Major Defeat Dealt to States Seeking to Apportion Income Using the "Operational Function Test"

The U.S. Supreme Court issued a very interesting ruling affirming its earlier decisions related to the taxation of "unitary businesses".  (See MeadWestvaco Corp. v. Illinois Department of Revenue, U.S. Supreme Court, Dkt. 06-1413, vacating the Illinois Appellate Court, April 15, 2008).

In this case, Mead had sold Lexis-Nexis for a $1Billion gain. That gain was allocated to Ohio by Mead. Illinois audited them and took the position that the gain should have been apportioned to IL. IL made the argument at the trial court (which agreed with the State) that although the businesses weren't unitary, the asset (Lexis-Nexis) was used in an "operational function", it should be apportioned. This "operational function" concept has arisen in a couple of recent US Supreme decisions. It has apparently given the states the idea that there is no such thing as allocable income anymore because all they have to do is argue that the asset involved was used in an operation function and they can apportion it. Of course, only the extraterritorial states want to make this argument. But the Supremes in this case, say the IL court erred in their interpretation of this test. See below for their commentary:

Texas Offers 30 Day Extension on Margin Tax Filing

Texas --Corporate Income Tax: Comptroller Extends Filing Date by 30 Days

In a Press Release, issued by Texas Comptroller Susan Combs, dated, April 22, 2008 it was announced that businesses unable to meet the May 15 due date for the revised franchise tax, also referred to as the business margin tax, are being granted a 30-day extension to submit their returns or file an extension without penalty. Reports filed on or before June 16, 2008, for annual reports and June 2, 2008, for initial reports will be considered timely. Prior to the extension, a 5% penalty would have been imposed on those not filing by May 15. The comptroller's office is allowing the additional 30 days due to the complexity of the revised franchise tax and the newness of the enhanced electronic reporting methods.

Millionaires in MD Beware

I don't know how many of our Blog readers in MD are Millionaires -- probably a lot I would guess. Here's a recent development targeting you or your client:

 

Senate Bill 46, effective July 1, 2008, temporarily (yeah, right) increases the personal income tax rate for those with Maryland taxable income in excess of $1,000,000. For taxable years beginning after December 31, 2007, but before January 1, 2011, the Maryland personal income tax for an individual, including spouses filing a joint return or a surviving spouse or head of household, is 6.25%. Currently, the highest income tax rate is 5.5% and applies to individuals, spouses filing a joint return or a surviving spouse or head of household with Maryland taxable income in excess of $500,000. Those with a Maryland taxable income of $500,001 through $1,000,000 are taxed at the rate of 5.5% for taxable years beginning after December 31, 2007, and ending before January 1, 2011.

I guess MD, doesn't like high earning individuals living in their state.

AL Loses in Bid to Classify Sale of Land/Plant as Nonbusiness Income

In a recent case decided by the AL Supreme Court, Kimberly Clark won its appeal.

Kimberly Clark had classified the income from the sale of timberland and a paper processing plant as business income. AL is a UDITPA state and as such follows the transactional test when it comes to classifying income. If the transaction can be said to occur in the normal course of business of the taxpayer, then it is business income. States are notorious for taking positions that are in their favor of course. Taxpayers are also wise to take positions in their own favor. In this case, the property sold was located in AL. Therefore, its no surprise that AL is going to take the position that the income from the sale is nonbusiness. Nonbusiness income is allocable as opposed to apportionable. Inasmuch as the property is located in AL, the income would be all allocable to AL, if AL could win their argument. AL argued that Kimberly Clark was not in the business of selling timberland and processing plants. In fact, Kimberly Clark had classified the sale as "extraordinary" in its own financial statements.

MA Says 80 New Auditors Will Bring In $60Million

I saw this headline and it piqued my interest. I wondered how this would be. That would mean each auditor would find over $700,000 in assessments each year. That seems a little overstated. Further reading of the article in the Worcester Telegram and Gazette revealed that the estimates are pretty loose indeed.

Newspaper Calls Wal-Mart State Tax Planning "Corporate Tax Shenanigans"

I find it interesting how the newpapers and other media report about corporate tax matters. Sometimes it's quite the eye-opener. Take this editorial article in the Carrboro (NC) Citizen which is written by Elaine Mejia who is referred to as the director of the N.C. Budget and Tax Center. In this article she describes a tax planning technique (which I'm sure was done for other than tax-reduction purposes) that was used by Wal-Mart that had the effect of dramatically reducing state income taxes in NC. NC is a separate return state. Following is her description of what Wal-Mart did and take note of the inflammatory adjectives she throws in there. She makes a call for combined reporting -- the bain of state income tax consultants.

ALABAMA Income Tax Law Survives Challenge

The Alabama Court of Civil Appeals on Friday overturned a lower court decision in a corporate tax case that might have resulted in a a multimillion-dollar revenue loss to the state. The vote wasn't close. The 5-0 order by the appeals court reversed Circuit Judge Tracy McCooey of Montgomery, who had ruled that VFJ Ventures' (Vanity Fair) deductions were not unreasonable as that term was defined in the law. What was the definition of "unreasonable" in the law. That was the key to the lower court's ruling -- it was not defined.