Presented by Mike Williams

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Institute of Management Accountants Trends in
State Taxation

• Presented by Mike Williams
• September 24, 2009

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Current Trends in State Taxation

• Texas franchise and sales tax developments
• Economic development vs. revenue generation
  trends
• Credits incentives
• Gross receipts
• Audit and other activities
• Nexus
• Other state topics
• Questions and Answers

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Calculating the Franchise Tax

• Tax base (Margin) is calculated in one of three
  ways
• Total Revenue minus Cost of Goods Sold
  (Election) or
• Total Revenue minus Compensation (Election)
• Total revenue times 70 (Ceiling)
• Apportion Margin based on business done in Texas
• Determine tax rate
• Margin X Apportionment factor X Rate Tax

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81st Legislature statutory revisions to
franchise tax

• No tax due revenue threshold increased to 1M
• Effective for reports due on or after January 1,
  2010
• Threshold to reduce to 600,000 for reports due
  on or after January 1, 2013
• Lending institutions report gross receipts on the
  sale of loans or securities
• Securities available for sale or trading
  securities under FAS 115
• Destination management services exclusion from
  total revenue
• Defines destination management services
• Tax credit for clean energy projects (carbon
  dioxide sequestration)
• 10 of total capital cost of the project or 100M
• No credit to be issued by Comptroller until 2013

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Where do we stand?

• Franchise tax revenue fell short by approximately
  1.5B
• Revenue estimator attributes shortage to COGS
• BART to hire more auditors
• Matching with IRS on Form 1099 or TWC filings
• Desk audit program began in March/April
• SIC Code reported as service industry but
  utilized COGS
• No Tax Due filers reporting gross receipts
  greater than 300k
• Taxpayers utilizing .5 tax rate as
  wholesaler/retailer

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Where do we stand? (cont)

• Comptroller Policy
• Passive entity policy (temporary win)
• Net distributive income (just havent won yet)
• Any constitutional challenges?
• Old franchise tax still within statute of
  limitations

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Common Issues Encountered by Taxpayers

• Notices
• Combined filing requirements
• Cost of Goods Sold interpretation
• Revenue exclusions
• Tax rates
• Tiered partnerships
• Passive entities
• Short period returns

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Sales Tax

• Legislation
• Local sales tax sourcing change
• Exemptions
• Destination management
• Media production facilities
• Ag aircraft ME and Ag products production
• Policy change on Airplane Transactions Economic
  substance doctrine

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Current Texas Franchise Tax Credit Planning

• Several credits that have carryover provisions
  from old to new
• Investment Credit Jobs Creation RD
• Credits often overlooked due to loss position or
  limited applications
• Amend previous franchise tax returns to establish
  credit and apply carry forward portion to higher
  margin tax
• Thorough documentation should substantiate any
  credit

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Economic Development vs. State Revenue Campaigns
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Courtesy of USA Today, August 26, 2009
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Economic Development Trends

• Tom Leppert - Dallas is a great place for CEOs to
  move their businesses. Four hundred CEOs across
  the country will soon receive iPhones bearing Tom
  Lepperts pitch.
• Targeting companies that have at least 500M in
  revenue and focusing on CA, NJ and NY
• 250k for iPhone campaign
• CEO and local business leaders endorsements

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Texas Enterprise Zone Opportunities

• State sales and use tax benefits and possible
  local tax abatements
• Economic distressed areas throughout the state
• Limited amount of enterprise project designations
  available
• Negotiation with local economic development
  representatives and city/county
• Capital investment Job Creation/Retention

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Texas Enterprise Zone Opportunities (Cont)

• ABC Company to create 50 additional jobs and
  retain 400 jobs within one plant
• CapX spend estimated to be 5M over the next 5
  years
• Sales tax spend at the plant to be significant
  over 5 years
• Assume city approves EZ designation
• Potential sales tax refund over next 5 years
  limited to job creation and retention 2,500 X
  450 1.25M of potential refund

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Other States Economic Development Incentives

• Southern and Southeastern states are active in
  negotiating tax incentives
• Statutory credits v. negotiated incentives
• Property tax abatements
• Training grants
• Jobs incentives
• Tax Incremental Financing
• Investment tax credits
• Sales/use tax abatements

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Other States Economic Development Incentives

• Louisiana Tax Equalization
• Pennsylvania Keystone Opportunity Zone
• Oklahoma Manufacturing Facilities Exemption
• Mississippi Growth and Prosperity Program
• New Mexico Technology Jobs Credit
• Tennessee Fast Track Job Training Assistance
  Program

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State tax trends

• Nexus questionnaires
• Aggressive auditors
• Statutory and policy changes
• Combined reporting
• NOL limitations
• Apportionment trends towards sales factor
• Federal information sharing
• IRS audit

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State tax trends (Cont)

• Amnesty programs
• LA, MD, ME, VT, VA, OR (and others)
• Voluntary disclosure programs
• State specific
• MTC audit
• Managed audits
• FIN 48

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Economic Nexus

• No physical presence
• Roots with intangible property companies
• Geoffrey
• Current Trends
• MBNA
• Capital One

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Attribution Nexus

• Agency Relationship Basis/Affiliate Nexus
• Activities performed by an in-state company on
  behalf of the out-of state company can create
  nexus if significantly associated with the
  in-state companys ability to establish and
  maintain a market
• Common ownership between a corporation with nexus
  in a state and out-of-state company that make
  substantial sales into the state may create nexus

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Gross Receipts

• Corporate income tax becoming obsolete
• Broad based, low tax rate
• Revenue generator in bad economic times
• Planning is limited
• No federal exemptions (i.e. PL 86-272)
• Nexus broad based
• Case law and administrative policy limited

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Gross Receipts (Cont)

• No uniformity amongst states
• Perceived multiple taxation
• Not related to ability to pay
• Sourcing issues
• FAS 109 implications

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Ohio

• Commercial Activity Tax (CAT)
• Ohio sitused gross receipts over 150k
• Phase-out of existing franchise tax
• Broad based
• Ohio Grocers Association challenge
• Unconstitutional excise or franchise tax on gross
  receipts for the wholesale sale of food

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Michigan

• Gross receipts component
• Tax rate of .8
• Net income component
• Tax rate of 4.95
• Surcharge of 21.99
• Favors in state manufacturers
• Few exemptions or credits

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California?

• Commission of the 21st Century Economy
• Recommend revenue-neutral ways to modernize stat
  tax law and reduce volatility of current system
• Business net receipts tax
• Special session to implement recommendations

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FIN 48

• Effective Date for Nonpublic Entities
• Interpretation originally issued June 2006
• Was to be effective for all entities for fiscal
  years beginning after December 15, 2006.
• Deferred for two years for nonpublic entities
• Series of amendments called FSPs (FSP FIN 48-3)
• Nonpublic entities must now apply FIN 48 for
  annual periods beginning after December 15, 2008
• December 31, 2009 financial statements, if
  calendar year end

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FIN 48 (Cont)

• Provides a consistent and uniform methodology
  required to be used for accounting and reporting
  in GAAP financial statements for uncertain tax
  positions taken on a tax return
• Establishes a more-likely-than-not threshold for
  recognizing income tax positions in GAAP
  financial statements
• Where FAS 5 contained a probable loss standard

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FIN 48 (Cont)

• State Taxes Sample of Entity-level Taxes
• California Tax on certain S-corporations (1.5)
• District of Columbia Tax on certain pass-through
  entities (9.975)
• Illinois - Tax on certain pass-through entities
  (1.5)
• Kentucky - Tax on certain pass-through entities
  (6)
• Michigan MBT on pass-through entities (4.95)
• New Hampshire BPT on pass-through entities
  (8.5)
• New York City S-corps not recognized taxed as
  C-corps. 4 tax on unincorporated entities
• Philadelphia BPT and NPT on pass-though
  entities
• Tennessee 6.5 entity-level income tax
• Texas Margin Tax

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QA
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• Mike Williams RSM McGladrey, Director - State
  and Local Tax
• [phone] mike.williams_at_rsmi.com
• Mike has over 16 years of experience in public
  accounting with approximately 14 years experience
  in the state and local tax area. Prior to
  joining RSM McGladrey in 2006, Mike spent 9 years
  practicing with PricewaterhouseCoopers. He
  spends the majority of his time assisting
  companies with their state income/franchise tax
  issues with a focus on Texas, Louisiana and
  Oklahoma. He has assisted clients in a variety
  of industries including manufacturing, retail,
  distribution, energy and service companies.
  Mikes extensive experience includes
  restructuring implementations, merger and
  acquisition consulting, refund reviews, nexus
  studies, state audit defense, legislative
  initiatives and state income tax provision
  consulting.
• Mike has a Bachelor of Science in Accounting from
  Louisiana State University and a Masters in
  Business Administration from the University of
  New Orleans. He is affiliated with the American
  Institute of Certified Public Accountants, the
  Texas Society of Certified Public Accountants,
  the State Taxation Committee of the Texas Society
  of Certified Public Accountants, Texas Taxpayers
  and Research Association and the Louisiana
  Society of Certified Public Accountants.

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• This document was not intended or written to be
  used, and it can not be used, for the purpose of
  avoiding U.S. federal, state or local tax
  penalties.