10 SALT predictions for 2015

Business sunny outlookGrant Thornton LLP’s State and Local Tax professionals are once again making educated predictions about SALT developments for the coming year. See if you agree with their predictions and reasoning.
You can also download the PDF for more information.
Check out the outcomes of the 2014 predictions.

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 that 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.

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 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.

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:  Congress won’t solve this issue in 2015. The U.S. 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 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. Accordingly, 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.

Jamie Yesnowitz
+1 202 521 1504

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