AICPA Corporate Taxation Insider

PL 86-272 provides that if the only in-state activities a business has is the solicitation of orders for tangible personal property that is approved and filled from outside the state, the state may not impose a net income tax on the business. States set the rules, within due process and commerce clause constraints of the U.S. Constitution, for businesses that sell services or intangibles.

In recent years, concern over declining corporate tax collections, aggressive tax planning and state revenue needs have led a few states to consider and even enact a gross receipts tax (GRT) on companies that do businesses within its borders. On the surface, a GRT is simple since it allows no deductions. The broad base allows for a very low rate that can make the tax more palatable. Further, all businesses are typically subject to the GRT, with the result that all businesses contribute something to state coffers.

Recent tax reform efforts in Ohio, Texas and Michigan have led to an increase in the number of states imposing gross receipts taxes (GRT). Let's take a closer look at GRT and some important legal issues surrounding it.

Public Law 86-272, addressing circumstances under which a multistate business may owe state income taxes, was enacted as a stopgap measure on September 14, 1959. For the past several years, efforts to reform this law have raised issues similar to those of 1959. This article provides a brief history and the issues surrounding PL 86-272 and poses the question -- when the 50th anniversary milestone is reached, will PL 86-272 be in its historic form or a new form (and what might that be)?

State sales tax bases have traditionally included only tangible personal property. Often services are either ignored completely in describing the tax base, or a small number of services are specifically targeted as legally taxable. One reason for exclusion is historical. Tangible personal property was the main consumption item back in the 1930s when many states started imposing a sales tax. However, in the past two decades, consumption of services has become significant.

S corporations now account for two-thirds of U.S. corporate tax returns (see NTA report) and while designed for simplicity, they’ve become increasingly complex and harder for regulators to standardize and monitor.

As the number of small businesses has exploded, the number of S corporations formed has more than quadrupled since the last review (of 1984 returns) while the number with assets exceeding $10 million has increased 10-fold. Today’s S corporations are not necessarily small, and not necessarily easy to classify for tax reporting purposes.

Regardless of one’s view on the issue of climate change and how high priority it should be on national and international agendas, the topic, as well as ideas for reducing greenhouse gas (GHG) emissions, is getting much attention by legislators, governors, mayors and others.

Reports made by the United Nations and other groups over the past year have concluded that global warming is a certainty (United Nations Intergovernmental Panel on Climate Change, Pew Center on Global Climate Change and others). Greenhouse gases (GHG) trap heat in the atmosphere that slowly warms the earth. The primary greenhouse gas is carbon dioxide (CO2) generated from the burning of fossil fuels, such as oil, coal and natural gas.

Two great concerns leading to calls for tax reform are (1) that changes in the world economy are reducing the likelihood that the U.S. will be assured of a dominant role and (2) inordinate complexity that leads to disrespect for the tax system, economic inefficiencies and increased costs of tax compliance. Yet, despite numerous calls for tax reform, the major changes we have seen to the system recently have actually increased its complexity. Examples include the addition of Schedule M-3 for large corporations and the IRC §199 manufacturing deduction. Why?

The best way for a business to simplify its nexus determination for sales tax purposes is to set up a sales office in the state in question. Then, it clearly has nexus and must collect sales tax there. But, this approach isn’t the business reality or plan for Internet-era businesses. Businesses without an obvious physical presence in a state, but with customers there, may be challenged to know if they should collect sales and use tax. This article looks at the reasons for uncertainty and what improvements might be made.