State Tax Changes Impact M&D
- Sep 24, 2019
- Gary Bingel
The past two years have seen many significant tax changes at both the federal and state levels that impact taxpayers. In many instances, states have been slow to issue appropriate guidance, and in others, the changes can have significant impacts on how business is conducted. As a result, many taxpayers are finding it difficult to keep up with these changes and how they may impact their businesses. In an effort to bring a glimmer of method to this madness, here are three of the more significant state tax changes that may impact those in the manufacturing and distribution industries.
Few U.S. Supreme Court decisions have had as wide-ranging impacts as its 2018 Wayfair decision. The overturning of Quill’s physical presence requirement was a sea-change as far as where companies need to file returns, as well as the underlying record-keeping and systems requirements needed to support such filings. Under Wayfair, states can now impose their sales tax regime on companies based solely on a company’s “economic presence.” Specifically, it was found that merely having $100,000 of sales OR 200 separate transactions with customers in such state is sufficient to create nexus, and a “physical presence” is no longer required. As of this writing, approximately 44 jurisdictions (including D.C.) have enacted some type of economic nexus provision for sales tax purposes. As a result, many companies are finding that they have nexus in a much greater number of states than they previously did.
Many companies initially viewed Wayfair as only impacting internet retailers, believing that it had little or no impact on traditional “bricks and mortar” businesses. Consequently, many companies failed to fully analyze how these provisions impact them, and underestimated the efforts and resources required to become compliant with this new landscape.
A general outline for becoming compliant in a Wayfair world is as follows:
- Determine your nexus footprint and how it may have changed under Wayfair. While states have implemented different thresholds, a general starting point is to look at those states where you meet the $100,000/200 transaction thresholds.
- Determine what new information you may need from your customers and/or systems:
- Do you need to implement a new software package to determine the correct rates that need to be charged and reflected on invoices?
- Do you need to collect additional exemption certificates from customers in new states where you didn’t previously have nexus?
- Are additional registrations required, such as with the Secretary of State or for income taxes, in addition to those required for sales taxes?
- How will you handle additional filings, and the potential associated increased audits?
- How will an increased sales tax nexus footprint impact other taxes such as income taxes?
The one largely open issue is how aggressively states will apply these new Wayfair thresholds to other types of taxes such as income taxes.
State Treatment of GILTI/FDII
Some of the more significant changes resulting from the Tax Cuts and Jobs Act (TCJA) were those related to foreign income, specifically Global Intangible Low Tax Income (“GILTI”) and Foreign Derived Intangible Income (“FDII”). Many states were slow to issue guidance, and others issued guidance that was confusing or later revised. Companies that conduct any type of business overseas or that have foreign customers should make sure they are aware of how these items of income will be treated for state tax purposes. Unfortunately, there is little consistency among the states as to how these various types of income will be treated. While many states include both GILTI and FDII in gross income, they differ as to how much is included, and what types of deductions are permitted. Further, states differ as to how to treat such amounts for apportionment purposes.
New Jersey originally included a portion of GILTI income, based on a gross domestic product ratio, but has recently reversed course, and now appear to exclude such amount from income in most circumstances.
New Jersey Combined Reporting
Following a trend seen throughout the U.S. over the past decade, New Jersey implemented mandatory combined reporting for unitary groups, effective for tax years ending on or after July 31, 2019. Thus, 2019 will be the first year calendar year filers need to comply with this new combined reporting regime. New Jersey has issued several technical bulletins over the past few months to help taxpayers deal with this change.
New Jersey’s default is for a water’s edge combined report, which includes only those companies formed in the U.S., but which may include foreign companies with 20% or more of their property and payroll in the U.S. While generally only unitary members are included in the combined report, an election may be made to include all members of the U.S. affiliated group, which is binding for six years. This election also impacts how taxpayers calculate their apportionment factor, as different rules apply to affiliated groups than apply to worldwide or water’s edge groups. Taxpayers may also elect to file on a world-wide basis, which would include foreign affiliates in the combined report, and which is also binding for six years. Prior to making any such elections, taxpayer should carefully analyze their current, and potential future, impacts.
All combined groups must designate a managerial member who is responsible for the filing of the returns, handling audits, and other tax matters for the group. Each member of the combined group that has nexus with New Jersey is subject to the $2,000 minimum tax.
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Gary Bingel, Partner-in-Charge of the National State and Local Tax Group, with expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.
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