ceo roundtable on local and state tax laws

experience direction //

CPAs & ADVISORS

BOB JOHNSON

Agenda Income Tax Sourcing

Service vs Property Internet Sales & “Amazon Law” Credits & Incentives

High Performance Incentive Program (HPIP) Promoting Employment Across Kansas (PEAK) Work Opportunity Tax Credit (WOTC)

Recent Kansas Tax Law Changes

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INCOME TAX SOURCING


Income Tax SourcingPublic Law 86-272 (“P.L. 86-272”) prohibits a state from imposing a net income tax on income derived within its borders from interstate commerce if the only business activity by or for the taxpayer in the state is the solicitation of orders for sales of tangible personal property, approval of these sales outside the state, and shipment of the tangible personal property so ordered effectuated from outside the state.

Solicitation of orders by in-state resident employees or representatives of the company, if the only office or other place of business in the state is an in-home office, does not by itself create nexus for state income tax purposes . However, providing services to customers is not protected by P.L. 86-272.

Activities associated with these services create a state income tax nexus with those states where the services are performed and exposes all in-state income-generating activities to taxation.


INCOME TAX SOURCING

A trend in state income taxes is the adoption of market-based rules for sourcing sales of services in lieu of the traditional Uniform Division of Income for Tax Purposes Act (UDITPA) cost-of-performance rule. Under UDITPA Section 17, for purposes of computing the sales factor, sales of services are assigned to the state in which the income-producing activity is performed.

If the corporation performs the income-producing activity in two or more states, the sale is assigned to the state in which the corporation performs either a majority of income-producing activity, or the greater proportion of the income-producing activity, than in any other state based on the costs of performance.


INCOME TAX SOURCING

With market-based approach, the corporation assigns sales of services to the state in which the service is received.

States that have market-based approach for sales include:

Alabama, Arizona (if elected by the taxpayer), Arkansas, California, Connecticut, District of Columbia (beginning in 2015), Delaware, Georgia, Illinois, Iowa, Maine, Massachusetts, Maryland, Michigan, Minnesota, Missouri (effective August 15, 2015) Nebraska (beginning in 2014), New York (beginning in 2015), Ohio, Oklahoma, Pennsylvania (beginning in 2014), Rhode Island (2015), Utah, Texas, Washington and Wisconsin.


INCOME TAX SOURCING


Market Sourcing• Delivery – (especially services) generally defaults to customer or other

delivery location• Receipt of service – similar to sourcing of delivery• Benefit received – specifically for services• Use – (focus on intangibles) may be customer or some other user’s location• “Reasonable approximation” – where sourcing by these theories is not

possible

INCOME TAX SOURCING

MTC Draft Revisons to Section 17:(a) Sales, othr than sales of tangible personal property described in Section

16, are in the this State if the taxpayer’s market for the sales in this state. The taxpayer’s market for sales is in this state if:

(3) in the case of sale of a service, if and to the extent the service is delivered to a location in this state; and(4) in the case of intangible property

(i) that is rented, leased, or licensed, if and to the extent the property is used in this state, provided that intangible property is utilized in marketing a good or service to a consumer is “used in this state” if that good or service is purchased by a consumer who is in this state


Internet Sales


INTERNET SALES

In recent years, some states have enacted laws, often called “Amazon laws” in reference to the Internet retailer, to try to capture uncollected taxes on Internet sales and yet still comply with the Constitution’s requirements. States have used two basic approaches. The first is enacting “clickthrough nexus” statutes, which impose the responsibility for collecting tax on those retailers who compensate state residents for placing links on their websites to the retailer’s website (i.e., use online referrals).

The other is requiring remote sellers to provide information about sales and taxes to the state and customers. New York was the first state to enact click-through nexuslegislation, in 2008. In 2010, Colorado was the first to pass a notification law.


INTERNET SALES

Two common misconceptions exist about the ability of states to impose sales and use taxes on Internet sales. The first is that the Internet Tax Freedom Act, enacted in 1998, prevents such taxation. This is not true. The act contains a moratorium only on state and local governments imposing “multiple or discriminatory taxes on electronic commerce,” as well as new taxes on Internet access services.

As a result of this law, a state may not, for example, impose a tax on electronic commerce that is not imposed on similar transactions made through other means (such as traditional “brick and mortar” stores). It remains permissible, however, for a state to impose a sales or use tax that is administered equally without regard to whether the sale was face-to-face, mail order, or Internet.


INTERNET SALES

The second misperception is that the U.S. Constitution prohibits states from taxing Internet sales. States have the power to tax their residents who purchase goods or services on the Internet, even when the seller is located outside the state and has no real connection with it. However, if the seller does not have a constitutionally sufficient connection (“nexus”) to the state, then the seller is under no enforceable obligation to collect the tax and remit it to the state.


INTERNET SALES

What is “click-through nexus.” This term arises from the “clickthroughs”—online referrals—that some Internet retailers solicit through programs where an individual or business (called an associate or affiliate) places a link on its website directing Internet users to an online retailer’s website. The associate or affiliate receives compensation for their referral, which is typically based on the sales that occur when users click through from one of these links and purchase goods and services. “Click-through nexus” statutes require an online retailer to collect use taxes on sales to customers located in the taxing state based on the physical presence in that state of the retailer’s associates or affiliates.

Another approach requires remote retailers to provide information to the state and customers, rather than requiring the retailers to collect the use taxes themselves. This approach is illustrated by Colorado’s law, which was enacted in 2010 and later determined unconstitutional.


INTERNET SALES

State “Amazon laws” potentially implicate the dormant Commerce Clause and the Fourteenth Amendment’s Due Process Clause. In fact, both the New York and Colorado laws have been challenged on these grounds. As discussed below, it appears Colorado’s notification law is the more constitutionally problematic approach.

Illinois Supreme Court reversed “Amazon Law” and may be the new trend.


INTERNET SALES

Main Street Fairness Act• Federal Government involvement in state issues• Requires collection of sales tax for all internet sales• First introduced in 2010• In 2013, Senate approved by stalled in House of Representatives

• States will not agree• Future litigation likely related to the passing of this bill


ITEMS SOLD BY AMAZON.COM LLC, OR ITS SUBSIDIARIES, AND SHIPPED TO DESTINATIONS IN THE FOLLOWING STATES ARE SUBJECT TO TAX:

Arizona Illinois Massachusetts North Carolina TexasCalifornia Indiana Minnesota North Dakota VirginiaConnecticut Kansas Nevada Ohio WashingtonFlorida Kentucky New Jersey Pennsylvania West VirginiaGeorgia Maryland New York Tennessee Wisconsin


Note:• No sales tax is charged when purchasing gift cards; however, purchases paid for with gift cards may be subject to tax. • Items sold by Warehouse Deals and shipped to destinations in Alaska are also subject to local sales tax.

CREDITS & INCENTIVES

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HIGH PERFORMANCE INCENTIVE PROGRAM (HPIP)

The High Performance Incentive Program provides tax incentives to employers that continue to have capital investment in Kansas, pay above-average wages, and have a commitment to skills development for their workers.

Benefits:• A 10 percent income tax credit for eligible capital investment that exceeds $50,000

($1M in five metro counties) at a taxpayer’s facility, with a carry-forward that can be used in any of the next 16 years in which the qualified facility re-qualifies for HPIP

• A sales tax exemption to use in conjunction with the company’s eligible capital investment at its qualified facility

• A training tax credit of up to $50,000

Must be pre-certified prior to the investment occuring!


PROMOTING EMPLOYMENT ACROSS KANSAS (PEAK)

• PEAK requires the qualified company to commit to creating five new jobs in non-metropolitan counties or ten (10) new jobs in the metropolitan counties of Shawnee, Douglas, Wyandotte, Johnson, Leavenworth and Sedgwick over a two-year period.

• Qualified PEAK companies may retain 95 percent (95%) of the payroll withholding tax of PEAK-Eligible employees/jobs• May also request a refund from KDOR

• Secretary of Commerce can approve benefit periods for up to 10 years.• Current environment benefits are only for 5 years• Secretary of Commerce has also been including a cap on benefits

• Must be pre-qualified prior to the creation/hiring of the new jobs


PROMOTING EMPLOYMENT ACROSS KANSAS (PEAK)

• The qualified company must also pay wages to the PEAK jobs/employees, that when aggregated, meet or exceed the county median wage or average wage for their industry.

• Qualified applicants include for-profit companies in eligible NAICS codes and not-for-profit headquarters facilities. Such companies must make available to its full-time employees “adequate” health insurance coverage and be paying at least 50% of the premium.


CREDITS AND INCENTIVES

Work Opportunity Tax Credit• Federal income tax credit for hiring designated targeted individuals

• Veterans• Temporary Assistance to Needy Families (TANF)• Qualified ex-felons• Vocational rehabilitation referrals Residents ages 18 to 39 of Rural Renewal

Counties, Empowerment Zones and Renewal Communities• Long-term TANF recipients• Qualified food stamp recipients• Qualified Supplemental Security Income recipients

• Applicants must complete and submit forms within 28 days of start date• Program currently suspended - expect to be renewed at some point• Credit ranges from $2,400 - $9,600


RECENT LAW CHANGES

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RECENT LAW CHANGES

Tax Amnesty• The bill authorizes a tax amnesty, though it will be limited to penalties and interest

applied to tax periods ending on or before December 31, 2013, and only for certain taxes.

• Taxpayers wishing to participate must pay their outstanding tax in full between September 1, 2015, and October 15, 2015.

• Taxes eligible for amnesty include privilege, income, estate, cigarette, tobacco products, liquor enforcement, liquor drink, severance and state sales and use taxes.


RECENT LAW CHANGES

Individual Income Tax Changes• Rate Adjustment – Previously scheduled rate reductions have been delayed until

tax year 2018. The rates in effect for the 2015 tax year will remain in effect through tax year 2017.

• Itemized Deduction Limitations – Retroactively enacted to January 1, 2015, the bill eliminates all Kansas itemized deductions, with the following exceptions:• Charitable contributions• Mortgage interest• Property taxes paid• There’s no adjustment to the rules related to charitable contributions taken on

the Kansas return compared to the prior year; however, a 50 percent “haircut” scheduled for tax year 2017 will be effective immediately for itemized deductions for mortgage interest and property taxes paid.


RECENT LAW CHANGES

Individual Income Tax Changes (Continued)• Guaranteed Payments – Guaranteed payments from a business that previously

could be included in the subtraction modification for certain pass-through nonwage business income now must be included in the taxpayer’s Kansas adjusted gross income beginning in tax year 2015.

• Low-Income Taxpayer Tax Liability Relief – Beginning in tax year 2016, a special low-income exclusion provision will eliminate income tax liability for single filers with taxable income of $5,000 or less and for married taxpayers filing jointly with taxable income of $12,500 or less.

• Individual Development Account Tax Credit – A tax credit for contributions to certain individual development accounts has been reinstated for tax year 2015. The credit was originally discontinued prior to tax year 2013 as part of 2012 legislative changes.


RECENT LAW CHANGES

Non-Income Tax Changes• Sales & Use Tax – The statewide rate for sales and use tax increased to 6.5

percent from 6.15 percent on July 1, 2015.• Cigarette Tax – On July 1, 2015, the tax on a pack of cigarettes increased by

50 cents to $1.29 per pack. Retailers with inventory on hand as of July 1 will be responsible for paying an inventory tax equivalent by October 31.

• Property Tax Lid Provisions – Beginning in 2018, cities and counties will be limited in how much they can increase property tax without triggering a mandatory election. The limitation allows cities and counties to raise the rate in response to inflation and for a number of expressly allowed purposes, but any raise beyond those limits must be approved by taxpayers.


QUESTIONS?


ceo roundtable on local and state tax laws

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