Illinois: Sale of a business segment can be excluded from the apportionment sales factor when classified as an occasional sale
On March 1, 2013, the Illinois Department of Revenue (IDOR) held, in a Private Letter Ruling (PLR), that a company could treat the sale of a segment of its business as an occasional sale, allowing it to be excluded from the company’s sales factor. Typically, a company conducting business in multiple states must determine the amount of business income that is apportionable to Illinois by comparing its sales in Illinois to sales everywhere. However, the IDOR found that the gain received from the sale of the assets of a segment of business does not have to be included in that apportionment calculation since it found such a sale to be “incidental or occasional” after considering several factors, such as the fact that the company had never before had a sale of this kind.
The executive offices of the company seeking the PLR (Company) are located in Illinois. The Company formerly operated two business segments. One segment involved improving the reliability of call recording, and applying human behavioral modeling to optimize the performance of call centers. The second segment (Segment Two) focused on helping clients transition their contact centers to a single network infrastructure, as opposed to the traditional separate voice and data network structure. Segment Two was acquired by another company via an acquisition agreement where substantially all of the assets of Segment Two were sold, including the registered trademark and trade name. This was the only such sale of assets in the Company’s history.
Illinois Department of Revenue holding and implications
Illinois law provides that “business income” is defined as all income that may be treated as apportionable under the U.S. Constitution, excluding compensation. 35 Ill. Comp. Stat. § 5/1501(a)(1) (2013). Generally, a company generating income from doing business in Illinois and other states is required to apportion its income to Illinois by the single sales factor method. The single sales factor method is calculated by multiplying income by “a fraction, the numerator of which is the total sales of the [company] in this State during the taxable year, and the denominator of which is the total sales of the [company] everywhere during the taxable year.” 35 Ill. Comp. Stat. §§ 5/1501(a) & (a)(3) (2013). The fraction described in the preceding sentence is known as the single sales factor. However, Illinois law provides that if this single sales factor method does not fairly reflect the actual amount of business activity of that company in Illinois, then the company may be permitted to use an alternative apportionment methodology. 35 Ill. Comp. Stat. § 5/304(f) (2013).
Regulations promulgated by the IDOR provide alternative apportionment methodologies. One such alternative arises “where gross receipts arise from an incidental or occasional sale of assets used in the regular course of a person’s trade of business.” 86 Ill. Adm. Code § 100.3380 (2013). If such incidental or occasional sale occurs, those gross receipts shall be excluded from the sales factor.
The PLR ultimately held that gain from the sale of the business segment will be included in the Company’s income. However, the gross receipts (i.e., the total purchase price) from the sale would be excluded from the numerator and denominator of the single sales factor. Exclusion of such gross receipts from the single sales factor would effectively decrease a multistate company’s overall Illinois tax liability, all other aspects being equal.
This outcome is dependent on the ability of the Illinois taxpayer to choose to treat all income, except compensation, as business income. Illinois is one of a small faction of states that allows for taxpayers to make such an election. In the event the taxpayer could not make this election, the sale of the business segment assets could be considered nonbusiness income entirely allocated to Illinois, potentially increasing the taxpayer’s overall income tax liability. To evaluate the effect of this PLR on your company, a key consideration is whether the type of transaction can truly be considered “occasional or incidental.” The outcome is largely dependent on whether such a transaction has occurred before in the taxpayer’s history. And there was no indication in the PLR that limited sales of this type in a company’s history would necessarily prevent similar treatment.
Click here to read the text of Illinois Department of Revenue Private Letter Ruling IT 13-00001-PLR, March 1, 2013 (released April 2013).
Oregon: No stairway to haven – House passes anti-tax haven bill to boost revenue
Increasingly, national attention has focused on those who are perceived as not paying their “fair share” of income taxes. Most recently, national attention shifted to Apple, Inc. (Apple) when a congressional committee asked Apple CEO Tim Cook to testify on the company’s offshore tax practices. No wrongdoing was found. However, the use of so-called offshore tax havens appears to be an emerging area for regulatory scrutiny as politicians seek to raise additional revenue (and the opportunity to raise his or her political stature). According to Michigan Senator Carl Levin, U.S.-based multinational corporations have managed to shield an estimated $1.9 trillion in profits from U.S. taxes through the use of these offshore tax havens.
In what may only be a signal of things to come at the state level, the State of Oregon took steps late last month to end tax avoidance through the use of tax havens. A unanimous Oregon House of Representatives voted in favor of a law, H.B. 2456, created to crack down on offshore tax havens, potentially raising approximately $20 million in tax revenue.
H.B. 2456 states that “if a corporation required to make a return under [Oregon law] is a member of an affiliated group of corporations making a consolidated federal return…the corporation’s Oregon taxable income shall be determined beginning with federal consolidated income of the affiliated group[.]” An “affiliated group” is a number of different corporations which, for purposes of filing tax returns, is considered one entity. This “affiliation” is generally predicated on high interrelatedness of activities between the many corporations and common control.
The bill further states that “for purposes of determining Oregon taxable income, the taxable income or loss of any corporation that is a member of a unitary group and that is incorporated in any of the following jurisdictions shall be added to federal consolidated taxable income.” The Oregon bill then lists a number of territories. If a member of the Oregon taxpaying entity’s unitary group is incorporated in one of those territories, then any income from those territories would be added back to the federal consolidated income figure used as a basis in determining the taxpaying entity’s Oregon taxes. This list of territories includes Aruba, the Bahamas, the British Virgin Islands, and the Cayman Islands, to name a few.
The effect of H.B. 2456 would be to turn various offshore tax haven approaches that are effective under federal (and generally state laws) on their head, at least in Oregon. For example, presently if a company registered in Oregon owns a corporation with assets in Aruba that were sufficiently disconnected from Oregon, Oregon would not have required that company to declare the assets or income from the Aruba corporation in the company’s Oregon tax returns. Under H.B. 2456 in that same situation, the Oregon company would likely be required to include income and assets from the Aruba corporation in its Oregon tax returns. Under H.B. 2456, incorporating in a targeted country, such as Aruba, would not necessarily shield these types of assets or income.
Of course, this analysis rests upon the assumption that constitutionally-sufficient nexus exists between Oregon and such corporation incorporated in one of the enumerated offshore tax havens. The main idea behind H.B. 2456, however, is that if there is sufficient nexus between activities of a corporation in Oregon and assets or income in an offshore account, such as Aruba, Oregon will require those assets and income to be recognized in an Oregon tax return.
H.B. 2456 is currently in the Oregon State Senate, where it is believed the bill will be part of a broader bipartisan tax deal. It is very possible additional states will follow suit and attempt to pass anti-tax haven laws, as closing such offshore tax haven loopholes not only increases tax revenue, but it protects politicians by enabling them to avoid raising taxes on regular citizens while raising revenue.
Click here to read the text of H.B. 2456.
Colorado: Governor signs historic marijuana sales and excise taxes
On May 28, 2013, Colorado Governor John Hickenlooper signed a series of bills regulating the manufacture, sale, distribution, and use of recreational marijuana, including a bill to tax marijuana sales by 25 percent (Tax Bill). However, the Tax Bill will need to be approved by Colorado voters in November in order to become effective.
Governor Hickenlooper, state lawmakers, public interest groups, and marijuana advocates have stated it is critical that Colorado voters approve this Tax Bill. If this Tax Bill is not approved by Colorado voters, the state will be required to use general fund money to pay the costs necessary to enforce the new marijuana laws, which would divert money away from education and other state priorities.
If the Tax Bill is passed by Colorado voters, then beginning January 1, 2014, the Tax Bill would impose a 10 percent sales tax on the sale of retail marijuana products sold to consumers by a retail marijuana store, and an excise tax on the first sale or transfer of unprocessed retail marijuana by a retail marijuana cultivation facility, at a rate of 15 percent of the average market rate of unprocessed retail marijuana.
The first $40 million of revenues collected from the excise tax on the unprocessed retail marijuana product sales will be used for the state’s construction of schools, and the remainder of the revenues collected from the excise tax and the sales tax will be used to enforce the regulations on the retail marijuana industry.
Lawmakers hope they struck a balance with the tax rates set forth in the Tax Bill so the revenues generated from such taxes will be sufficient to provide funding for the enforcement of the regulations on the retail marijuana industry, while not being so onerous that consumers would choose to buy cheaper, untaxed marijuana products on the black market.
Click here for additional information about this Tax Bill discussed in the Multi-State Tax Update on May 23, 2013.
Click here for the full text of the Tax Bill (H.B. 1318).
For additional information regarding these subjects or any other multistate tax issues, please contact:
David M. Kall
Susan Millradt McGlone
Jeremy J. Schirra
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.