Current corporate income tax developments.

• Author: Boucher, Karen J.
• Position: Part 1

EXECUTIVE SUMMARY

* Several states, including California and New Jersey, enacted legislation suspending NOL deductions.

* New Illinois legislation allows an annual irrevocable election to treat all noncompensation income as apportionable business income.

* The Missouri and Massachusetts Supreme Courts decided several cases involving royalty payments for use of trademarks transferred by a parent to DHCs.

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During 2002, an overwhelming number of state statutes were added, deleted or modified; court cases were decided; regulations were proposed, issued and modified; and bulletins and rulings were issued, released and withdrawn. Because it is impractical to summarize all of these activities, this article focuses on some of the more interesting items in the following corporate income tax areas: nexus; tax base; business/nonbusiness income; trademark/tradename cases and determinations; apportionment formulas; filing methods/unitary groups and administration. It also includes several other significant state tax developments. The first four areas are covered in Part I; the remaining areas will be covered in Part II, in the April 2003 issue.

Nexus

* District of Columbia

According to nexus guidance (1) recently posted on the Office of Tax and Revenue's web page, for a business to have franchise tax nexus, it must be engaged in a business activity (that is not "protected" by Public Law (P.L.) 86-272) within the District or have physical presence there.

* Florida

The state Department of Revenue (DOR) ruled (2) that a limited liability company (LLC) that checked-the-box to be taxed as a corporation has nexus for Florida corporate income tax purposes solely through the use of an independent contractor who provides maintenance services to in-state customers.

* Georgia

Effective for years after 2001, the Georgia DOR amended Regulation 560-7-7-.03 to provide that a corporation is considered to own property or do business in Georgia whenever it is a limited or general partner in a partnership that owns property or does business in the state.

* Illinois

The DOR amended nexus Regulation 86 Ill. Adm. Code 100.9720 to clarify that a nonresident person does not have nexus with the state merely because the apportionment and allocation rules would cause that person to have Illinois net income.

* Massachusetts

In Alcoa Building Products, Inc., (3) the Appellate Tax Board ruled that P.L. 86-272 protections do not apply to warranty-claims activities performed by in-state sales representatives if such activities serve an independent business function apart from the solicitation of sales.

* New Jersey

Sweeping corporate tax reform in the Business Tax Reform Act of 2002, A2501, P.L. 2002, c. 40 (7/02/02) (NJBTA), included expanding the reach of the corporate business tax to corporations deriving receipts from sources within New Jersey or engaging in contacts with the state.

* New York

A New York State administrative law judge (ALJ) ruled (4) that a natural gas vendor transferring title to natural gas in the state at the same time that custody of the gas was transferred from a Canadian pipeline to a New York pipeline was not carrying on its business in the state and, thus, was not subject to the Section 186 gross receipts franchise tax. The ALJ noted that the taxpayer's "very brief ownership of the gas and transfer of title in New York was not sufficient to establish even a `slightest presence' in New York."

In another situation, a company sent individuals into the state to solicit subscriptions to a free publication of general interest to members of certain organizations; on receiving such orders, the company would canvass local businesses for paid advertisements to be placed within the publication. The N.Y.S. Department of Taxation and Finance ruled (5) that P.L. 86-272 would not protect the company from New York nexus, as there was no solicitation of sales of tangible personal property. The publication was free to subscribers and P.L. 86-272 does not protect the solicitation of advertising sales, because the Department does not view the sales as tangible personal property. Thus, the company was subject to state franchise tax.

* North Carolina

The DOR announced (6) a change in position on when an investment partnership is doing business in the state. Under the new policy, a partnership engaged solely in investment activities is not considered to be doing business in North Carolina.

* Pennsylvania

Act 89 (HB 1848) expanded nexus to include a corporation (whether in its own name of through any person, association, business trust, corporation, joint venture, LLC, limited partnership, partnership or other entity) engaged in any of the following within Pennsylvania: (1) doing business; (2) carrying on activities including solicitation; (3) employing or using capital; and (4) owning property. The legislation also "clarified" that, for nexus purposes, a corporation's interest in a noncorporate entity is considered a direct ownership interest in the assets, rather than an intangible interest.

In Schering-Plough Healthcare Products Sales Corp, (7) the Commonwealth Court held that it was not necessary for a sales company soliciting sales for its parent to actually have title to goods to qualify for P.L. 86-272 protection. The court based its opinion on the statute's plain wording and the extensive legislative history. Accordingly, "it cannot seriously be argued that a company which limits its activity in a state to a solicitation of orders for goods to which it will never take title has a greater nexus to that state than a company taking similar orders for goods it owns someplace else."

* Tennessee

The DOR explained (8) that an out-of-state limited partnership registered to do business in the state and disregarded for Federal income tax purposes, will not create nexus for its two out-of-state single-member LLC partners, owned by an S corporation without Tennessee nexus. However, the limited partnership will be subject to the state's minimum franchise tax, because it is registered to do business in the state, and will be subject to both excise and franchise taxes if it does business in the state sufficient to establish nexus. The DOR noted that mere registration of the partnership, without more, does not rise to the level of "doing business."

The Court of Appeals found (9) that "there are a substantial number of businesses in Tennessee helping to make the AOL service available to Tennessee...