Grant Thornton LLP State and Local Tax professionals are predicting state and local tax developments for 2015. See if you agree with their predictions and reasoning in areas like state income tax cuts and corporate tax incentives and disclosures. Learn more - http://gt-us.co/1DJhSRW

1. 1. Income tax cuts
The year is young, and some governors, especially
in Red states, have outlined lofty intentions to cut
income taxes. But Kansas’ experience of cutting taxes
and ending up with a serious budget gap and few
palatable options will weigh heavily on legislators, and
ultimately the governors.
Prediction: At least three Red states with governors
who are currently considering reductions in the
corporate or personal income tax rates will not enact
these reductions this year.
2. Three-factor election
We predicted a lack of consensus on the Multistate
Tax Compact’s three-factor election cases, and the
outcome was inconclusive. We suspect that 2015 will
look the same as 2014.
Prediction: The bulk of the action will be judicial,
not legislative; Gillette will be decided in favor of the
taxpayers, but the decision will leave unanswered
questions; other states will remain inconsistent and
muddled, and the legality of Michigan’s retroactive
denial of the three-factor election will remain uncertain;
and litigation will begin in at least one compact state
besides the five states where litigation is ongoing.
3. Multistate Tax Commission’s (MTC’s) version of
market-based sourcing
State legislatures will consider whether to enact the
changes the MTC made to the compact, including
the shift from cost of performance to market-based
sourcing for sales of items other than tangible personal
property. Many of the compact states (which are
concentrated in the western part of the United
States) strongly endorsed the MTC’s changes, so
tax authorities from these states will likely suggest
ratification by their legislatures.
Prediction: At least three states west of the Mississippi
River will decide to adopt the new market-based
sourcing statute.
10 SALT predictions for 2015
Grant Thornton LLP’s SALT professionals are once again making educated
predictions about state and local tax developments for the coming year.
See if you agree with their predictions and reasoning. You can also
download the PDF for more information.
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10 SALT predictions for 2015
4. Repair regulations
The federal tangible property regulations focus on
when amounts paid to acquire, produce or improve
tangible property are required to be capitalized or
may be deducted as repair and maintenance costs,
and dispositions and partial dispositions of tangible
depreciable property. States often decouple from
federal statutes and regulations that cause deferrals
from income that result in current revenue losses, and
conformity to the federal tangible property regulations
will sometimes result in deferrals. Some states will
measure the revenue impact and not like the answer.
Prediction: At least three states will decide to
decouple from at least one aspect of the federal
tangible property regulations.
5. Required corporate disclosures
State legislatures, especially in Illinois and California,
have focused on whether corporate taxpayers should
be required to publicly disclose state income tax
information. The issue raises questions about the need
for such legislation when weighed against privacy
concerns, the fact that the tax data presented in the
disclosure may not reflect a taxpayer’s true financial
position, and the taxpayer burden in complying with
these rules. To bring these points across will require at
least one state to step out and enact legislation.
Prediction: At least one state will adopt a corporate
disclosure bill that requires taxpayers to publicly
divulge significant information, and the legality of this
bill will be immediately challenged.
6. Burden of proof in alternative apportionment
Several courts have considered which party should
have the burden of proof in alternative apportionment
cases. The state of Mississippi adopted legislation
allowing for alternative apportionment when the
statutory or regulatory method doesn’t fairly
represent the taxpayer’s business activity in the state
and the proposed method more fairly represents
the activity than any other reasonable method.
In CarMax, the South Carolina Supreme Court
determined that the moving party must prove by
a preponderance of the evidence that the statutory
formula doesn’t fairly represent the taxpayer’s
business activity in the state and its alternative method
is reasonable. The CarMax standard essentially makes
it easier for a state tax authority or a taxpayer to use
alternative apportionment. With the expectation that
the Tennessee Supreme Court will hear Vodafone this
year, the MTC’s intent to set forth a burden of proof
standard similar to CarMax and the potential for
legislation in other states, the question becomes which
burden-of-proof standard will be followed elsewhere.
Prediction: At least two judicial decisions or
legislatures will be consistent in following the more
lenient CarMax approach.
7. Retroactive legislation
In IBM, a divided Michigan Supreme Court held that
an election could be made to use the compact’s three-
factor apportionment formula for purposes of the
Michigan Business Tax (MBT) for the 2008 tax year. In
response to the estimated $1.1 billion price tag of the
IBM decision, Michigan enacted legislation to prevent
taxpayers from claiming the MBT refunds based on
the compact election. It may take years to determine
whether that move violated the Constitution, but
retroactively divining the intent of the legislature is
here to stay. Taxpayers will continue to win their share
of cases on the merits, and legislators will find ways to
curb the effect of the decisions.
Prediction: At least one high-profile decision in
favor of a taxpayer will be effectively overturned by
a state legislature that fears the revenue impact of
refunds on the issue.
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10 SALT predictions for 2015
8. ‘Remote seller’ developments
2015 promises to be busy in the area of remote
sellers’ potential obligations to the states for
purposes of the sales and use tax. The House
Judiciary Committee is likely to vet at least one
version of potential solutions that would require
remote sellers to collect and remit sales and use tax
to states. In Direct Marketing Association v. Brohl,
the U.S. Supreme Court is expected to decide the
question of whether substantial notice and reporting
requirements can be imposed on remote sellers in
lieu of a collection and remittance requirement, and
whether such a challenge may be heard in federal or
state court. Finally, state efforts regarding affiliate
and click-through nexus will continue.
Prediction: Given contrasting views on how remote
sellers should be obligated to collect and remit
sales and use tax, Congress won’t solve this issue
in 2015. The Supreme Court will hold in favor of
Direct Marketing Association, leading to Colorado’s
dropping its notice and reporting requirements. At
least two more states besides Michigan will enact
affiliate and/or click-through nexus legislation.
9. Incentives packages and clawbacks
A business that received a $21 million incentive
package from North Carolina to move to Charlotte
will be shutting down its Charlotte operations to
relocate closer to its corporate parent’s current
operations. As a result, clawback provisions included
in the incentive package agreement will be activated,
forcing the business to repay the approximately $2.5
million it received from North Carolina, Mecklenburg
County and the city of Charlotte. This is a reminder
that such agreements with states don’t always lead to
a successful partnership. Sometimes clawbacks result
from factors beyond the company’s control.
Prediction: At least one additional clawback requiring
a business to pay a state at least $10 million will be
reported this year.
10. The Revised Texas Franchise Tax and
potential repeal
The two-year gap between legislative sessions in Texas
means a significant amount of time has passed since
legislators last met. There is still a strong impetus to
keep taxes low, but the declining price of oil could
wreck the status quo. The dramatic drop in oil prices
has created problems for producers. If oil prices
don’t recover soon, legislators may need to consider
using financial reserves to meet their budget or tweak
revenue streams. The Revised Texas Franchise Tax
(RTFT), a multibillion-dollar revenue stream paid by
businesses, has been criticized as complex and incapable
of capturing all the revenue promised to Texas when it
was enacted. As a result, legislators are thinking about
calls for repeal of the RTFT. The question is whether an
effort to achieve a more stable revenue base through a
wholesale change to a corporate tax regime can happen
during fiscal uncertainty.
Prediction: The Texas legislature won’t repeal the
RTFT this year and instead will modestly adjust the
tax rate and make deductions available to taxpayers.
Contact
Jamie Yesnowitz
Principal, SALT -- National
Tax Office Leader
T +1 202 521 1504
E jamie.yesnowitz@us.gt.com
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