State Corporate Income Apportionment Key Fundamentals Understanding Trends and State Approaches to Factor Weighting, Service Revenue, Joyce vs. Finnigan and Other Apportionment Concepts Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. WEDNESDAY, MAY 15, 2013 Presenting a live 110-minute teleconference with interactive Q&A Richard Call, Attorney, Morrison & Foerster, New York Kelly Brown, Director, State and Local Tax Group, PricewaterhouseCoopers, Boston Marianne Evans, Senior Manager, KPMG, Washington, D.C. For this program, attendees must listen to the audio over the telephone.
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State Corporate Income
Apportionment Key Fundamentals Understanding Trends and State Approaches to Factor Weighting,
Service Revenue, Joyce vs. Finnigan and Other Apportionment Concepts
“A taxpayer stores part of its inventory in a public warehouse. The
total charge for the year was $1,000 of which $700 was for the use of
storage space and $300 for inventory insurance, handling and
shipping charges, and C.O.D. collections. The annual rent is $700.”
This is MoFo. 29
Property Factor (Cont.)
Movable property
Multistate Tax Commission Reg. IV.10(d)
“The value of mobile or movable property such as construction
equipment, trucks or leased electronic equipment which are
located within and without this state during the tax period shall be
determined for purposes of the numerator of the factor on the
basis of total time within the state during the tax period.”
“An automobile assigned to a traveling employee shall be
included in the numerator of the factor of the state to which the
employee's compensation is assigned under the payroll factor or
in the numerator of the state in which the automobile is licensed.”
This is MoFo. 30
Property Factor (Cont.)
In-transit property
“Property in transit between locations of the taxpayer to which it
belongs shall be considered to be at the destination for purposes of
the property factor.” Cal. Code Regs. tit. 18,
25129(d)
Inventory in transit from one state to another is not included in the
denominator of the property factor. N.J. Admin. Code
18:7-8.4(c)(3)
Maryland required inclusion of the value of automobiles on the high
seas in the Maryland numerator, despite the fact that in-transit
inventory was not addressed in the property factor statute.
Mercedes Benz of N. Am., Inc. v. Comptroller of Treasury, Dkt. No.
2813, (Md. Tax Ct. Oct. 7, 1988)
This is MoFo. 31
Property Factor For Banks
Loans in property factor
Minnesota - Minn. Stat.
290.191, Subd. 11
Secured loans are attributable to Minnesota if the security is in
Minnesota.
Unsecured consumer loans or consumer loans secured by
intangibles are attributed to Minnesota if the loan was made to a
resident of Minnesota.
Unsecured commercial loan and installment obligations are
attributable to Minnesota if the proceeds of the loan are to be
applied in Minnesota.
Loans will generally include credit card receivables.
This is MoFo. 32
Property Factor For Banks (Cont.)
Loans in property factor (Cont.)
MTC
A loan is considered to be located within this state if it is properly
assigned to a regular place of business of the taxpayer within this state.
A loan is properly assigned to the regular place of business with which it
has a preponderance of substantive contacts.
To determine the state in which the preponderance of substantive contacts relating to a loan have occurred, the facts and circumstances regarding the loan at issue shall be reviewed on a case-by-case basis and consideration shall be given to such activities as:
Solicitation
Investigation
Negotiation
Approval
Administration
This is MoFo. 33
Property Factor
Meredith Corp. (N.Y. App. Div. 2012)
Is programming delivered via satellite TPP includable in the property
factor?
Policy change
When litigation commenced, programming delivered via videotape
was considered TPP by the department.
The department changed its policy via a TSB to exclude
programming delivered by videotape.
“This record establishes that programming on videotape had long been
considered by the Department as tangible property for purposes of the
property factor, and … there is no rational distinction for taxation
purposes between programming sent to a station on videotape and
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FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
Notice
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(ii) PROMOTING, MARKETING OR RECOMMENDING TO
ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction described in the
associated materials we provide to you, including, but not limited to, any tax opinions,
memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are subject
to change. Applicability of the information to specific situations should be determined through
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
Payroll Factor: What Is Included?
Total amount paid to employees for compensation
− Includes salaries, commissions, other taxable remuneration
− Per the taxpayer’s accounting method – accrual or cash
− Includes payroll capitalized as part of cost of asset, for book or tax
purposes
− May elect to use cash method if compensation reported under cash
method for unemployment tax purposes
Payroll related to production of non-business income is excluded
Payroll paid to an employee in an “no-nexus”/P.L. 86-272 state is
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
Payroll Factor: What Is Included? (Cont.)
If the factor includes the total compensation paid to employees,
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
Hierarchy Of Payroll Sourcing
A. The state in which the employee’s services are wholly or substantially
performed, if services performed outside of that state are incidental
(temporary or transitory) or rendered in connection with isolated
transactions
B. The state in which the employee’s base of operations is located, if
some part of the services are performed in that state
C. The state from which the employee is directed or controlled, if some
part of the services are performed in that state
D. The state in which the employee resides
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SPECIFIC INDUSTRY APPORTIONMENT
Kelly Brown, PricewaterhouseCoopers
PricewaterhouseCoopers Slide 41
Special Industry Apportionment
• Three-factor formula works best for merchandising and manufacturing
businesses. States allow other formulas, by statute and by taxpayer
appeal.
• Construction: Include work in progress
• Athletes: Use duty-days
• Motion pictures: Use audience data
• Service providers: Use sales or payroll factors only
• Transportation: Use in-state miles, passenger-miles, train car-miles, ton-
miles, time in-port
PricewaterhouseCoopers Slide 42
Special Industry Apportionment (Cont.)
• Insurance companies: Use premium dollars written
• Mutual funds, banks: Use deposits, number of clients, number of cards
issued
• Communications: Use cable-miles, circulation, number of satellite
stations on the ground
PricewaterhouseCoopers Slide 43
Alternative Apportionment Method
• States may allow department to require, or taxpayer to request, use of an
alternative apportionment method.
• Usual goal is to prevent distortion or clearly reflect income in state.
Slide Intentionally Left Blank
COMBINED/CONSOLIDATED RETURN ISSUES
Richard Call, Morrison & Foerster
This is MoFo. 46
Combination
Combined report typically includes unitary members of the combined
group on either a worldwide or water’s edge basis.
Inter-company transactions within the group may be eliminated, for
apportionment purposes.
Joyce/Finnigan
Partnership factor flow-up
This is MoFo. 47
Combination (Cont.)
Appeal of Joyce (Cal. SBE 1966)
SBE held that a company’s receipts from sales of TPP, shipped to
California by a seller that was not taxable in California because of
P.L. 86-272 but was part of a unitary business conducted in California,
could not be included in the California sales factor numerator.
Joyce rule treats each combined group member as a separate entity, for
apportionment purposes. Unless an entity has stand-alone nexus, its sales
are not included in the sales factor numerator.
Effects – Combined group members may have to throw back sales not
subject to tax in other states in which other combined group members are
subject to tax.
This is MoFo. 48
Combination (Cont.)
Appeal of Finnigan (Cal. SBE 1990)
SBE overruled Joyce and held that when a combined group member
has sales to another state in which the combined group member is
not taxable, but in which other unitary combined group members are
taxable, the combined group member’s sales to that state are not
subject to throwback.
Finnigan rule treats all combined group members as one entity, for
apportionment purposes.
Effects – All combined group members’ sales that are sourced to
California are included in the numerator, regardless of whether the
individual combined group member is subject to tax in California.
This is MoFo. 49
Combination (Cont.)
Partnership factor flow-up
How does a state treat the apportionment factors of a partnership or
LLC when income from those entities is included in the tax base?
Are the factors of the partnership included in computing the tax?
California
Factors of the partnership flow up if the taxpayer and partnership
are engaged in a unitary business.
Factors of the partnership do not flow up if the partnership is in a