As we begin the Year of the Monkey, lists of upcoming trends abound. Whether you are ready to try a new hair style, visit this year’s hottest travel destinations, or shake up your menu, there is a list to safely guide you into the new year. If you’re wondering what 2016 has in store for corporate income tax, we have you covered. Based on Bloomberg BNA coverage of the 34th Institute on State and Local Taxation hosted by the New York University School of Professional Studies, here are five top trends to watch in 2016:
1. Gillette decision and possible resolution of MTC litigation at the state level.
The California Supreme Court unanimously ruled against Gillette and five other multistate companies. In a decision issued on New Year’s Eve, the court reversed the state’s intermediate appellate court and denied the taxpayers’ bid to elect to use the three-factor apportionment formula under the Multistate Tax Compact instead of California’s statutory apportionment formula. The ruling signals a bad omen for taxpayers hoping for refunds in California and other states. Similar litigation is pending before state supreme courts in Michigan, Minnesota, Oregon, and Texas, and we may see resolution in those cases based on this decision.
2. Tax compliance for pass-through entities will grow even more complicated
Look for a continuation in the rise of pass-through entities in 2016. Panelists at the NYU conference noted that sub-chapter K entities are increasingly the vehicle of choice for enterprise-level operations. According to the panelists, two complications are on the horizon: more federal audits will create a massive data dump on states through information sharing arrangements and state withholding regimes for pass-through entities will reach new level of complexity. Matt Polli, a partner in Deloitte Tax LLP’s Multistate Tax Services, asked whether this will be the straw that breaks the camel’s back, speculating that states may opt-out of a pass-through regime in favor of an entity-level tax similar to those implemented by Texas and Tennessee.
3. Market-based sourcing regulations.
Not everyone agrees on what the hottest trends will be this year. When it comes to clothing, some say 2016 will mark the rise of cat sweaters, but Todd A. Lard, a Washington-based partner with Sutherland Asbill & Brennan LLP, recently told Bloomberg BNA’s Jennifer McLoughlin that sales factor sourcing is actually the “sexy issue” de jour. (No offense to cats or sweaters, but I am siding with Mr. Lard on this one.) MTC model sourcing regulations were referred to the Executive Committee in mid-December, and several states, including Rhode Island and Nebraska, closed out 2015 by issuing new sourcing regulations. “[W]e have more regulations, more variety, more observations about sourcing of sales of other than tangible personal property” than in the prior 50 years, Lard noted. As a result, practitioners may see several key concepts take shape this year: the service delivered model, reasonable approximation, a throwout rule, and some variances in the sourcing rules for business customers and individual customers.
4. Due process nexus challenges coming to the forefront.
Despite what leading practitioners describe as deafening silence from the U.S. Supreme Court, due process nexus challenges are expected to emerge in taxpayer challenges in 2016. Leading practitioners at the conference hope that the High Court will settle challenges to nexus interpretation by state courts that are seen by many as inconsistent with Supreme Court precedent. The panelists did not think it is likely that state courts will extend Quill physical presence standard to corporate income tax, which begs the question of what standard governs. With four cases in as many years adopting different approaches, it remains to be seen how the issue shakes out but NYU panelists predicted that due process nexus challenges will continue into 2016 with Karl A. Frieden, vice president and general counsel of the Council On State Taxation (COST), suggesting that the Supreme Court will take a case in the next four to five years. “We do need them to weigh in and say, this is wrong, this is a violation of due process,” he told Bloomberg BNA’s Jennifer McLoughlin.
5. Transfer pricing.
Finally, 2016 will likely see more states engaging in aggressive transfer pricing enforcement. Practitioners and state officials at the conference said that tax base erosion combined with outdated auditing measures are encouraging states to undertake transfer pricing audits. States are very much concerned about some intercompany transactions, said Joe W. Garrett Jr., deputy co-commissioner of the Alabama Department of Revenue. In an interview with McLoughlin, Garret explained that “large taxpayers are shifting profits outside of the state,” and the impact “tends to hollow out the corporate income tax base and the corporate income tax system.” Bloomberg BNA’s Dolores Gregory recently reported that a high-profile state case involving the District of Columbia's use of contractor Chainbridge Software LLC to prepare transfer pricing analyses is set for oral argument in February before the District of Columbia Court of Appeals.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What corporate income tax trends do you foresee in 2016?
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