NOVEMBER 2013 NEWS FROM SULLIVAN & ASSOCIATES, PC

As the seasons change so do the mind of the Fiefdoms. The New Jersey tax court has recently decided to change its mind on the proper nexus standard for its now defunct throwout rule, albeit three years after it ceased to be in existence. This position may result in some material refund opportunities for taxpayers. While up in New England, Massachusetts has been quite busy becoming Taxachusetts again; but in an odd turn of events, things have taken a significant right turn recently. In July of this year, a new law was passed to impose sales tax on most “computer services” in the state. The taxation of these services was not at all popular. Well I guess some unhappy business owners started throwing computers into the Boston Harbor, exclaiming taxation without representation, or something of that ilk, since Massachusetts has now decided to retroactively repeal this piece of legislation. Hopefully, this will lead to the repeal of a lot of the other unfriendly tax initiatives recently enacted in the Bay State. Have a great rest of your November.

Illinois – Corporate Income Tax – Insurance Company Not Required in Combined Group

The Illinois Fourth District Appellate Court recently overturned a trial court ruling and determined that a captive insurance company was an insurance company for Illinois corporate income tax purposes, and was therefore not includable in the corporate Illinois combined filing. Under Illinois law, insurance companies cannot be included in a combined return with noninsurance affiliates because insurance companies are required to apportion business income using a different single-factor apportionment formula based on direct premiums written. Although a significant amount of the insurance company’s income for the tax years in question was generated from intercompany trademark royalty payments and interest, rather than from insurance premiums paid by affiliates, it was still an insurance company since the company was licensed as an insurance company under Vermont law, and the Internal Revenue Service (IRS) treated it as an insurance company under separate federal audits and did not dispute its status. Wendy’s International, Inc., v. Hamer, 2013 IL App (4th) 110678, No 4-11-0678 (Oct. 7, 2013).

Massachusetts – Corporate Income Tax- Common Ownership Provision for Combined Reporting Discussed

Two corporations that were involved in a transaction that qualified as a tax-free spin-off for federal income tax purposes were under common ownership for Massachusetts corporate excise tax purposes and, therefore, must be included in a combined group. The federal test to determine voting power did not apply to the facts here. The federal test requires that a parent corporation own stock in another corporation that possesses at least 80% of the total voting power of the stock of such corporation. However, Massachusetts looks at whether more than 50% of the voting control of each member of the combined group is owned by a common owner or owners. The Massachusetts rule focuses on actual voting control, while the federal rule seeks to determine the voting power held by each share of stock. Therefore, in the instance case, since the common owner held more than 50% of the voting control of the two corporations during the applicable period, the two corporations were under common ownership for purposes of combined reporting. Massachusetts Department of Revenue Letter Ruling 13-7.

Massachusetts – Sales and Use Tax – Tax on Computer Services Repealed

Massachusetts has signed legislation that eliminates sales and use tax on computer system design services and the modification, integration, enhancement, installation or configuration of standardized software. The repeal is effective retroactive to July 31, 2013, the date the tax initially took effect. Persons who failed to collect or pay tax on these transactions will not be subject to penalties. Vendors are required to make reasonable efforts to return to purchasers any tax that was collected but not remitted. Any taxpayer who remitted tax on these services is entitled to a refund. Abatement applications must be filed by December 31, 2013. The Department of Revenue has announced that vendors may also obtain refunds by electronically amending their returns on WebFile for Business. Vendors must return these refunds to customers within 30 days of receipt. Ch. 95 (H.B. 3662).

Michigan – All Taxes – New Law Revises VDA Program

A new law amends Michigan’s voluntary disclosure agreement (VDA) programs so as to:

  • Include the new Michigan corporate income tax (CIT) among the taxes covered by the “look-back” period of a VDA;
  • Provide for a combined 48-month look-back period for the former Michigan single business tax (SBT), Michigan Business Tax (MBT), and the CIT; and
  • Require the refund of SBT, MBT, and/or CIT taxes to a taxpayer that entered into a VDA after October 1, 2012, and before May 1, 2013, if the combined look-back period under that agreement exceeded 48 months.

H.B. 4586

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New Jersey – Corporate Income Tax – Ownership Interest in Limited Partnership Created Nexus for Corporation

A corporation was deemed to have nexus with New Jersey and required to file corporate business tax returns where the corporation owned 99% of a limited partnership that operated 25 supermarkets in New Jersey. The court noted that the corporation and the limited partnership were in the same line of business, were dependent upon each other, and almost all of the corporation’s officers worked out of an office located in the state that was listed as the headquarters of the limited partnership. The court also noted that the corporation and the limited partnership also had a significant overlap of officers and a cash management agreement that included the corporation, the limited partnership and other affiliates as the basis for its determination that the corporation had nexus with the state. Village Super Market of PA v. Director, Division of Taxation, New Jersey Tax Court, No. 021002-2010 (October 23, 2013).

New Jersey – Corporate Income Tax – Ruling Applied Economic Nexus Standard to Throwout Rule

A recent New Jersey Tax Court ruling required the Division of Taxation, when using the throwout rule, to apply the same economic presence nexus standard it used for determining New Jersey nexus when deciding whether a taxpayer is subject to tax in another state. The throwout rule was effective between 2002 and 2010. It required taxpayers to exclude receipts that would be assigned to a state or to any foreign country “in which the taxpayer is not subject to a tax on or measured by profits or income, or business presence or business activity” when calculating their appointment formula sales factor denominator. This resulted in taxpayers apportioning a greater percentage of their income to New Jersey because the throwout rule reduced a percentage of income assigned elsewhere for sales factor purposes. The throwout rule has been repealed for tax years after 2010.

The issue before the court was whether the state could use a different nexus standard in determining whether the taxpayer, an intangible holding company located in North Carolina, was “subject to tax” in a state so that receipts should be thrown out of the sales factor denominator that it used in determining whether an entity was subject to tax in New Jersey. The Division of Taxation argued that the taxpayer was required to actually file returns in other states to be considered subject to tax and thus not subject to throwout. The taxpayer argued that the state should apply its own economic nexus standard in determining whether the taxpayer was subject to tax in the other state. Therefore, if the taxpayer would be subject to tax in the other state under an economic nexus standard, the throwout rule should not apply. Lorillard Licensing Co. LLC v. Division of Taxation, No. 008772-2006 (N.J. T.C. 2013).

New York – Corporate Income Tax – Income from Equipment Finance Agreements Was Business Income

An appellate court has affirmed the tax appeals tribunal’s conclusion that the income from certain equipment finance agreements between a corporation and various government entities was business income and not investment income. The tribunal determined that the agreements did not constitute stocks, bonds, or other securities within the meaning of the applicable tax law, and therefore the income derived from these agreements was business income rather than investment income. Xerox Corp. v. New York State Tax Appeals Tribunal, Appellate Division of the Supreme Court of New York, Third Department, No. 514464 (October 24, 2013).

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