operational territory of employees and location of the Business Tax, which imposed both an income and a company’s property is a good first indicator of where gross receipts tax.11 Since these are not income taxes, the company should be filing. For companies that sell they generally have different nexus thresholds and can tangible personal property, e.g., retailers, manufacturers, create liabilities even if the company posts a net loss for distributors, etc., Public Law 86-272 can provide the year. protection, although limited in nature, from income taxes nexus.2 An emerging jurisdictional concept among states is that of “economic nexus.” Under this concept, a taxpayer is deemed to be doing A growing number of states, including California, Illinois, Michigan, Massachusetts, Minnesota, New York, Texas and Wisconsin, require corporations that conduct a “unitary business” to file a combined return. business in a state based on the amount of economic In some cases, combination on a worldwide basis is activity, e.g. sales, it has within a state even if the necessary in the absence of a proper election to exclude taxpayer lacks traditional measures of nexus such as foreign affiliates. Proper due diligence requires a target physical presence.

Businesses dealing in intangibles, company’s filing position be examined to determine if a e.g. software, or providing services, are particularly return should have filed on a combined basis and if so, exposed to economic nexus risk. State and local tax what entities were includible under state law. 3 due diligence should focus on states like California, Colorado and Connecticut if investigation reveals activity but no returns have been filed. Multistate apportionment can also entail state tax exposure risk.

Sales factor sourcing rules for service and intangibles companies are complex. Failure to understand when to apply the cost-of-performance approach, e.g., proportionate method and the plurality method4 versus benefits derived5 can lead to material income, franchise and other business entity tax liabilities. Do not overlook local tax filings in the due diligence process. Many municipalities have income or other business entity taxes that can be material.

New York City, Philadelphia, Louisville and various communities in Ohio impose such taxes. If available, the target’s tax calendar of due dates provides a convenient roadmap for someone outside the company to understand where it files and due dates to be aware of. Reviewing on-going and prior year audits can bring other state exposures to light. Organizing these documents in advance of a buy-sell transaction While income taxes often create state and local tax (both in a paper and electronic format) is recommended. exposure, a number of states impose taxes based on stock.7 Other taxes that can come into play include gross receipts taxes, like Washington’s Business and Occupation Tax8, Ohio’s Commercial Activities Tax9, the Texas Franchise Tax10 and the now defunct Michigan Jon P.

Skavlem, CPA is a director in the State and Local Tax group at Baker Tilly Virchow Krause, LLP in Milwaukee. Contact him at 414-777-5333 or jon.skavlem@bakertilly.com. Phillip A.H. Roemaat, J.D., CPA is a manager in the State and Local Tax group at Baker Tilly Virchow Krause, LLP in Milwaukee. Contact him at 414-777-5445 or phillip.roemaat@bakertilly.com. Interstate Income Law, 15 U.S.C.

§381 through §384 (known to state and local tax practitioners as P.L. 86-272), 3 See Cal. Rev.

& Tax § 23101 Compare, N.C. Gen. Stat.

§ 105-130.4(l)(3) and Tex. Tax Code Ann. §171.103(a)(2) with Cal.

Rev. & Tax § 25136 for taxable years beginning prior Jan. 1, 2013 and 72 Pa.

Stat. Ann.§ 7401(3)(2)(a)(17), 5 See, e.g. Wis.

Stat. § 71.25(9)(dh)(1); 18-125 ME Code R. § 801.05E(1); Cal.

Rev. & Tax § 25136 for taxable years beginning after January 1, 2013, 6 Ga. Code Ann.

§ 48-13-72, 7 Pa. Stat. Ann.

§ 7602, 8 Wash. Rev. Code § 82.04.220 a, 9 Ohio Rev.

Code § 5751.02, 10 Tex. Tax Code. Ann § 171.001, 11 Mich.

Comp. Laws Ann. §§ 208.1201, 208.1203 2 4 18 On Balance November|December 2013 Reposted with permission from On Balance, the magazine of the Wisconsin Institute of Certified Public Accountants www.wicpa.org shutterstock.com the corporation’s net worth6 or the value of its capital .