market-based apportionment nick niemann mcgrath north mullin & kratz, pc llo omaha, ne
TRANSCRIPT
Market-Based Apportionment
Nick NiemannMcGrath North Mullin & Kratz, PC LLO
Omaha, NE
Sale of TPP
Initially• 3 factors
– Property– Payroll– Sales
Trend• Single factor• Some combination of
1-3 factors– Single, double or triple
weighting
Sale of Services
Initially• Cost of Performance
– Cliff (All-or-Nothing)
Trend• Cost of Performance
– Percentage
• Market-State
Apportionment Nationally
DRAMATIC EFFECT OF NEBRASKA’S PRESENT INCOME APPORTIONMENT RULE
Company Facts:· Service Provider Operating In Nebraska and Iowa· Company Costs of Performance (Facilities and Employees): 49% Nebraska; 51% Iowa· Customer Locations: 49% Nebraska; 51% Iowa
Question: How Should The Company Income Be Divided (Apportioned) Between Nebraska And Iowa?
DRAMATIC EFFECT OF NEBRASKA’S PRESENT INCOME APPORTIONMENT RULE
Company Facts:· Service Provider Operating In Nebraska and Iowa· Company Costs of Performance (Facilities and Employees): 51% Nebraska; 49% Iowa· Customer Locations: 51% Nebraska; 49% Iowa
Without LB 872(Cost of Performance Rule)
Question: How Should The Company Income Be Divided (Apportioned) Between Nebraska And Iowa?
Cost of Performance Rule
Result:Taxed On 100% of Income Result:
Taxed On 49% of Income
Market-State Rule
With LB 872(Market-State Rule)
TotalTaxed on149% of Income
Example #1
+ =
Market-State Rule
Result:Taxed On 51% of Income Result:
Taxed On 49% of Income
Market-State Rule
TotalTaxed on100% of Income
+ =
Without LB 872(Cost of Performance Rule)
Cost of Performance Rule
Result:Taxed On 0% of Income Result:
Taxed On 51% of Income
Market-State Rule
With LB 872(Market-State Rule)
TotalTaxed on
51% of Income
+ =
Market-State Rule
Result:Taxed On 49% of Income Result:
Taxed On 51% of Income
Market-State Rule
TotalTaxed on100% of Income
+ =
Example #2
DRAMATIC EFFECT OF NEBRASKA’S PRESENT INCOME APPORTIONMENT RULE
Company Facts:· Service Provider Operating In Nebraska and Iowa· Company Costs of Performance (Facilities and Employees): 49% Nebraska; 51% Iowa· Customer Locations: 49% Nebraska; 51% Iowa
Question: How Should The Company Income Be Divided (Apportioned) Between Nebraska And Iowa?
DRAMATIC EFFECT OF NEBRASKA’S PRESENT INCOME APPORTIONMENT RULE
Company Facts:· Service Provider Operating In Nebraska and Iowa· Company Costs of Performance (Facilities and Employees): 51% Nebraska; 49% Iowa· Customer Locations: 51% Nebraska; 49% Iowa
Without LB 872(Cost of Performance Rule)
Question: How Should The Company Income Be Divided (Apportioned) Between Nebraska And Iowa?
Cost of Performance Rule
Result:Taxed On 100% of Income Result:
Taxed On 49% of Income
Market-State Rule
With LB 872(Market-State Rule)
TotalTaxed on149% of Income
Example #1
+ =
Market-State Rule
Result:Taxed On 51% of Income Result:
Taxed On 49% of Income
Market-State Rule
TotalTaxed on100% of Income
+ =
Without LB 872(Cost of Performance Rule)
Cost of Performance Rule
Result:Taxed On 0% of Income Result:
Taxed On 51% of Income
Market-State Rule
With LB 872(Market-State Rule)
TotalTaxed on51% of Income
+ =
Market-State Rule
Result:Taxed On 49% of Income Result:
Taxed On 51% of Income
Market-State Rule
TotalTaxed on100% of Income
+ =
Example #2
COP – Cliff (All-or-Nothing)
COP - Percentage
Market-sourcing approach
No Income Tax
OtherNote: Year shown = States enacting market-state in past 10 years.
Sales Factor: Sourcing of Services
2011
2009
2010
2009
2007
2003
2007
2011 2005
2009
Phase-In2014-2017
Effective2014
TPP• 1967: 3 factor• 1987: Single factor (Sales)
– LB 772: Phase In (1988-1992)
– LB 775: Immediate for Nebraska incentive package
Services• 1967: COP – Cliff• 2012 Single factor (Sales) - LB 872: Market-State (Eff. 1-1-14)
Nebraska’s Apportionment Rule
History
Nebraska Market-State Rules
In NE If Buyer Uses SaaS In NE
Individual Customers:Billing Address In NE
Business Customers:Uses In Regular Course Of
Business In NE
2. Application Service (SaaS)
Use In Multiple States:% Use In NE
% Use In Everywhere
B) Application Service(SaaS)
Use In Nebraska:If Buyers, from Neb. location,
Use SaaS in the regular course of business
Individual:Billing Address Is In NE
Apportionment For Business Entity:If use in more than one state,
apportion based on proportion of use in Neb. vs. other states
If Location Of Sale Can’t Be Determined:
State From Which Order Was Placed(If that office cannot be determined,
then Customer’s Billing Address)
OR
AND
AND
Apportioned To NE IfDerived From Buyer In NE
Services On Real Property:Property in NE
Services On Tangible Personal Property:
TPP in NE at the time the service is rendered;
Individual Customers:Individual Physically
Present In NE
Business Customers:1) Buyer Engaged In Business In
NE; and 2) Relates To That Part Of The
Business Operated In NE
1. Apportionment of Services
Use In Multiple States: Use In NE
% Use In Everywhere
If Location Cannot Be Determined:State From Which Order Was Placed
(If Indeterminable, Customer’s Billing Address)
In NE If Buyer Uses SaaS In NE
Individual Customers:Billing Address In NE
Business Customers:Uses In Regular Course Of
Business In NE
2. Application Service (SaaS)
Use In Multiple States:% Use In NE
% Use In Everywhere
B) Application Service(SaaS)
Use In Nebraska:If Buyers, from Neb. location,
Use SaaS in the regular course of business
Individual:Billing Address Is In NE
Apportionment For Business Entity:If use in more than one state,
apportion based on proportion of use in Neb. vs. other states
If Location Of Sale Can’t Be Determined:
State From Which Order Was Placed(If that office cannot be determined,
then Customer’s Billing Address)
OR
AND
AND
Apportioned To NE IfDerived From Buyer In NE
Services On Real Property:Property in NE
Services On Tangible Personal Property:
TPP in NE at the time the service is rendered;
Individual Customers:Individual Physically
Present In NE
Business Customers:1) Buyer Engaged In Business In
NE; and 2) Relates To That Part Of The
Business Operated In NE
1. Apportionment of Services
Use In Multiple States: Use In NE
% Use In Everywhere
If Location Cannot Be Determined:State From Which Order Was Placed
(If Indeterminable, Customer’s Billing Address)
Nebraska Market-State Rules• Sale of Intangibles: . . . . . . . • Treasury Function: . . . . . .
Loan: . . . . . . . . . . . . . . . . . .
• Credit Card: . . . . . . . . . . . . .• Lease or License of TPP: . . . • Sale, Lease or License of
Real Property: . . . . . . . . . . .• Other Sales: . . . . . . . . . . . .
• Telecom Companies: . . . . .
Location of UseExtent of ManagementLocation of Security or Debtor’s AddressBilling AddressProperty Location
Property LocationExtent of NE Business Activity
Keep COP - Cliff
Market-State for Services- Tax Perspective -
Pros
• In-state service providers– Avoid >100% taxation– No tax penalty for engaging in
a service
• Less TPP v. Service controversies
• Less “Income-producing activity” controversies
• No more COP interpretation issues
Cons
• Increases taxable jurisdictions for out-of-state service providers
• More nexus enforcement• Multiple Market Based Sourcing
tests• Retaining / obtaining user or
customer information– Benefits received
• Cost of compliance• Introduces new sourcing
interpretation issues
Market-State for Services- Economic Development Perspective -
Pros Cons
• Certain in-State companies may prefer COP – Cliff if results in -0- tax
• May cause some out-of-state service providers to not make services available to in-State customers
• No tax penalty for having jobs and capital investment in the taxing State
• Puts emphasis on exporting services (and importing revenue) using in-State employees and capital investment
Market-Based Apportionment
Thank You
Nick Niemann
Nick Niemann• Partner - McGrath North Law Firm• Member - American & Nebraska Bar Association
- American Institute & Nebraska Society of CPA’s- Council On State Taxation (Practitioner)
• Creighton - College of Business 1978 (Summa Cum Laude)- School of Law 1981 (Magna Cum Laude)
- Adjunct Faculty – State Tax • Best Lawyers In America (Tax Law and Litigation & Controversy – Tax)• Principal designer and drafter of most of Nebraska’s economic development tax incentive
programs (e.g., 1987’s LB775 Employment and Investment Growth Act and 2005’s LB312 Nebraska Advantage Programs, the Nebraska capital gains exclusion and the single factor corporate apportionment formula).
• Nick works with company tax department personnel and their outside CPA firms and/or legal counsel, to address site selection, state tax planning opportunities, tax audits and appeals, refund claims and appeals, and tax and other incentives.
• Contact Info: [email protected] Website: www.McGrathNorth.com
(402) 633-1489Nick’s partner, Matt Ottemann, of McGrath North assisted in the creation of this presentation.
Market-Based ApportionmentPresentation Disclaimer
Disclaimer•This presentation should not be considered as legal, tax, business or financial advice. This presentation is designed to provide information about the subject matter covered. It is provided with the understanding that while the speaker/author is a practicing state tax and incentive advisor, neither he nor his firm has been engaged by the attendee/reader to render legal or other professional services (unless a specific engagement agreement has been executed). If legal advice or other expert assistance is required by the attendee/reader, the services of a competent professional should be sought.
Circular 230 Disclosure•The following statement is required by the U.S. Treasury Department Regulations: Any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed here.