Multistate Tax Symposium State Tax Reboot The Age Of .
The 2019 NationalMultistate Tax SymposiumState tax reboot—The age of MultistateFebruary 6-8, 2019
Accounting for state taxes – Income and indirect taxesChris Barton, Deloitte Tax LLPKent Clay, Deloitte Tax LLPStephanie Csan, Deloitte Tax LLPFebruary 6-8, 2019
Agenda Taxes and credits within the scope of ASC 740 Consequences of Wayfair – ASC 450 Identifying and measuring deferred taxes Uncertain tax positions Leases: Accounting for income tax implications – ASC 842 State income taxes and federal tax reform Other considerationsCopyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 20193
Taxes and credits within the scope ofASC 7404
ScopeOverviewASC 740-10-05-1 The Income Taxes Topic addresses financial accounting and reporting for effects of income taxes thatresult from an entity’s activities during current and preceding yearsMastery glossary definitions Income taxes: domestic and foreign federal (national), state, and local (including franchise) taxes basedon income “Income” is not defined but “taxable income” is defined Taxable income: the excess of taxable revenues over tax deductible expenses and exemptions for theyear as defined by the governmental taxing authorityApplication ASC 740 is applied for a particular tax-paying component of an entity and within a particular jurisdictionCopyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 20195
ScopeDistinctions between income and non-income taxesFinancial statement itemDescriptionCurrent tax expense Recognized for both income and non-incometaxes Recorded for income taxes onlyUncertainties UTBs related to income taxes (ASC 740)Contingent liabilities related to non-incometaxes (ASC 450)Presentation Income taxes reported below the lineNon-income taxes reported above the line Different disclosure requirements for income vs.non-income taxesDeferred tax assets anddeferred tax liabilitiesDisclosureCopyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 20196
ScopeDistinctions between income and non-income taxes (cont’d)Examples of taxes not within the scope of ASC 740 Gross receipts taxes Capital taxes Taxes withheld on behalf of and for the benefit of the recipientof the payment or distribution (i.e., dividends, interest, royalties, services, etc.), assuming the recipient isnot a member of the consolidated financial groupWhether a tax is an “income tax” may not be obvious, e.g., An increasing number of jurisdictions assess taxes based on gross receipts less certain current perioddeductions (e.g., Texas) The tax law may state that the tax is not an income tax (e.g., Texas), but the tax may still be within thescope of ASC 740Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 20197
Is a credit an income tax item?Overview Determining whether credits are withinthe scope of ASC 740 may not always beclear; generally, refundable credits areaccounted for outside the scope of ASC740 since monetizing the credits is notdependent upon taxable income, whereasnonrefundable credits are in the scope ofASC 740 Should consider Purpose of the creditIs the creditrefundable?YesRecord in pretaxincomeNoCan the creditbe monetizedoutside of theincome taxsystem?YesConsiderconsultation(depends onfacts andcircumstances) Impact on tax basis How the credit is computed How and when the credit is refunded ormonetizedCopyright 2019 Deloitte Development LLC. All rights reserved.NoCredit is anincome taxcredit withinthe scope ofASC740The National Multistate Tax Symposium: February 6-8, 20198
Consequences of Wayfair – ASC 4509
Overview of ASC 450Loss contingencies related to numerous non-income taxes are covered by U.S. GAAP ASC 450: Excise Taxes Sales and Use Taxes Gross Receipts Taxes (Washington B&O; Ohio CAT; etc.) Payroll Taxes Capital Stock and Franchise Taxes Property Taxes Local Taxes Canadian GST/PST/Retail Sales Tax European Value Added Taxes Withholding Taxes Any other tax not encompassed in ASC 740 Income TaxesCopyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201910
Overview of ASC 450 – Contingencies v. LiabilitiesKnown obligations are “liabilities” – not loss contingencies. In general, transaction taxes tend to beliabilities rather than contingencies.“Contingency” – “[a]n existing condition, situation, or set of circumstances involving uncertainty as topossible gain ('gain contingency') or loss ('loss contingency') to an entity that will ultimately be resolvedwhen one or more future events occur or fail to occur." (see ASC 450-20).Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201911
Overview of ASC 450 – When Recognizing a Liability is AppropriateAn estimated transaction tax liability shall be accrued by a charge to income (accrued liability)when payment is required by law, even if it is uncertain whether the taxing authority is awareof the obligation and will demand payment.An estimated loss from a contingency is accrued only if both of the following conditions aremet: It is PROBABLE that the liability has been incurred at the date of the financial statements,AND The amount of the liability is reasonably ESTIMABLE.Probable “likely to occur” (a higher likelihood than “more likely than not”).Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201912
Overview of ASC 450 – When Recognizing a Liability is Appropriate (cont’d)When a loss contingency such as the uncertain incurrence of a transaction tax liability exists, thelikelihood that the future event or events will confirm the incurrence of the liability can range fromprobable to remote: Probable: The future event or events are likely to occur (higher level of likelihood than more likelythan not contained in ASC 740). Reasonably possible: The chance of the future event or events occurring is more than remote, butless than likely. Remote: The chance of the future event or events occurring is slight.Copyright 2018 Deloitte Development LLC. All rightsreserved.Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201913
Estimation MethodologiesThe liability recognized for transaction tax should be the best estimate of the probable amount due tothe tax authority under the applicable law.If the best estimate of the liability is a range, and if one amount in the range represents a betterestimate than any other amount within the range, that amount should be recorded. (see ASC 450-2030-1).If no amount in the range is a better estimate than any other amount, an entity should use theminimum amount of the range for recording the liability. (see ASC 450-20-30-1).Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201914
Estimation Methodologies (cont’d)Taxpayers are not allowed to consider audit selection in calculating/recognizing a liability for transactiontaxes.The likelihood of being identified (“audit lottery”) if a company does not comply with the law (i.e., does notfile a return, does not collect tax on taxable transactions) is not a valid reason for not recording liabilities asincurred.Similarly, tax audit detection risk is not acceptable criterion on which to base an adjustment to a transactiontax liability.Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201915
Estimation Methodologies (cont’d)“Shortcut” approaches may be appropriate. A detailed analysis should be performed for benchmarking purposes to test the “shortcut” approach.Accrued liability must include amounts for interest and penalties.Accrued liability should assume that tax audits will take place and that any exposure will be uncovered bythe audit.16Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201916
Estimation Methodologies (cont’d)Settlement percentage expectation may be an acceptable criterion in limited circumstances where: There is reasonable documentation to support the estimate (i.e., product sold is not subject totax, exemption certificate on file, etc.); and The methodology used in calculating the anticipated percentage settlement is documented andreasonable.NOTE: this may be more relevant in certain industries and with certain types of transactions. For example, a construction contractor in New York might take an exemption for all of itsconsumable supplies because most of its supplies are used at job sites for exempt customers.However, some percentage of the supplies may be determined to be subject to sales tax.17Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201917
RecapProbability Standards: Probable – future event or events are likely to occur Reasonably possible – The chance of the future event or events occurring is more than remote butless than likely Remote – The chance of the future event or events is slightAn estimated loss from a contingency is accrued if it is probable and reasonably estimable.18Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201918
Identifying and measuringdeferred taxes19
Measuring deferred taxesASC 740-10-30-5 Deferred taxes are determined separately for each tax-paying component (tax return filing group) in eachtaxing jurisdiction DTAs and DTLs for temporary differences are measured using the applicable tax rate (ATR) (Enacted taxrate* x Apportionment factor) Apportionment factors can significantly impact the state ATR As a shortcut, entities sometimes use PY apportionment factors and CY statutory rate Apportionment percentages should be adjusted for significant operational changes (e.g., acquisitions ordivestitures, internal restructurings and significant changes in business operations); this method mayyield a reasonable estimate* Note: Tax rate expected to apply when temporary differences reverse (generally marginal ratesunless graduated rates have material impact)Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201920
State Applicable Tax RateOverviewGenerally, state ATR should be: Calculated for each taxpaying component within the consolidated financial reporting group Applied to that taxpaying component’s temporary differences A shortcut may be acceptable if it does not result in a material difference (considerations include, but arenot limited to): Different filing groups (e.g., worldwide, consolidated, separate entity, unitary) Aggregate apportionment factors could be significantly greater than or less than 100% Different inventory of temporary differences Whether/how states decouple from federal (e.g., depreciation) Adjusted gross receipts tax regimes (e.g., Texas)Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201921
Blended vs. separate company ATRExample 1Reporting entity has two entities, X and Y, which file in separate states, and have temporarydifferences of 900 and 100, respectivelyDescriptionEntity XEntity YCurrent year taxable income100200State tax rate3%5%310TaxTotal300 [a]13 [b]Current blended rate calculation:Blended state rate [b] [a]4.33%Consolidated temporary differences1,000Deferred tax assets - incorrect43[c]32[d]Separate Company rate calculation:Separate company state rates3%5%Separate company temporary differences900100275Deferred tax assetsDifference [c] - [d]Copyright 2019 Deloitte Development LLC. All rights reserved.11The National Multistate Tax Symposium: February 6-8, 201922
Blended vs. separate company ATRExample 2Reporting entity has two entities, X and Y, which file in separate states, and have temporarydifferences of 900 and 100, respectivelyDescriptionCurrent year taxable incomeState tax rateTaxEntity XEntity Y(100)2003%5%010Total100 [a]10 [b]Current blended rate calculation:Blended state rate [b] [a]10.00%Consolidated temporary differences1,000Deferred tax assets - incorrect100[c]32[d]Separate Company rate calculation:Separate company state rates3%5%Separate company temporary differences900100275Deferred tax assetsDifference [c] – [d]Copyright 2019 Deloitte Development LLC. All rights reserved.68The National Multistate Tax Symposium: February 6-8, 201923
Effective tax rate (ETR) vs. ATRExampleAssumptions Corp X apportions its income to State A that has an enactedstatutory rate of 7%– Current pretax income is 1,000 and unfavorabletemporary differences are 800 Corp X is implementing an approach that will shift its third-party licensing function to a NewCo and, with it, 200 of bookand taxable income– Corp X will continue to file in State A and NewCo will berequired to file in a new state with a statutory rate of 2%QuestionBefore planningDescriptionCorp XPretax income 1,000 [a]Temp differencesState taxable income800 1,800State tax rate7%Current tax expense– State 126Deferred tax expense– State( 56)Total income tax expense –State ETR [b] [a]ATR to measure temps70 [b]7%7% What is the ATR and ETR after planning?Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201924
ETR vs. ATRExample – Answer – ETR and ATR after planningAfter planningDescriptionPretax incomeCorp XNewCoTotal 800 2008000 1,600 2007%2%Current tax expense– State 112 4Deferred tax expense– State( 56) 0( 56)Total income tax expense – State 56 4 60 [b]Temp differencesState taxable incomeState tax rate 1,000 [a] 116ETR [b] [a]6%ATR to measure temps7%Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201925
ETR vs. ATRExample continuedAdditional facts and solution Corp X and New Co have 2,000 of consolidated pretax income in Year 2 when temporarydifference reverses, as followsDescriptionBook incomeCorp XTotal 1,800 200 2,000(800)0(800) 1,000 200 1,2007%2%Temporary differenceTaxable incomeNew CoState tax rateCurrent tax expense – State 70 4 74Deferred tax expense – State* 56 0 56Income tax expense – State 126 4 1307%2%6.5%State ETR* Temporary difference results in a tax savings at the rate of 7% in Year 2. If the DTA had been incorrectly recordedat the ETR of 6% in Year 1, the ETR in Year 2 would have been 6.1%.Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201926
Scheduling of ATRExampleFacts A single entity company files tax returns in Jurisdiction A that has an enacted statutory tax rate of 9% In 20X0, the company apportioned 100% of its income to Jurisdiction A At the end of 20X0, the company had net taxable temporary differences of 500 expected to reverseat various times over the next 5 years During 20X0, Jurisdiction A enacts a phased-in triple weighted apportionment sales factor that willdecrease the company’s total apportionment factor in Jurisdiction A to 60% over the next 5 yearsCopyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201927
Scheduling of ATRExample (cont’d)SolutionDescriptionDeductible temporary differencesTaxable temporary differencesNet temporary differencesApportionmentTax rateState tax effect – correctTotalbalancesheetamount 4,500 4,250 250(5,000)(250)(250)( 500) 4,000100%90%80%60%60%9%9%9%9%9%( 27) ( 216)Scheduled to reverse in20X1 32420X2 20X4 20X300 0(500) Total asscheduled0 4,500(4,000)(5,000)( 500) ( 4,000)( 500) 81Net Temporary Differences( 500)State tax effect of temps at current applicable rate - Incorrect( 45)Fully phased in future apportionment60%Tax Rate9%“Expected” deferred without scheduling – IncorrectCopyright 2019 Deloitte Development LLC. All rights reserved.( 27)The National Multistate Tax Symposium: February 6-8, 201928
Uncertain tax positions29
State Income Tax Considerations of WayfairUncertainty in the income tax arena In 1993, South Carolina Supreme Court held that physical presence was not required for the imposition ofincome tax, and that Quill’s physical presence standard was limited to only sales and use tax. To date, the U.S. Supreme Court has not granted certiorari in any case pertaining to economic nexus andincome taxes. Number of states have enacted so-called “factor-based” economic nexus presence standards for income orgross-receipts type taxes. Taxpayers will need to revisit positions that they may have taken regarding the need for physical presencein order to establish substantial nexus. Potential retroactive application and enforcement to the effective date of a state’s applicable income taxnexus statute or rule is possible. Wayfair will also receive careful consideration by other states, which may seek to enforce or adopteconomic factor-based presence nexus provisions. P.L. 86-272 remains in force and prohibits states from levying a net income tax upon an out-of-statecompany if the company’s activities in a state are limited to the solicitation of orders for the sale oftangible personal property and the orders are approved and filled from outside the state. Any sales ofservices can void this protection. Financial reporting considerations.Copyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201930
Unrecognized Tax Benefits Considerations Were positions taken on previous financial statements that could be affected by the Wayfair decision? Is the tax position “more likely to be sustained than not” on the basis of its technical merits? If “no”, recordUTB for the full amount– Need to understand tax law in local jurisdictions– Nexus issues/considerations are intensively fact sensitiveo PL 86-272o Consider the limitations of PL 86-272o Factor-based nexus standards – under a bright-line “factor-based” standard, nexus is created with astate when a minimum amount of payroll, property or sales in the state is met.o What are the reserve requirements if not filing in a state with a bright-line nexus statute based on aspecified amount of in-state revenue that is lower than a company’s sales into that state?o What are the reserve requirements if not filing in a state with a broad nexus statute, but no specificthreshold based on a defined amount if sales into the state?o Economic nexus – Will the Wayfair decision influence the number of states asserting economic nexusfrom an income tax perspective? Calculate interest and penaltiesCopyright 2019 Deloitte Development LLC. All rights reserved.The National Multistate Tax Symposium: February 6-8, 201931
Administrative Practice and Precedent and Remediation Focal point in determining the number of years for which UTBs are recognized when returns have notbeen filed but are MLTN required Unless an administrative practice or precedent limits the look-back periods, UTBs are recorded for all“nexus” years when the recognition standard is not satisfied Deferred taxes must also be recognized if nexus is ongoing Administrative practices and precedents need to be widely understood Opportunity may exist to remediate nexus issues through voluntary disclosure agreements (VDAs) orstate amnesty programs The lack of a statute of limitations period means that nexus exposures may continue to build year-overyear As nexus exposures can relate to periods many times the typical three-year statute of limitations periods
Accounting for state taxes –Income and indirect taxes Chris Barton, Deloitte Tax LLP Kent Clay, Deloitte Tax LLP Stephanie Csan, Deloitte Tax LLP February 6-8, 2019
-DFN 7UDFKWHQEHUJ Principal jtrachtenberg@deloitte.com 1.212.436.4324 Jack Trachtenberg is a Principal on the Deloitte Multistate Tax Controversy Services team in New York and a liaison to the Deloitte Tax Washington National Tax-Multistate practice as a New York controversy and technical lead.
The National Multistate Tax Symposium: January 29-31, 2020 Making sense of the buzzwords: What is the Internet of Things? The Internet of Things –What’s Next Internet of Things (“IoT”) refers to a world of intelligent, connected devices that generate data for automating business processes an
The Board may include the Multistate Bar Examination, the Multistate Essay Examination and the Multistate Performance Test of the National Conference of Bar Examiners as components of the examination. (e) In the e vent the Board of Admissions to the Bar
Uniform Bar Exam (UBE) 2 days Uniform Bar Exam DC, IL, NY, NJ, CO, WA, OR and 30 more Day 1 -multiple choice Multistate Bar Exam - MBE Day 2 - essays 2 Multistate Performance Tests - MPTs Multistate Essay Exam (MEE) Six 30-minute mixed subject essays Not every subject appears every year.
On July 30, 2014, MTC revised the Compact's rules for sourcing sales other than sales of TPP On February 24, 2017, MTC formally adopted revisions to reflect market-based sourcing approach of receipts from sales of services and intangibles rather than previous COP methodology
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found in API RP 500, API RP 505 and NFPA 497 are examples of the direct example approach method. This approach utilizes engineering judgment to determine the extent of the hazardous area classification. The diagrams and the boundary distances utilized are selected based on the type of installation, volume and properties of the hazardous gases/vapors. The second ANSI method, less commonly used .
