Perspectives

The new normal in state taxation

Inside Deloitte

This edition of Inside Deloitte uses the 2016 National Multistate Tax Symposium as a platform to discuss transformational state tax topics and state tax cases of the US Supreme Court from the 2014 term, as well as to speculate on some state tax cases that the Supreme Court may choose to hear in the future, and provides relevant taxpayer and practitioner considerations.

When a trend becomes the norm

As more states continue to pursue revenue-raising measures through aggressive legislative initiatives and enhanced audit enforcement, state and local tax practitioners should ask themselves at what moment does a trend become the norm?

At the 2016 National Multistate Tax Symposium on February 3-5 in Orlando, Florida—titled ‘‘The Shifting Landscape—Transformational Changes in State Taxation’’—state and local tax practitioners from industry, law firms, and Deloitte Tax LLP gathered to provide a national perspective and leading practices on numerous transformational topics that could be considered the ‘‘new normal.’’

Topics considered by panelists included:

  • Whether factor-based and economic presence nexus standards are consistent with a reasonable interpretation of the commerce clause and due process requirements
  • Whether due process arguments continue to be viable with the increased state adoption of click-through and affiliate nexus standards
  • In market-based sourcing states, how to comply with the affirmative duty to know the market in which the availability of required data may be limited
  • Whether there are lessons to be learned from the Multistate Tax Compact three-factor election litigation
  • Whether Michigan’s 2014 legislation retroactively repealing that state’s compact membership is a disturbing trend that may encourage other states to enact retroactive state tax legislation to neutralize the revenue impact of taxpayer-favorable court decisions
  • Where states may be headed with regard to the sales and use taxation of electronically delivered services and digital goods

In this article, the authors use the National Multistate Tax Symposium as a platform to provide a snapshot of various practical considerations, discuss the state tax cases of the US Supreme Court from the 2014 term, and speculate on state tax cases that the US Supreme Court may choose to hear in the future.

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Excerpts from the article

A snapshot for practitioners

Highlights from The National Multistate Tax Symposium

In discussing the movement of several states to market-based sourcing, Kristen Cove of Deloitte said that while states are trending toward market-based sourcing, there are varying approaches on how each state defines the market and how states may enforce their respective standards on audit.1 Cove added that the varying approaches may provide proactive taxpayers with a potential opportunity to enhance their market-based sourcing positions on audit. Taxpayers should review their market-based sourcing facts as soon as is practical and compare their facts with each state’s market-based sourcing rules for application of the applicable sourcing method.

In a session titled ‘‘State Transfer Pricing—Preparing for Increased Scrutiny of Intercompany Transactions,’’ Mike Bryan of Deloitte emphasized to attendees that transfer pricing continues to be a priority for states and the Multistate Tax Comission’s inability to launch the Arm’s-Length Adjustment Service program should not be interpreted as a lack of state interest.

Bryan also encouraged middle-market companies to revisit their current transfer pricing studies, because states appear to target taxpayers that they perceive as potentially resource-constrained. Taxpayers should continue to consider developing state-relevant, exam-ready transfer pricing documentation to the extent such a study has not been previously prepared and review any existing transfer pricing studies to determine whether an update is advisable, given changes to the taxpayer’s business activities or to take into account state laws.

Regarding transfer pricing, panelists discussed the state significance of the Organisation of Economic Co-operation and Development base erosion and profit-shifting project, which was undertaken to address governments’ concerns that principles of national and international taxation were not keeping pace with the global nature of modern trading and business models. Although there may not be any direct state tax implications, Karl Frieden of the Council On State Taxation explained that the Base Erosion and Profit Shifting project is the basis for tax haven legislation,2 the state’s enhanced focus on transfer pricing, and additional information reporting requirements.

The District of Columbia and the following six states have enacted some form of tax haven legislation:

  • Alaska
  • Connecticut
  • Montana
  • Oregon
  • Rhode Island
  • West Virginia

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To learn more about the ramifications of US Supreme Court state tax decisions from the 2014 term, download the full article above. 

If you have questions regarding this edition of Inside Deloitte, please contact:

 

J. Snowden Rives, manager, Deloitte Tax LLP

 

Jeremy Sharp, senior, Deloitte Tax LLP

 

The authors thank Valerie Dickerson, Tom Cornett, Moira Pollard, Holly Love, and Whitney Lessman for their contributions to and review of this article.

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