• Sale of stock treated as an asset sale• Business vs. non-business income• Apportionment of income

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Pass Through Entities• Withholding or composite returns• Credit for taxes paid• Taxes imposed upon pass-through entity

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Pass Through Entities

REFUND OPPORTUNITY

Georgia Tax Tribunal case Rosenberg v. MacGinnittie

Sales/Use Tax

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Sales tax: Why be concerned? • $406 Billion-- sales tax collections estimated for 2015 • 28% of total state revenue from sales tax • $20 billion in unremitted tax due• States view your company as:

– Source of future tax remittances on taxable sales– Source of revenue from taxable purchases (use tax)– Source of revenue from historical errors (audits)

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Four Common Sales Tax Risks

• Improper Nexus Determination• Inaccurate tax rules applied to sales• Insufficient exemption documents• Inherited tax liability (successor)

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Sales Tax Legislative Trends• Nexus Expansion Legislation

1. Click-through (“Amazon”) nexus 2. Affiliate Nexus

• Expansion of tax base to services1. Software as services (SaaS) (TN)2. Digital products3. Installation and repair services4. Staffing and personal services

• 2016 Georgia Legislative Session

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Thank You!

Tim ClancyWindham Brannontclancy@windhambrannon.com678.510.2804

Ned LenhartInterstate Tax Strategiesnlenhart@salestaxstrategies.com770.985.9573