cost -se regional presentation march 2015

State and Local TaxesUnclaimed Property & Credits and Incentives

Alice M Nolen, EsqRaquel M. Mazarin, Esq.

State and Local Taxes Update: Current Developments in SE StatesMyron H. Vansickel, CPA, CGMA, MSKatherine Gauntt

Experis™ Finance 2

• Market Based Sourcing

• Corporate Income Tax Rate Reduction

• Tax Base Expansion Sales and Use Tax

• Tax Tribunals

Trend Watch


• Alabama Tax Tribunal - HB105 (Act 2014-146) – Signed into Law 3/11/2014; Came into existence October 2014.

• Replaces DORs Administrative Law Division; Part of the Executive Branch• Changes Alabama Taxpayers Bill of Rights

• Statute of limitations extended for localities for periods audited by ADOR. • Appeals now begin thirty days after mailing not thirty days after entry.• Preliminary assessments older than 5 years can be taken by taxpayer to

tribunal or circuit court.• Jurisdiction expanded ; includes all but ad valorem taxes (except property

appeals by public utilities.)• Taxpayers retain right to go directly to circuit court• Appeals to tribunal ruling must be filed in 30 days to circuit court and will proceed

to a trial de novo

ALABAMA-Legislation 2014/2015


Alabama Dept. of Revenue v. CSX Transportation, Inc. No. 13-553 3/4/2015 SCOTUS

– ISSUE: Whether a state “discriminates against a rail carrier” in violation of 49 U.S.C. § 11501(b)(4) [4-R Act] when commercial and industrial businesses, including rail carriers pay sales-and-use tax on diesel fuel but exemptions allowed for railroads’ competitors (motor carriers and watercraft); and (2) whether the court should consider other aspects of the state's tax scheme rather than focusing solely on the challenged tax provision .

– FINDING: Mixed Finding #1 Overturned –Found for CSX; #2 Remanded to Eleventh Circuit

ALABAMA- Cases/Rulings 2014/2015


Alabama Dept. of Revenue v. American Equity Investment Life Insurance Company No. 2130933 Ala. Civ. App. 1/16/2015

– ISSUE: Calculation of Net Worth for Business Privilege Tax (BPT) based on the ratio of Alabama Premium Income over total premiums nationwide. Taxpayer included annuity considerations which Alabama DOR excluded because definitions of “premiums” for Premium Tax purposes excluded annuities.

– FINDING: For the Taxpayer. The two taxes are not similar so definitions should not be construed together.

ALABAMA- Cases/Rulings 2014/2015


2015 BUDGET HIGHLIGHTS: Gov. Scott proposed $673 million in tax cuts in his $77-million state budget.

• Include reduction of communications services tax• Permanently eliminating sales tax on machinery and other equipment. As it stands

now, the tax is off the books, but only until 2017. • A bill (SB 138) would increase the income tax exemption from $50K to $75K net

income.• Decreasing state employees by 1,350 and freezing raises

2014 Legislation• IRC Conformity Updated• Sales Tax: Rental Car surcharge applicable to Car Sharing Service• Wireless Surcharge 911- a 40¢ fee on each sale of prepaid wireless service that

allows a caller to interact with the Enhanced 911 (E911) System

• .

FLORIDA- Legislation


Fla. TAA 14CF1-009 (08/11/2014)- Deconsolidation

ISSUE: Parent company requests deconsolidation of tax returns due to material changes in business circumstances including substantial growth through acquisition and greatly expanded activities and product line.

FINDING: For the Taxpayer. Based on four conditions: (1) Deconsolidation effective in tax year XXXX; (2) No realized but unrecognized income or expense items recognized at a later date; (3) Taxpayer group does not become part of a consolidated Florida corporate income tax return prior to the tax year ending XXXXX. 4. That any deferred gains which are realized for Federal tax purposes, but which have not yet been recognized, are required to be reported in total, on the income tax returns filed by the taxpayers, for the period ending XXXXX.

FLORIDA- Cases/Rulings 2014/2015


Technical Assistance Advisement, No. 14C1-015, Florida Department of Revenue, December 31, 2014.

ISSUE: Taxpayer requests guidance on the method by which income generated by or arising out of the qualifying project will be determined for purposes of the Florida Capital Investment Tax Credit under §220.191, F.S.

FINDING: Taxpayer shall use its proposed pro-forma format to file consolidated returns whereby Taxpayer (i) uses site ID for allocation of income and expense, and, (ii) allocation based on cost of sales for miscellaneous expense not directly linked to site. Taxpayer will apply 5.5% income tax rate to project Florida taxable income and associated capital investment credit.

FLORIDA- Cases/Rulings 2014/2015


• More Take Home Pay Act of 2015- GA HB 445- Stated purpose is to lower personal income tax rate and raise state tax rate to 5% and

• Expand the sales tax base, including revisions to• Definitions for Telecommunications Service, Prewritten Software• Exemptions for Food• Makes digital goods taxable

• Revision of certain tax credits including• Clean energy property• Employers providing child care• Manufacturing and telecommunications in Tier 1, 2, 3 & 4 counties • Water conservation facilities and qualified water conservation investment property• Qualified R&D expense• Jobs credit• HQ Credits

GEORGIA- Legislation


Inglett & Stubbs International, Ltd. v. Riley, No. TAX-IIT-1340253 (Ga. Tax Tribunal 2/11/2015)ISSUE: Taxpayer requested refund for sales tax paid on electrical materials used to fulfill government contracts in Afghanistan to install electrical distribution systems. Taxpayer purchased materials separately from out-of-state vendors and consolidated for shipment in Georgia to minimize shipping costs pursuant the contract.

FINDING: Finding for the DOR. The Tribunal applied Georgia’s “first use” rule which places the taxable event at the first instance of use, consumption, distribution or storage of materials purchased outside the state and deemed “first use” to have occurred when the materials were shipped to Georgia and repackaged for shipment to Afghanistan. The Tribunal also reiterated that the contractors were per se consumers of the materials pursuant the Meadors case and that was controlling despite statutory language surrounding services being performed in the state. (The services were performed overseas.)

GEORGIA- Cases/Rulings 2014/2015


Georgia Power Company v. MacGinnitie, No. Tax-S&UT-1403540 (Ga. Tax Tribunal, Jan. 5, 2015) ISSUE: Taxpayer is a Georgia electric public utility. Electricity is considered tangible personal property and therefore, production of electricity qualified as manufacturing. In 2008, the exemption for manufacturing equipment was expanded from a standard of “directly used in manufacturing” to qualify for the exemption to “necessary and integral to manufacturing.” In 2009, legislation was added to classify entities under NAICS code 22111 (Electronic Power Generation) as manufacturers. Taxpayer requested refund for transmission and distribution equipment .

FINDING: Finding for the DOR. Tribunal held that the equipment did not “manufacture” electricity but rather, ,manufacturing occurred at the generating plant. Despite the level of integration between generation , transmission and distribution of the electricity, the Tribunal ruled that the transmission and delivery system was not necessary to produce electricity . In addition, it underscored the existence of a separate NAICS code for transmission and distribution systems.

GEORGIA- Cases/Rulings 2014/2015


2015 Session: • Senate Bill 20 Fuel Tax Passed - March 1 gas tax is lowered from

37.5 cents/gal to minimum of 35 cents/gal. where it is frozen.

• State Income Tax Reduction – Proposed – “Single sales factor” for calculating corporate taxes,. Lower the state’s corporate income tax to 4 percent in 2016 and 3 percent in 2017.

• State Incentives Modification- Proposed - Create a new targeted incentive for large-scale manufacturers, and adjust existing targeted incentive programs.

NORTH CAROLINA- Legislation


2014 Omnibus Tax Law Changes- HB 1050• Replaces current Net Economic Loss provisions with new net loss provisions whereby

the net loss for a tax year is the amount by which allowable deductions for the year (other than prior year losses) exceed gross income under the Internal Revenue Code as adjusted.

• Standards in IRC §381 and 382 must be applied in determining the extent to which a loss survives a merger or acquisition.

• Tax Years n or after January 1, 2015, any unused portion of a NEL can be carried forward for the next 15 tax years. Likewise there is a 15 year carry forward period for net losses created under the new law.

• Increase IRC § 179 limitation from $125K to $200K in 2013

• Transferee may take remaining bonus depreciation changes prior to 2013 if (1) basis adjustment election requirements met, and, (2) asset has been disposed of and has no remaining life on books of transferee.

• Changes to sales and use definitions

NORTH CAROLINA- Legislation


Wake County v. Hotels.com LP, North Carolina Court of Appeals, No. COA13-594, 762 S.E.2d 477, August 19, 2014ISSUE: Whether Online Travel Companies (OTC) are subject to local occupancy taxes as retailers and, if so, is the tax base determined at the rate charged to the consumer or the rate negotiated with the hotel.

FINDING: The appellate court held that a business that arranges for the rental of hotel rooms over the Internet, but does not physically provide the rooms, is not in the same business as a hotel, motel, or tourist home or camp. OTCs were deemed by the court to be neither operators nor retailers within the meaning of the state sales tax. The OTCs’ gross receipts are not subject to the North Carolina sales tax, and as such, the gross receipts the OTCs derive from the rentals are not subject to the room occupancy tax imposed by the counties.

NC- Cases/Rulings 2014/2015


PROPOSED 2015-Revenue Modernization Act- SB 603/HB 644 –Amendments to Tennessee’s business tax, excise tax and franchise tax including• Expansion of “substantial nexus in this state” to include substantial economic presence

in the form of receipts, property or compensation in the state

• Expands scope of business activities subject to business tax for out-of-state companies without physical presence

• Deletes current apportionment provisions dealing with sale of services or intangibles for excise tax and replaces with one consolidated provision that establishes that receipts from sales of services/intangibles is in Tennessee if the market for the sale is in Tennessee

• Provides for constructive possession language regarding use of computer software

• “Click through” nexus with $10,000 threshold

TENNESSEE- Legislation


Vodafone Americas Holdings Inc. & Subsidiaries v. Roberts (No. M2013-00947-COA-R3-CV) Tenn. Ct. App. June 23, 2014

ISSUE: Vodaphone sourced receipts outside Tennessee using the statutory cost of performance sourcing method because a greater portion of the earnings producing activity occurred outside Tennessee. The Commissioner exercised his authority to require an alternative market based sourcing method.

FINDING: Finding for the Commissioner. Tennessee Court of Appeals found that the Commissioner had the authority to require Vodaphone to use an alternative apportionment method and held that the cost of performance method did not accurately reflect Vodaphone’s in state activity.

APPEAL PENDING. Vodafone Americas Holdings Inc. & Subsidiaries v. Reagan Farr, case number M-2013-00947-SC-R11-CV, in the Supreme Court of Tennessee

TENNESSEE- Cases/Rulings 2014/2015


Tenn. Ltr. Ruling 14-06, Industrial Machinery Credit Not Available for Equipment Acquired Through IRC §338(h)(10) Election for Franchise or Excise Tax Purposes , Aug. 25, 2014ISSUE: Taxpayer owning manufacturing assets that qualified as industrial machinery in Tennessee was sold to buyer in 100% stock sale. Seller and buyer elected to treat the stock sale as a sale of assets for federal income tax purposes under I.R.C. § 338(h)(10). Can taxpayer claim the industrial machinery credit for tax periods following the sale for Tennessee franchise and excise tax purposes?

FINDING: Taxpayer cannot claim the Tennessee franchise and excise tax industrial machinery credit with respect to the assets that the taxpayer was deemed to have acquired through the I.R.C. § 338(h)(10) election. In order for the taxpayer to qualify: (1) the taxpayer must have purchased the assets during the tax period in which the credit was claimed; (2) the assets must be industrial machinery; and (3) the assets must be located in Tennessee. The Department concluded that the first requirement for the industrial machinery credit was not met under these facts because the taxpayer did not, for Tennessee tax purposes, purchase the assets as a result of the sale.



Tenn. Ltr. Rul. 14-05 –Cloud Collaboration Services (SaaS), Aug. 25, 2014ISSUE: Taxpayer provided cloud based services to support customer’s telecommunications equipment through remote applications for processing and routing calls, remote performance monitoring, and general administration of setups. Are these cloud based technology services subject to sales tax?

FINDING: Tennessee ruled that sale of Cloud Based Collaboration Services was the sale of telecommunications services (not TPP or computer software) since the Taxpayer used “computer processing applications to provide customers with voice, video, presence and mobility capability in conjunction with its customers Public Switched Telephone Network connections.” (e.g. routing voice, data, audio etc.) Also found the telecommunications services to be intrastate and thus subject to a higher local tax rate based on its conclusion that “Although the Taxpayer’s data center, software and hardware are located in the state of [STATE], the Taxpayer’s service of using computer processing application information to act on a customer’s content occurs where its customer is located.”.


NOTE: Using the same set of facts, Georgia ruled that the Taxpayer services were nontaxable services that did not constitute taxable sales of hardware or software. Georgia LR-SUT-2014-05, June 9, 2014


Tenn. Ltr. Rul. No. 14-11 (Oct. 30, 2014; released Dec. 8, 2014).ISSUE: The Taxpayer provide IT staff on a contract basis to supplement the staffs of IT companies in the development, installation and modification of computer software on a hourly basis. IT staff included Business Analysts, Systems Analysts, Systems Designers, Programmers, Developers, Database Administrators and Project Managers. Are these exempt employment services or taxable computer services.

FINDING: On a stand-alone basis, only Programmers and Database Administrators are subject to tax under Tenn. Code Ann. §67-6-102(68). However, if Taxpayer exclusively provides all IT personnel necessary to achieve a specific software development project, the entire charge is subject to the tax.



PROPOSED 2015• S0026 -"SOUTH CAROLINA FAIR TAX ACT", Comprehensive changes to code and

statute

• S0170 – Click Through Nexus (In Comm 1/13/2015)

• H3322- Allow DOR to file tax liens by implementing Internet assessable notice system

ENACTED 2014 – SB 953- IRC Conformity– HB 4701 (Reenacted Temporary Provisos) -Sales tax exemptions Medical

Therapies, Private Schools– HB 3747 –Phased-in exemption on injectable medication and biologics (50%

through 7/2015; 100% thereafter)

SOUTH CAROLINA - Legislation


CarMax Auto Superstores West Coast, Inc., v. South Carolina Department of Revenue, Appellate Case No. 2012-212203 SC Sup. Ct No. 27474 (12/23/2014)ISSUE: CarMax Business Services (CBS), a multi-member LLC, was owned by CarMax West (93.5%) and CarMax East (6.5%) and provided intellectual property, financing and other shared services. CBS charged a management fee which included an intellectual property royalty. The income from the management fee and financing is distributed to CarMax West and CarMax East. Did CarMax's use of the South Carolina statutory apportionment formula fairly represent taxpayer’s business activity?

FINDING: South Carolina Supreme Court held that the party seeking to deviate from a statutory apportionment formula (the SC DOR) bears the burden of proving beyond a preponderance of the evidence that (1) the statutory formula does not fairly represent the taxpayer’s business activity in the state; and (2) its alternative accounting method is reasonable. There is no further requirement (as provided by the lower court) that the proponent prove its method is the most reasonable. The court suggested that a taxpayer’s motives and lower tax provide insufficient support for whether the statutory formula fairly represents in-state activity

SC- Cases/Rulings 2014/2015


Duke Energy Corporation v. South Carolina Department of Revenue, Opinion No. 5274 (S.C. Ct. App. Oct. 8, 2014)ISSUE: For the tax years at issue, manufacturers were subject to a three-factor formula and all other companies used a one-factor sales formula. Since the term "manufacturing" is not defined in the tax code, the court interpreted the term in accordance with its usual and customary meaning..

FINDING: For the DOR. The Court ruled that Duke's principal business in South Carolina is manufacturing based on its use of mechanical power to produce or create electric energy. Therefore, Duke must use the apportionment formula applicable to manufacturers. The Court ruled that it is irrelevant whether electricity is considered a "tangible" good since, in the court’s logic, taxpayers that produce intangible products or services such as electricity may still be deemed engaged in the business of manufacturing. The company is also required to exclude from its sales factor denominator the gross receipts from certain short-term investments.

SC- Cases/Rulings 2014/2015


Private Letter Ruling #14-2, South Carolina Department of Revenue, August 26, 2014- Cloud Computing ServicesISSUE: Taxpayer provides scalable computing capacity for customers over the internet for customer data and content. Customers can use their own software, taxpayer’s open-source (e.g. free) software or designated third party operating systems software. Customers have no control over open source or third party software within the Taxpayer’s environment. Taxpayer charges customers hourly based solely upon use of computer resources. In addition, Taxpayer provides virtual storage capacity for data, content, applications and software on servers outside South Carolina. Taxpayer charges on a per gigabyte basis and a usage fee for upload/download instances. All are separately stated on the customer invoice.

FINDING: Taxpayer’s services and the usage fees charged for uploading, downloading, or moving data are not subject to the sales and use tax on communication services because they are not charges for the manner, method, or instrument for sending a signal of the voice or of messages. Additionally, these services are not subject to the sales and use tax because there has been no sale of tangible personal property

SC Cases/Rulings 2014/2015


CONTACT INFORMATION:

Myron H. Vansickel, CPA, CGMA, MS Katherine GaunttNational Tax Director, Strategic Accounts Engagement ManagerExperis Finance US, LLC Experis Finance US, LLC8300 Boone Blvd., Suite 830 7000 Central Parkway, Suite 950Vienna, VA 22182 Atlanta, GA 30328C: 571-382-0460 (Preferred) C: 404-909-5814 (Preferred_O: 703-336-8182 O: 770-821-5777F: 703-336-8151 F: [email protected] [email protected]

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cost -se regional presentation march 2015

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