State and Local Tax Traps for the Unwary - Tim Clancy

1. State and Local Tax Traps
for the Unwary
Tim Clancy & Ned Lenhart

2. Income Tax

3. #WBInsights15
Nexus – What causes it?
Historical perspective
– Physical presence
– Public Law 86-272
– Sales of Services

4. #WBInsights15
Nexus – Other Standards
Bright line nexus
– Factor presence test under Multistate Tax
Commission
• Sales > $500,000
• Payroll > $50,000
• Property > $50,000
• Greater than 25% test
– Indexing and other threshold levels used by states
– Application to income, franchise, gross receipts tax

5. #WBInsights15
Nexus – Other Standards
Economic nexus
– Licensing, use of intangibles, financial, software
• “Lanco” “Geoffrey”
• “KFC” “MBNA”
– Physical presence is not
required “Quill”
– Application to income, franchise,
and gross receipts tax

6. #WBInsights15
Nexus – Traps for the Unwary
• Fulfillment activities
• Warranties
• Remote employees
• Independent contractors

7. #WBInsights15
Nexus – Traps for the Unwary
• Investments in pass through entities
• Internet activities
• Digital goods
• Intangible property

8. #WBInsights15
Nexus – Traps for the Unwary
Non-filing of returns
• Unpaid taxes
• Interest
• Penalties

9. #WBInsights15
Nexus – Opportunities
• State by state analysis of laws and court cases
• Preventative measures by taxpayers
• Review of includible apportionment factors

10. #WBInsights15
Nexus – Opportunities
• State by state analysis of laws and court cases
• Preventative measures by taxpayers
• Review of includible apportionment factors
• Voluntary disclosure agreements vs amnesty
programs
• Credit for taxes paid to another state

11. #WBInsights15
Apportionment – Sales of Services
Methods of sourcing service revenue
– Cost of performance
– Proportionate
– Market

12. #WBInsights15
Sales of Services
Traps/Opportunities
Cost of performance (“COP”)
– Income producing activity
– Costs included
– Use of independent contractors
– Application of “COP-ish” rules or fair
reflection of income

13. #WBInsights15
Sales of Services
Traps/Opportunities
Market based sourcing
– Georgia laws
– Inconsistent state laws
– Cascading rules
• Delivery
• Receipt
• Benefit
• Use
• Reasonable approximation

14. #WBInsights15
Occasional Transactions
Sale of LLC Interest
• Business vs. non-business income
• Apportionment of income
• Beware of tiered entities!!!!

15. #WBInsights15
Occasional Transactions
Sales under IRC §338(h)(10)
• Sale of stock treated as an asset sale
• Business vs. non-business income
• Apportionment of income

16. #WBInsights15
Pass Through Entities
• Withholding or composite returns
• Credit for taxes paid
• Taxes imposed upon pass-through entity

17. #WBInsights15
Pass Through Entities
REFUND OPPORTUNITY
Georgia Tax Tribunal case Rosenberg v.
MacGinnittie

18. Sales/Use Tax

19. #WBInsights15
Sales tax: Why be concerned?
• $406 Billion-- sales tax collections estimated for
2015
• 28% of total state revenue from sales tax
• $20 billion in unremitted tax due
• States view your company as:
– Source of future tax remittances on taxable sales
– Source of revenue from taxable purchases (use
tax)
– Source of revenue from historical errors (audits)

20. #WBInsights15
Four Common Sales Tax Risks
• Improper Nexus Determination
• Inaccurate tax rules applied to sales
• Insufficient exemption documents
• Inherited tax liability (successor)

21. #WBInsights15
Sales Tax Legislative Trends
• Nexus Expansion Legislation
1. Click-through (“Amazon”) nexus
2. Affiliate Nexus
• Expansion of tax base to services
1. Software as services (SaaS) (TN)
2. Digital products
3. Installation and repair services
4. Staffing and personal services
• 2016 Georgia Legislative Session

22. #WBInsights15
Thank You!
Tim Clancy
Windham Brannon
tclancy@windhambrannon.com
678.510.2804
Ned Lenhart
Interstate Tax Strategies
nlenhart@salestaxstrategies.com
770.985.9573