Each year in early spring, approximately 300 state and local tax (SALT) professionals convene in New Orleans for the Advanced Tax Seminars, which have been cosponsored for over 20 years by the ABA Section of Taxation and the Institute for Professionals in Taxation. This unique conference is presented over the course of one week and comprises three distinct seminars focusing on state income, sales and use, and ad valorem taxation. This article spotlights a few of the many topics that were covered at the 2016 conference. Conference materials are linked where available and appropriate.
Advanced Income Tax Seminar
Historically, states have sourced sales in accordance with the Uniform Division of Income for Tax Purposes (UDITPA) cost of performance (COP) rule.1 Gregg Barton and Maria Eberle discussed the developing trend to require multistate corporate taxpayers to apportion sales using a Market-Based Sourcing (MBS) regime2 that primarily affects the sourcing of income from intangibles and services. Given the unsettled MBS landscape, the panelists emphasized that, practitioners should be careful to verify the current law in relevant states and monitor for future changes. As there is relatively little judicial guidance, practitioners should focus on the statutory language, regulations, and any other available guidance issued by the taxing authorities. South Carolina is one state that has seen litigation on this matter. In the Dish3 and DirecTV4 cases, the South Carolina Administrative Law Court held that South Carolina is not a strict COP state nor does it subscribe to an all-or-nothing result. Subsequently, the taxpayers’ sales were found to be attributable to South Carolina to the extent that the income-producing activity is performed within the state. In an effort to harmonize the various state MBS laws, the Multistate Tax Commission (MTC) is working on revisions to UDITPA section 17.5 To what extent the states will adopt the MTC’s proposal remains to be seen.
In the Transfer Pricing Update, Scott Brandman, Stephen Kranz, and Jill Weise discussed transfer pricing issues at the state level. In the event of a Service allocation adjustment, the taxpayer bears the burden of establishing that the Service’s determination was arbitrary, capricious, or unreasonable, and that the arm’s length standard under section 482 was satisfied.. Although nearly every state has adopted a statutory regime similar to section 482 to allow for intercompany price adjustments,6 very few states have the depth of expertise or resources to conduct a proper transfer pricing analysis. As a practical matter, practitioners must engage state taxing authorities in fundamental discussions about transfer pricing issues if they hope to overcome an adjustment. Some states have combated income shifting by forcing taxpayers to combine reporting with their affiliate entities. However, in Rent-A-Center East,7 the Indiana Tax Court held that the taxpayer did not have to file a combined report with its out-of-state affiliates, in part because the taxpayer was able to demonstrate that its intercompany transfer prices were at arm’s length. States find it difficult to address intercompany transactions that lead to income shifting across state lines because of the high resource requirements.8 In response, the MTC initiated its Arm’s Length Adjustment Service Program (ALAS) in 2013 with the goal of pooling resources together in order to audit a single taxpayer across states.9
Advanced Sales Tax Seminar
A highlight of the sales tax seminar was a comprehensive overview of state voluntary agreements by Brian Goldstein, Lynn Gandhi, and Thomas Shimkin. The panelists explored common scenarios in which taxpayers may not realize that they have a jurisdictional nexus and corresponding filing obligation. If taxpayers decide against risking the audit lottery, a few options are available to address their outstanding tax liabilities. Many states have a limited-time amnesty program, whereby taxpayers may be eligible to pay a predetermined amount in exchange for a tax liability pardon without fear of criminal prosecution. Amnesty programs are fickle solutions, however, because they change often and unpredictably, often varying in relation to a state’s budgetary needs. If an opportune amnesty program is unavailable, the taxpayer may be proactive and consider a voluntary disclosure agreement (VDA). In exchange for certain benefits, many states allow taxpayers to voluntarily and preemptively comply with their tax laws. (Note, however, that once taxpayers are under audit, they are typically disqualified from filing a VDA.) To aid the VDA process, the MTC assists taxpayers with settlement negotiations through its National Nexus Program (“NNP”).10 A taxpayer may apply for a VDA through the NNP, which facilitates the negotiation and settlement process by serving as an intermediary between the taxpayer and the state.
The increasing pace of corporate mergers and acquisitions makes it important for tax practitioners to keep in mind the various state sales/use and transfer tax issues that are sometimes overshadowed by federal income tax issues. In the M&A panel, panelists Stephanie Lipinski Galland, Robert Mahon, and Kathryn Pittman discussed common SALT issues that arise in corporate reorganizations. States typically interpret a “sale” broadly11 and will liberally apply a sales/use tax to transactions that they characterize as an asset sale.12 In addition to sale/use taxes, many states levy real estate transfer taxes in the form of a tax on the transfer of the property or a tax on the recordation of the deed. If a sales/use or real estate transfer tax is levied, it is important for the practitioner to research whether the transaction qualifies for an exemption.13 Other M&A SALT issues that may arise include the imposition of non-traditional taxes, bulk sale compliance requirements, and successor liability obligations. Ultimately, the onus is on the practitioner to be aware of the M&A SALT implications and try to mitigate any risk with proper due diligence.
Advanced Property Tax Seminar
The property tax seminar began with a discussion by Judy Engel, David Lennhoff, Linda Terrill, and Jack Van Coevering on valuation issues involving the hotly debated “Dark Store Theory.”14 The controversy surrounding the theory has refocused attention on core valuation questions: what is the proper approach to assess property value, what is a property’s “highest and best use” considering comparable properties, and do functionally obsolescent features significantly reduce a property’s market value? Addressing these questions, the panelists analyzed the approaches and responses of various states. The Indiana Tax Court held in Meijer Stores v. Smith15 that it was appropriate to consider the sales to second-generation users of similar vacant retail stores in appraising a profitable two-yea-old firs-generation Meijer store property. This methodology was further supported in the Meijer Stores v. Marion County16 and Kohl’s Indiana17 cases. In response, the Indiana Legislature passed statutes in 2015, made retroactive to 2014 assessments, to address this Dark Store Theory.18 In Michigan, the Michigan Tax Tribunal held in Lowe’s Home Centers v. Township of Marquette19 that the property should be assessed according to its market value, including comparisons to vacant retail stores available for sale (“value-in-exchange”), rather than its value to the current owner (“value-in-use”). The Tribunal added that build-to-suit and sale-leaseback transactions should not be included in the fair market analysis. Although not all states have directly confronted the Dark Store Theory, many have addressed underlying principles that may lead to future cases.20 Given the lack of guidance combined with the tax revenues at stake, it is likely that states will continue to grapple with this issue.
Property tax incentives are generally viewed as the most valuable tax incentives. In the property tax incentives panel, Amanda Butler, Janette Lohman, and Joan Youngman explored the process of securing property tax incentives as a business expands or relocates its operations. It is imperative for practitioners to inquire and evaluate available incentives at the earliest opportunity because many incentives are precluded once a decision to expand to a jurisdiction is made. A jurisdiction’s incentives may be found through widely published sources, but many valuable incentives are discretionary or “hidden” in administrative niches. Thus, it is vital for practitioners to be familiar with the local players who can best assist the incentive search.21 After identifying the property tax incentives available in a jurisdiction, practitioners must determine the actual value of the benefits. This analysis is often complicated by the incentive’s requirements. Finally, practitioners must be aware of the various impediments that may arise including negative publicity, negotiation delays, and compliance problems.
In the area of green energy, states are using similar incentives to encourage the development of alternative energy properties. On the green energy panel, John Gadon and Catherine Collins explained that these incentives can lead to various valuation and assessment issues, especially if the properties also generate income tax credits. The panelists emphasized that states typically offer incentives in addition to property tax relief. Although incentive programs are quite common, they also tend to be highly idiosyncratic. Practitioners should first assess what green energies a state is promoting22 and carefully assess the program’s requirements. Items to consider include whether the property is standalone or a component of a larger property, whether any renewable resource produced is meant for personal use or sale, ownership issues in lease situations, the tangible versus intangible value of the property, and the specific assessment methods used by the state.
Over 30 panels covering topics across various state and local tax jurisdictions were presented during the conference. Topics not covered here included navigating the litigation process, ethical issues, digital transactions, and federal and international issues affecting SALT practitioners. For more information about the 2016 conference, the full program may be found here. To become more involved in the SALT community, the State and Local Tax Committee webpage may be found here. The 2017 Advanced Tax Seminars will be held in New Orleans on March 20-24, 2017. ■
1See Uniform Division of Income for Tax Purposes (UDITPA) § 17, available at http://www.uniformlaws.org/shared/docs/uditpa/uditpa66.pdf.
2 Under a market-based approach, the corporation assigns sales of services to the state in which the service is received.
4 DirecTV, Inc. v. S.C. Dep’t of Revenue, Dkt. No. 14-ALJ-17-0158-CC (S.C. Admin. Law Ct. May 12, 2015).
5 See Multistate Tax Commission Section 17 Model Market-Sourcing Regulations, available at http://www.mtc.gov/Uniformity/Project-Teams/Section-17-Model-Market-Sourcing-Regulations.
6 Delaware, New Mexico, and Pennsylvania are notable states that have not adopted such a regime.
7 Rent-A-Center East, Inc. v. Department of State Revenue, 42 N.E.3d 1043 (Ind. T.C. 2015).
8 Panelists noted that one controversial solution that some states have adopted is to hire consultants on a contingent fee basis to review taxpayer transfer prices. See also Cara Griffith, States No-Holds-Barred Approach to Auditing Transfer Pricing Arrangements, 95 Tax Notes 559, 561(February 13, 2012).
11 See, e.g., Cal. Rev. & Tax. Code § 6006 (defining “sale” as “[a]ny transfer of title or possession, exchange, or barter, condition or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.”)
12 Note that New York is the only state that levies a stock transfer tax.
13 While exemptions will vary by state, common exemptions include exemptions for capital contributions, sales for resale, isolated/casual sales, and statutory mergers/consolidations.
14 The Dark Story Theory refers to the assessment practice of valuing property based on comparable, often vacant, “dark stores,” within the jurisdiction. The theory proposes that property valuations should not be based on the specific condition of the property, including its business activity, at the time of the appraisal, but rather on the market value it would have if it were vacated and sold.
15 926 N.E.2d 1134, 1137 (Ind. Tax Ct. 2010).
16 Pet. Nos. 44-440-02-1-4-00573, et al., Ind. Bd. of Tax Review (Dec. 1, 2014).
17 Pet. Nos. 34-002-10-1-4-00350, et. al., Ind. Bd. of Tax Review (Dec. 31, 2014).
18 See Ind. Code §§ 6-1.1-4-43 and -44 (2015). Note that many practitioners have raised concerns over the constitutionality of the statute’s retroactivity.
19 Dkt No. 385768, Michigan Tax Tribunal (December 13, 2012).
20 See e.g., In re Equalization Appeal of Prieb Properties, Dkt. 2004-3806 EQ, KS Bd. of Tax Appeals (June 8, 2007) (confirming the proper valuation analysis is fee simple and rejecting build-to-suit leases); Lowe’s Home Centers, Inc. v. Holman, Dkt. No. 06-34040, MO State Tax Commission (June 6, 2008) (rejecting comparable sales of vacant property on the grounds that they were not sufficiently similar to the taxed property); Menard, Inc. v. County of Clay, File Nos. 14-CV-12-1500, et al. (MN Tax Ct. Sept. 18, 2015) (holding the use of the cost approach and sales comparison approach to be reliable indicators of market value of the property).
21 Such local players include local chambers of commerce, local economic development offices, local politicians and bureaucrats, consultants, and liaison organizations.
22 State programs typically support green energy projects involving solar, wind, water, geothermal, biomass, waste conversion, and greenscaping.