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October 2017 SALT Shaker

October 2017 SALT Shaker

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In this edition of the SALT SHAKER, we cover important State and Local Tax updates from Alaska, Illinois, South Carolina, South Dakota and Virginia for October 2017.

Alaska Dividends Received Deduction

In a recent Alaska Office of Administrative Hearing, Administrative Law Judge (ALJ) addressed dividend received deduction for a domestic subsidiary excluded from Alaska combined report based on the 80/20 rule. The issue arose in the matter of Costco Wholesale Corporation. Costco Wholesale filed an Alaska water’s edge combined report and deducted 100% of the dividends it received from a US subsidiary with over 80% activity outside of the country. The Alaska Department of Revenue disallowed 20% of the deduction although the Alaska statutes do not specifically address the deduction for the 80/20 companies. The state statutes, however, provide that 80% exclusion of the dividends is available to foreign companies, and otherwise conforms to the 100% exclusion of dividends for affiliated corporations.

The ALJ upheld the state’s disallowance of the 100% dividend deduction. The decision was based primarily on the comparison of the 80/20 subsidiary to a foreign subsidiary, and it was concluded that similar treatment was necessary for both.

Illinois (Economic Development for a Growing Economy) EDGE credit program reinstated

Gov. Rauner has signed legislation that reinstated the Growing Economy Tax Credit Act, known as the EDGE credit program, until June 30, 2022. The EDGE credit program previously expired April 30, 2017.

The EDGE program has been implemented as an incentive to multi-state businesses to support job creation, capital investment and improve the standard of living for Illinois residents. In order to qualify for the credit a business has to undertake a project involving an expansion of existing operations or open a new location in Illinois. The business also has to demonstrate that the tax benefits provided by the EDGE credit were a deciding factor in having the project take place in Illinois as opposed to their other business locations.

The current EDGE credit is equal to or lesser of  1) 100% of the income tax withheld from new employees; or 2) 50% of income tax withheld from new employees, plus 10% of their training costs. Business located in underserved area (under federal guidelines), have “75% of income tax withheld from new employees, plus 10% of their training costs.

South Carolina satellite subscription receipts are market-based

In a recent case DIRECTV, Inc. v. S.C. Dep’t of Revenue, No. 2015-001509 (S.C. Ct. App. Aug. 30, 2017), South Carolina court of appeals ruled on a dispute over the way DirecTV calculated its South Carolina corporate income tax. The South Carolina ruling is noteworthy in that it is the first appellate-level ruling that held South Carolina as a market or audience-based state without a statute.

The Department of Revenue had originally issued a determination stating that the gross receipts that DIRECTV generated from subscription sales were from income-producing activity occurring within the state, and that DIRECTV was incorrectly calculating South Carolina apportionment. DIRECTV argued that the income generated in South Carolina were mostly from broadcasting, sales and marketing that were performed outside of South Carolina. The Court of Appeals, however, rejected the argument and found that DIRECTV’s only income in South Carolina were from receipts from delivery of satellite signals to its subscribers. Although the court agreed that DIRECTV employs highly skilled personnel to develop technology and obtain content; it was certain that the end result was satellite signal delivery.

South Dakota Supreme Court holds sales tax economic nexus unconstitutional

On September 13, 2017, the South Dakota Supreme Court upheld that the trial court’s decision that South Dakota’s imposition of sales and use tax on vendors with no physical presence in the state is unconstitutional.

In March of 2016 South Dakota enacted SB 106, which stated that any entity exceeding an annual sales threshold of $100,000 or 200 separate transactions in South Dakota must collect sales tax effective May 1, 2016. The SB 106 contradicted the previous U.S. Supreme Court decision in Quill Corp. v. North Dakota,[1] which the state attempted to overturn. However, the court’s conclusion this month further affirmed the precedent by stating the following:

However persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled. Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes. We are mindful of the Supreme Court’s directive to follow its precedent when it “has direct application in a case” and to leave to that Court “the prerogative of overruling its own decisions.”

Virginia Supreme Court Corporate “subject to tax” addback exception limitation

In a decision of Kohl’s Department Stores, Inc. v. Virginia Department of Taxation, Virginia Supreme Court held that the Virginia exception to the Virginia addback statute (Code section 58.1-402(B) (8)(a)(1)) was to be applied on a post-apportionment basis.

For the years under question, Kohl’s did not add back royalties paid to Kohl’s Illinois because of the “subject to” exception of the addback statute.  According to the “addback” rules, for tax years beginning on and after January 1,2004 corporations have to add back intangible expenses of a related member However, based on the “subject to” exception the taxpayer may not be required to deduct such intangible expenses to the extent the income from such related member was “subject to a tax based on or measured by net income or capital imposed by Virginia, another state, or a foreign government that has entered into a comprehensive tax treaty with the United States government.”

In the Kohl’s case, the Virginia Supreme Court clarifies the “subject to tax” standard and affirms that only the portion of the royalties that are actually taxed by another state falls within the subject to tax exception. The Taxpayers thus have to be aware that the “subject to tax” exception applies only to those related members that have sufficient nexus in another state to be subject to such taxes.

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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

[1] 504 U.S. 298, 112 S. Ct. 1904 (1992).

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