Intercompany transactions: current state tax developments.

• Author: Levin-Epstein, Michael

Intercompany transactions can be used to shift income from entities with a physical nexus in many states to a related member with a limited nexus in favorable taxing jurisdictions. In moving to combat the benefits received from such intercompany transactions, states tend to employ one or more of the following concepts: (1) forced combination, (2) economic nexus, (3) expense disallowance, and (4) equitable/discretionary adjustments. This article will focus on interesting developments in some of these areas. Mary Kay Martire and Maria Eberle, two experts on intercompany transactions, supplied the information on which this article is based. Martire is a partner in the Chicago office of McDermott Will & Emory LLP, and Maria Eberle is a partner in the New York office of McDermott Will & Emory.

Forced Combination

As this publication goes to press, Martire and Eberle report that at least 25 states and the District of Columbia have laws or regulations requiring combined reporting, at least with respect to related corporations with substantial intercompany transactions.

More troubling, however, because of the lack of certainty, are circumstances in which states see fit to use their equitable powers to force taxpayers to file combined returns. This is particularly true when a discretionary determination also places the burden to disprove the accuracy of a return position, even when the return position is an equitable filing position chosen by the state, on the taxpayer, say the two attorneys.

One relatively recent example of states using this approach is Ind. Dep't of State Revenue v. Rent-A-Center East Inc., 963 N.E.2d 463 (Indiana 2012). In this decision, the Indiana Department of Revenue (Indiana DOR) forcibly combined Rent-A-Center East with two affiliated entities despite the fact that the affiliates did not operate retail stores in Indiana and had no capital, property, or employees within the state. "The effect of the forced combination was to increase Rent-A-Center's Indiana state tax liability, for a single year, by more than $513,000," note Martire and Eberle.

Not surprisingly, say the two attorneys, Rent-A-Center challenged the Indiana DOR's combination, and the Indiana Tax Court granted summary judgment for Rent-A-Center based on its conclusion that the Indiana DOR failed to demonstrate that the tax originally paid by Rent-A-Center East did not fairly reflect its Indiana adjusted gross income. (See Ind. Dep't of State Revenue v...