06.17.11

There has been a lot of recent activity at the state and local level with respect to taxation.  The following is a list of some recent state and local developments that taxpayers should be aware of:

Alabama

Alabama has recently enacted legislation that provides a new apportionment formula to be used for business income effective for tax years beginning on or later than December 31, 2010.  The equally-weighted three factor formula will be replaced by a four factor formula with double-weighted sales.

In addition, the Alabama legislation states that sales other than that of tangible personal property are included in determining the sales factor if the taxpayer’s market for the sale is in Alabama.  A taxpayer’s market for a sale will be considered to be in Alabama in cases where the sale, rental, lease or license of real property is located in the state. With respect to the rental, lease, or license of tangible personal property, a taxpayer’s market will be in Alabama if and to the extent the property is located in Alabama. In the case of sale of a service, the sale will be deemed to be Alabama-based to the extent that it is delivered to a location within the state, and in the case of a lease or license of intangible property to the extent that the intangible property is used in Alabama.

California

The California Franchise Tax Board (“FTB”) has provided an update with regard to the New Jobs Credit.  The FTB announced that as of June 4, 2011, $56,991,838 in total New Jobs Credit was generated on business entity tax returns and personal income tax returns that were filed and processed.  A tax credit of up to $3,000 for each additional full-time employee hired is available to small businesses with 20 or less employees.  California has allocated $400 million for the credit.  Taxpayers may only claim the credit on an original timely filed return received by the FTB on or before a cut-off date specified by the FTB.  The cut-off date is the last day of the calendar quarter within which the FTB estimates that it will have received timely filed original returns claiming the credit that cumulatively total $400 million.

The FTB has also issued informal guidance on the California research and development tax credit.  See Legal Division Guidance 2011-06-01 (June 1, 2011).  The guidance explains that California does not fully conform to the Internal Revenue Code (“IRC”) §41(c)(6) definition of “gross receipts” with respect to service receipts.  Instead, California modifies the IRC §41(c)(6) definition of “gross receipts” to include sales of property within California and excludes receipts that are not for sales of property.  To claim the California research and development credit, at some point in time, a taxpayer must have had both qualified research expenses and gross receipts in the same year.  Thus, a taxpayer that has only service receipts does not have California gross receipts and is not allowed to claim the credit. 

Colorado

The Colorado Department of Revenue has enacted a tax amnesty program that will run from October 1 to November 15, 2011.  Colorado will allow certain taxpayers to pay the full amount of overdue taxes, including one-half of any interest due, without being subject to any other civil or criminal penalties.  The amnesty program applies to taxes that were due on or before December 31, 2010 and does not include the 2010 Colorado income tax, which was due April 18, 2011.  If a taxpayer receives a delinquency notice on or before October 1, 2011, the taxpayer is not eligible for the amnesty program.  If a taxpayer has an eligible tax return, a payment plan may be set up. However, the full amount of the tax and half of any interest due must be paid no later than December 31, 2011.

The Colorado tax amnesty program applies to the following types of taxes:

• Personal, corporate, partnership and fiduciary income taxes;
• State sales and use tax and the following taxes collected by the Department of Revenue on behalf of counties and municipalities: county or city taxes; local marketing and promotion taxes; county lodging taxes; county rental taxes; local improvement district sales taxes; regional transportation authority sales and use tax; Denver metropolitan scientific and cultural facilities district sales and use taxes, metropolitan football stadium district sales and use tax, and regional transportation district sales and use tax;
• Gasoline and special fuel taxes;
• Cigarette and tobacco products taxes; and
• Severance taxes

NOTE: International Fuel Tax Agreement (IFTA) taxes are NOT eligible for amnesty

Massachusetts

On June 8, the Massachusetts Appellate Tax Board (“Board”) held that AT&T had properly used the “operational approach” to calculate their sales factor in determining their Massachusetts taxable income.  The main issue in AT&T Corp v. Commissioner of Revenue was whether the costs of performance associated with AT&T’s overall business activity or each transmission of a phone call should be included in the numerator of their sales factor.  Since AT&T was engaged in the sales of services, Massachusetts requires a two-step process in calculating AT&T’s sales factor.  First, there needs to be a determination of AT&T’s “income-producing activity”. Second, the “costs of performance” of that activity need to be analyzed. If there were more costs in Massachusetts than in any other state, then the sales associated from the income-producing activity must be sourced to Massachusetts.  

The Massachusetts Commissioner of Revenue argued that the income-producing activity for AT&T was the transmission of each call from Massachusetts and under this “transactional approach” the costs of performance are associated with the connection of each individual transmission in Massachusetts. In other words, the Commissioner argued that each transaction from customers in Massachusetts should be considered a Massachusetts sale. AT&T contended that the income producing activity was the operation of national, integrated telecommunications networks, operating and managed from its Global Network Operations Center in New Jersey.  Under the “operational approach” the costs of performances are related to operating and maintaining the network.  Those costs specifically are service activation, service assurance, service creating, service execution, network capacity and servicing, billing, and support and guidance.  The Board agreed with AT&T in applying the “operational approach”, and found that a greater proportion of the costs were incurred in New Jersey than Massachusetts.

A secondary issue addressed by the Board was whether access fees paid to local exchange operating companies should be included in AT&T’s costs of performance.  The Board held that since these were fees paid for activities performed on AT&T’s behalf, there were properly excluded from costs of performance under 830 CMR 63.38.1(9)(d)(2).

 
Michigan

In May, Michigan Governor Rick Snyder signed into law a bill which repeals the Michigan Business Tax and replaces it with a corporate income tax.  The new corporate income tax regime will become effective on January 1, 2012.

The Michigan Business Tax imposed, in part, a modified gross receipts tax, an income tax, and an annual surcharge that applied to the sum of both tax liabilities (i.e., the gross receipts and income tax liabilities).  The Michigan Business Tax also offered over 40 credits that reduced the initial calculation of tax and surcharge.

The new corporate income tax regime will impose a tax rate of 6 percent on the income tax base after allocation and apportionment to Michigan.  S Corporations, limited liability corporations, partnerships and individuals with business activities will not be subject to the new corporate income tax regime.  As with the Michigan Business Tax, taxpayers with less than $350,000 of Michigan gross receipts will not be required to file a return.  The corporate income tax also does away with all of the credits offered by the Michigan Business Tax except for the Small Business Alternate Tax Credit.  In addition, it should be noted that the new law also makes substantial changes to how individuals are taxed in Michigan.

New Jersey

In April, New Jersey Governor Chris Christie signed into law legislation that will change New Jersey’s corporate income tax apportionment formula.  New Jersey’s current apportionment formula is comprised of a payroll factor, a property factor and a double-weighted sales factor.  Each factor is calculated by dividing the portion attributable to New Jersey by the total worldwide figure.  For example, the property factor is calculated by dividing the value of all property in New Jersey by the value of all property worldwide.  The property and the payroll factors each make up 25 percent of the apportionment factor percentage.  The remaining 50 percent is made up of the sales factor. 

The new law signed by Governor Christie will gradually phase-in a sales only apportionment formula. With this law change, New Jersey will join approximately 12 other states that employ a single sales factor apportionment formula.

The current three-factor apportionment formula will remain in effect for the 2011 tax year.  For 2012, the sales factor will account for 70 percent of the apportionment formula while the payroll and property factors will each account for 15 percent of the apportionment formula.  For 2013, the sales factor will account for 90 percent of the apportionment formula, while the payroll and property factors will each account for 5 percent of the apportionment formula.  Beginning in 2014, the apportionment formula will be made up entirely of the sales factor.

What does this mean for New Jersey taxpayers?  Taxpayers that have a disproportionate amount of sales in New Jersey relative to their New Jersey property and payroll may pay more corporate income tax.  Conversely, taxpayers that have a large amount of New Jersey property and payroll relative to their New Jersey sales may benefit substantially from the new apportionment formula. 

Virginia

The Virginia Supreme Court recently ruled that the State Corporation Commission (“SCC”) does not have the authority to deduct a telecommunications company’s Internet-related revenues when determining the gross receipts that it certifies to the Virginia Department of Taxation (“Department”) for purposes of the
minimum tax imposed pursuant to Va. Code Ann. §58.1-400.1.  See Level 3 Communications, LLC v. State Corporation Commission, et. al, Docket Nos. 102043, 102044, 102045 and 102046 (Va. 2011).  Under Virginia law, telecommunications companies are subject to either a corporate income tax on income from Virginia sources or to a minimum tax on gross receipts.  Telecommunications companies pay the minimum tax only when their regular corporate income tax liability is less than the minimum tax.  The Internet Tax Freedom Act (“IFTA”) prohibits the states from imposing a tax on Internet access revenues or applying multiple or discriminatory taxes on electronic commerce. 

The Virginia Supreme Court rejected the taxpayer’s argument that the IFTA required the SCC to exclude Internet-related gross receipts from its gross receipts certified to the Department for purposes of determining the company’s potential minimum tax liability.  The court determined that the Department has the responsibility for imposing taxes, not the SCC.  Because the SCC does not impose any tax, the Virginia Supreme Court concluded that the IFTA does not apply to the SCC’s limited function under Virginia law, which is to certify telecommunications companies’ gross receipts to the Department pursuant to Va. Code Ann. §58.1-400.1. 

Should you have any questions about how these tax law changes might affect you, please contact Mike Fletcher at mfletcher@argy.com.

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