Current corporate income tax developments.

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

During 2009, there were many changes in the area of state corporate income taxation. Numerous 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were decided; regulations were proposed, issued, and modified; and bulletins and rulings were issued, released, and withdrawn. This two-part article focuses on some of the more interesting items in the following corporate income tax areas: nexus, tax base, allocable/apportionable income, Sec. 338(h)(10) transactions, apportionment formulas, filing methods/unitary groups, and administration. The article also includes several other significant state tax developments. Part I, below, covers the first four areas; the remaining topics will be reviewed in Part II in the April 2010 issue.

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Nexus

Alabama

For tax years beginning after 2008, HB 69, Laws 2009, provides a nexus exception for income from qualified investment partnerships (QIPs). The Department of Revenue (DOR) has since adopted Rules 810-3-24.2-.02 and-.03 to provide guidance related to restrictions and requirements for entities eligible to be a QIP.

California

For tax years beginning after 2010, SB X3 15, Laws 2009, provides that a taxpayer is doing business and thus subject to tax if the taxpayer's California sales exceed the lesser of $500,000 or 25% of the taxpayer's total sales, its California property exceeds the lesser of $50,000 or 25% of the taxpayers property, or its California payroll exceeds the lesser of $50,000 or 25% of the total compensation paid by the taxpayer. However, the nexus standard will be subject to the limitations on a state's assertion of nexus for sales of tangible personal property contained in P.L. 86-272.

Colorado

The DOR has proposed adoption of the Multistate Tax Commission's (MTC) factor presence nexus standard under which nexus will be created if the taxpayer exceeds $500,000 of Colorado sales or $50,000 of Colorado property or payroll.(1)

In another development, the DOR ruled that an out-of-state insurance company that solely generated Medicare Part D premiums (which under federal law are exempt from Colorado's gross premiums tax) is not subject to the corporation income tax.(2)

Connecticut

HB 6802, Laws 2009, adopts economic nexus for tax years beginning after 2009. A company has substantial economic presence and thus will be subject to tax if it purposefully directs business toward the state. Its purpose can be determined by analyzing factors such as the frequency, quantity, and systematic nature of its economic contact with the state.

Hawaii

The governor vetoed HB 1405, which among other provisions included an economic nexus standard under which taxpayers would have been presumed to have nexus if they engaged or solicited business with 20 or more persons within Hawaii or had at least $100,000 in income or gross proceeds attributable to Hawaii sources.

Kentucky

The Kentucky Court of Appeals affirmed a circuit court's decision, agreeing that an out-of-state corporation had acquired nexus due to its 99% limited interest in a partnership doing business in Kentucky.(3) However, the court reversed the circuit court's ruling and reasoning requiring the use of a standard three-factor apportionment formula and instead held that the corporation was taxable on its share of the partnership's distributable net income based on its business done in Kentucky. "Business done" was determined under applicable state statutes to be the partnership's single receipts factor, the ratio of gross receipts or services performed in Kentucky to gross receipts or services performed everywhere.

Massachusetts

Massachusetts's highest court concluded(4) that the constitutionality of the imposition of the financial institution tax is determined not by Quill's(5) physical presence test but by the substantial nexus test articulated in Complete Auto.(6) The court found that while the concept of substantial nexus is more elastic than physical presence, it plainly means a greater presence, both qualitatively and quantitatively, than the minimum connection that would satisfy a Due Process Clause inquiry. The court then determined that the taxpayers had a substantial nexus with Massachusetts. The U.S. Supreme Court has since denied the petition to review this decision.

In another decision issued the same day as Capital One, the Massachusetts Supreme Judicial Court similarly ruled that the corporate excise tax could be imposed on royalties earned by an out-of-state trademark company under a licensing agreement that based the royalties on in-state affiliate retailers' sales.(7) The court also upheld a related penalty imposition, concluding that the taxpayer did not show that it acted with reasonable cause in failing to file the corporate excise tax returns and pay the underlying taxes. The U.S. Supreme Court also denied review of this decision.

Michigan

The Michigan Department of Treasury issued a draft proposed rule defining "active solicitation" for establishing economic nexus under the Michigan Business Tax. (8) Similar to Revenue Administration Bulletin 2007-6, the draft rule provides that solicitation is purposeful when it is directed at or intended to reach persons within the state or the Michigan market. Active solicitation includes, but is not limited to, solicitation through the use of mail, telephone, and e-mail; advertising, including print, radio, internet, television, and other media; and maintenance of an internet site over or through which sales transactions occur with persons within Michigan.

Minnesota

Effective for tax years beginning after 2008, SF 832, Laws 2009, extends the exception to the minimum contacts required for corporate income tax jurisdiction to include an entity's ownership of property on the premises of a printer under specific circumstances.

Missouri

The DOR ruled that an out-of-state insurance company that solely generated Medicare Part D premiums (which are exempt from Missouri's gross premiums tax) was subject to Missouri's corporation income tax because the company did not pay tax on its gross premiums in Missouri and therefore was not exempt from the Missouri corporation franchise tax.(9) In response to this ruling, HB 577, Laws 2009, provides that effective August 28, 2009, insurance companies that are subject to the annual tax on gross premium receipts are exempt from corporate income and franchise taxes (i.e., the law no longer requires that the insurance company "pay" the gross premium tax to be exempt from the corporate tax).

Nebraska

The DOR explained that trucking companies transporting goods over Nebraska roads are subject to corporate income tax but are not required to apportion income to Nebraska unless: (1) the company owns or rents any real or personal property in Nebraska, other than mobile property; (2) the company makes any pickups or deliveries within Nebraska; (3) the company travels more than 25,000 mobile miles within Nebraska or the total mobile miles within Nebraska exceed 3% of the total mobile miles traveled in all states; or (4) the company makes more than 12 trips into Nebraska. (10)

New Jersey

The New Jersey Tax Court held that a 2006 regulation amendment that removed the direct investment in a non-publicly traded passthrough entity from the definition of "qualified investment asset" only applied prospectively because there was no showing that the 2006 amendment was merely a clarification of the department's prior interpretation of the rule. (11) Accordingly, a holding company's limited partner interest in a New Jersey partnership did not subject it to tax for the 2003 tax year at issue because the holding company qualified as an investment company under the previous version of the regulation.

In a different decision, the New Jersey Tax Court held that two out-of-state software companies that sold software on CD-ROMs to New Jersey customers were not subject to New Jersey's corporation business tax because one company lacked the requisite Commerce Clause substantial nexus to justify such taxation, given that its in-state activities were de minimis, and the other company's in-state solicitation activities were protected by P.L. 86-272. (12)

The latter company was, however, subject to New Jersey's corporate minimum tax based on its employment of an in-state sales representative, as P.L. 86-272 does not afford protection against this tax. The director unsuccessfully argued that the companies were subject to state corporation business tax under Lanco (13) economic nexus principles, claiming that they were licensing intangible property in New...