Read theInstructionscarefully then summarize theTax Article.

(make sure the summary does not have grammatical errors)

Please do not pass the assigned time!

Guidelines for Finding and Summarizing Articles Assignment: For this assignment you were asked to locate and summarize one article published in an accounting practitioner journal. You are to read and summarize the articles dealing with some aspect of taxation (not just accounting, but taxation). These articles must be current (published in 2013 - 2015), list an author(s) in the byline, and appear in a professional accounting or tax journal (as per the Syllabus instructions). These summaries must be one page, double-spaced. Please do not include a title or heading; your name as a header is sufficient to identify your paper. Please reference the article in the footer. Please give the article name, journal, and link (if available). Use no larger than Times New Roman 12-point font and no wider than 1-inch margins. Points will be given on the following items: 3 points: Article Choice Is the article on some aspect of taxation? Is the article on a current topic? I.e., was the article published in 2012-2015? Did you get an article from a proper journal, NOT a newspaper or magazine? ((The Syllabus lists examples of journals and databases that can be used)) 10 points: Summary itself. Were you able to convey what the article was about? Did you speak about all the main points in the article? Was all the information you gave in the summary in the article itself? Is it clear from your summary that you understood the article? Remember, do not explain why you choose the article or your own analysis of the article contents. The only thing to be concerned about is a summary of the article itself. 2 point: SGS/Clarity/Readability Was your Spelling/Grammar/Syntax correct? Was the summary easy to read and understand? Article Summaries You are to read and provide a written summary of the journal article dealing with some aspect of taxation (not just accounting). The purpose of this assignment is to get you in the habit of reading tax articles, particularly those dealing with current tax developments, and understanding what impact tax law changes have on your personal and business decisions. Each article summary must be at least one page, double spaced, written in your own words. These article summaries must be current and taken from articles that were published in 2013 or later. STATE & LOCAL TAXES State Taxation of Financial Institutions: A Multidimensional Landscape Co-Authors: Lutof Awdeh, J.D. Richard T. Gowen, J.D., LL.M., MSA Businesses that could be considered \"financial institutions\" must be aware that many states have adopted broad economic nexus provisions. Correction The June State & Local Taxes column, \"Sales and Use Taxes In a Digital An area that is sometimes overlooked by financial institutions is the array of various economic nexus regimes that are imposed by an increasing number of states. Economic nexus provisions, which often target financial institutions, vary considerably from state to state, and they can trigger income or franchise tax filing responsibilities of which taxpayers are often unaware. A number of states also impose taxing regimes that were established specifically for the purpose of taxing financial institutions. Two landmark cases, both decided in 2007, that have been instrumental in set ting the stage for the expansion of state economic nexus regimes, particularly in the context of financial institutions, are Commissioner v. M B N A America Bank, N A ., and Capital One Bank and Capital One F.S.B. v. CommissionerT M B N A was decided by the Supreme Court of Appeals of West Virginia and involved a Delaware-domiciled bank that provided credit card services to customers. M BNA argued that it was entitled to corporate income and franchise tax refunds because it did not have nexus with West Virginia. How ever, the court determined that since M BN A continuously and systematically engaged in activities such as direct mail, telephone solicitation, and promotion in West Virginia that produced significant receipts attributable to customers within the state, the bank had nexus with West Virginia under the state's economic nexus provisions. In Capital One Bank, decided by the Massachusetts Appellate Tax Board and affirmed by the Massachusetts Supreme Judicial Court, it was deter mined that the two credit card banks at issue had nexus with Massachusetts for purposes of the state's Financial Institu tion Excise Tax (FIET) since the banks conducted activities with 100 or more Massachusetts residents and had receipts exceeding $500,000 attributable to state sources, thus satisfying the state's eco nomic nexus provisions.2 In both M BN A and Capital One, a physical presence was not required to trigger nexus for income or franchise tax purposes, provided that the banks were targeting customers within the state and were deriving sig nificant receipts from those customers. Financial Institutions: Broadly Defined Taxpayers that may be affected by the various state economic nexus provisions or that may be subject to special taxing regimes aimed at businesses involved Economy,\" p. 454, om itted the names o f tw o co-authors: Alesia Lewis, CPA, 1. Tax Commissioner v. MBNA America Bank, N.A., 640 S.E.2d 226 (W. Va. 2007); Capital One Bank v. and Adam DoVale, J.D., LL.M. The Tax Commissioner o f Revenue, Nos. C262391 and C262598 (Mass. App. Tax Bd. 2007), aff'd, 899 N.E.2d Adviser regrets the error. V__________ _ _ ___________ 700 S e p t e m b e r 2 0 1 5 J 76 (Mass. 2009). 2. Mass. Gen. Laws ch. 63, 1. The Tax Adviser PHOTO BY NIROSHAN86/ISTOCK Editor: Sarah McGahan, J.D., LL.M. in making loans or extending credit are often unaware of how potentially broad the scope is of what can be considered a financial institution. A state's definition o f financial institution often includes entities that engage in activities or per form functions that would not generally be associated with traditional banks. For example, for purposes of the Massachusetts FIET, financial institu tions subject to the tax and its nexus provisions include not only banks and savings and loan associations, but also any other corporation in substantial competition with financial institutions that derives more than 50% of its gross income from loan origination, lending activities, or credit card activities.3 C on necticut's definition o f a financial service company is similar to the definition of a financial institution in Massachusetts and provides that a financial service company is any company, other than an insurance company or a real estate broker, that derives 50% or more of its gross income from activities that include loans; investment banking services; man agement, distribution, or administrative services to or on behalf of an investment entity; actuarial services; and leasing or acting as an agent, broker, or adviser in connection with leasing real and personal property that is the functional equivalent of an extension of credit.4 New Jersey defines a financial business corporation as a corporation that is in substantial competition with the busi ness of national banks, and that also employs moneyed capital with the object o f making a profit by its use as money.5 As the above definitions demonstrate, the scope of businesses that are subject to state taxing regimes that focus on financial institutions can be very broad and encompass a variety of activities, The definitions states apply to financial institutions often include entities that engage in activities or perform functions that would not generally be associated with traditional banks. such as facilitating leasing arrangements or simply deriving more than 50% of gross income from lending activities. Therefore, in a number of states, a range of businesses that would not typically come to mind in a more traditional banking context could nevertheless be subject to a taxing regime aimed at financial institutions. As a consequence, businesses that engage in activity in volving some form of lending or the extension of credit should be aware of the various state definitions and rules related to financial institutions in the jurisdictions from which they derive in come or receipts. Moreover, as discussed in the next section, states have become more aggressive in subjecting financial institutions to their taxing regimes even if those institutions have no physical presence in the state. F in an cial In stitution s: Evolving N ex u s S ta n d a rd s In the past few years, many states have begun to target financial institutions, even those that have no physical pres ence in their jurisdictions, through 3. Mass. Gen. Laws ch. 63, 1. 4. Conn. Gen. Stat. 12-218b(a)(6). 5. N.J. Admin. Code 18:7-1.16. 6. Cal. Rev. &Tax. Code 23101; 1 Colo. Code Regs. 39-22-301.1; Conn. Dep't of Rev. Servs., Informational Publication 2010(29.1), Q&4 on w w w .th etaxad viser.co m various concepts including economic nexus and a factor-presence test. The economic nexus provisions that states impose can vary significantly and can contain nuances that result in financial institutions'having nexus in jurisdic tions they might not have anticipated. Over the past several years, a number of states, including California, Connecticut, Colorado, Massachusetts, and, most recently, New York, have enacted nexus provisions that use a bright-line factor to determine presence.6 Under these bright-line nexus standards, a taxpayer will generally trigger nexus and a filing responsibility regardless of whether it has ever physically entered the state if the receipts it derives from the state ex ceed a prescribed receipts threshold. A financial institution that has made loans, acquired existing loans, or extended credit to customers within a factor-presence state and derives interest (or other) receipts from those customers that exceed the state's applicable receipts threshold would therefore typically trig ger nexus and a filing responsibility. In a factor-presence jurisdiction, whether the loans from which receipts are derived are secured by underlying real or personal property located in the state is generally irrelevant, provided that the receipts are sourced from that state. In California, Colorado, Connecticut, and M as sachusetts, the states'factor-presence nexus provisions have set $500,000 as the sales/receipts threshold for nexus.7 New York, under its recently enacted economic nexus provisions, has set the receipts threshold at $1 million.8 A number of other states that have economic nexus provisions do not have a bright-line factor-presence threshold. However, nexus in those states can sometimes be established by even less Economic Nexus (Dec. 28, 2010); Mass. Gen. Laws ch. 63, 1; N.Y. Tax Law 209.1(b). 7. Note that in California, the factor-presence threshold figures are adjusted for inflation on an annual basis pursuant to Cal. Rev. and Tax. Code 23101 (c). 8. N.Y. Tax Law 209.1(b). S ep te m b e r 2015 701 STATE & LOCAL TAXES activity than in the factor-presence states. For example, New Hampshire has an economic nexus regime under which the employment of business assets in, of the receipt of money from, the state can be sufficient to create nexus, and no clear threshold exists to determine at what point nexus would be established.9 New Jersey also has a broad economic nexus regime, under which deriving receipts from sources within the state can, by itself, create nexus and a filing responsibility.10 A financial business corporation, banking corporation, credit card company, or similar business com mercially domiciled outside of New Jersey is subject to New Jersey's income tax if it obtains or solicits business or receives gross receipts from sources within the state the only limitation on the reach of the state's nexus provision being the U.S. Constitution.11 Given the expansive language of the economic nexus provisions in states such as New Hampshire and New Jersey, the level of receipts derived by a financial institu tion from customers in those states (or states that have similar nexus provisions) would likely not have to be large to es tablish nexus and a filing responsibility. However, some recent developments may signal a curtailment of these broad nexus provisions. The Superior Court of New Jersey Appellate Division's af firmation in BIS LP, Inc. v. Director12 of that state's tax court's granting of sum mary judgment to the taxpayer in a case involving whether a corporate limited partner has nexus merely because it holds an interest in and derives income from a partnership doing business in New Jersey indicates that some state 9. courts may rein in broad economic nexus standards. In addition, the U.S. House Judiciary Committee also recently ap proved the Business Activity Tax Sim plification Act (BATSA), H .R. 2584.13 II BATSA becomes law, state economic nexus provisions would in effect be nullified, as BATSA would require that out-of-state businesses have a physical presence in a state for more than 14 days to create nexus for income or other busi ness activity tax purposes.14 Thus, while economic nexus provisions are currently imposed by a significant number of states and should be navigated with care and scrutiny, the current economic nexus landscape could potentially begin to move in the opposite direction from its pattern of expansion over the past several years. Special Financial Institutions Taxing Regimes and Apportionment Rules A financial institution that is required by either economic nexus or factor-presence rules to file returns in multiple states may face myriad tax regimes and/or special apportionment rules. A majority of states either impose a separate taxing regime on financial institutions or tax financial institutions under a standard corporate tax regime but apply special rules, particularly for apportionment, on those entities. In some cases, special tax rates are also imposed on financial institutions. Florida, Maine, and M as sachusetts are among the states that impose a separate taxing regime on financial institutions.15 Before 2015, New York also imposed a separate taxing regime on financial institutions, but as N.H. Rev. Stat. 77-A:1.XII. 10. N.J. Rev. Stat. 54:1 OA-2. See also New Jersey Division of Taxation Techni cal Advisory Memorandum, TAM-6 (1/10/11). 11. New Jersey Division of Taxation Technical Advisory Memorandum, TAM-6. 12. BIS LP, Inc. V. Director, 26 N.J. Tax 489 (N.J. Super. Ct. App. Div. 2011). 13. BATSA has been introduced in Congress several times since 2003 (when of Jan. 1,2015, financial institutions are subject to the state's general corporate tax regime.16 The varying treatment of financial institutions by the states, with some states imposing a separate taxing regime on those entities and others subject ing financial institutions to the state's general corporate income/franchise tax regimebut often with special apportionment rules or tax rates cre ates a veritable labyrinth of compliance provisions of which financial institu tions operating in multiple states should be aware. Under Massachusetts' FIE T regime, in addition to having special nexus provisions, entities that are sub ject to the F IE T are required to use an evenly weighted three-factor apportion ment formula and are also subject to a separate tax rate, which is currently 9%.17 Furthermore, Massachusetts ap plies special rules for computing the property and receipts factors, similar to some other states, including sourc ing interest income from secured loans based on the location of the underlying property while sourcing interest income from unsecured loans based on the cus tomer's location. The state also applies the so-called SINAA rules to appor tion loans for property factor purposes, sourcing the loan based on where the solicitation, investigation, negotiation, approval, and administration of the loan occurs.18 Interestingly, New York's pre-2015 bank franchise tax regime applied, in part, the SINAA rules rather than the property factor to source receipts.19 Maine imposes a franchise tax on finan cial institutions, where each financial 14. H.R. 2584 (114th Cong.). 15. Fla. Stat. 220.63; Me. Rev. Stat. tit. 36, 5206; Mass. Gen. Laws ch. 63, 2. 16. N.Y. Tax Law, Article 32, Franchise Tax on Banking Corporations; N.Y. Tax Law 209.1; Technical Memorandum TSB-M-15(2)C (2/26/15). 17. Mass. Gen. Laws ch. 63, 2; Mass. Gen. Laws ch. 63, 2A. the act was first introduced in the House of Representatives by Rep. Bob 18. Mass. Gen. Laws ch. 63, 2A(e). Goodlatte, R-Va., in H.R. 3220) without success. 19. N.Y. Comp. Code R. & Regs. tit. 20, 19-6.2. 702 S eptem ber 2015 T h e T ax A d v is e r STATE & LOCAL TAXES institution is required to determine its tax due using one of two methods, one of which involves applying the franchise tax on both Maine book income and Maine assets, and the other of which involves applying the franchise tax on M aine assets only.20 Under Florida's franchise tax imposed on banks and savings associations, the franchise tax base is adjusted federal income ap portioned to the state, plus nonbusiness income allocated to state, taxed at a rate of 5.5%.21 States that do not have a separate taxing regime for financial institutions, but that impose special apportion ment provisions on those entities, can sometimes create more confusion for taxpayers than those states that have entirely separate financial institution tax regimes. The various special provisions under many states'general corporate income/franchise tax regimes that spe cifically apply to financial institutions can sometimes pose traps, particularly when an entity subject to the special provisions applicable to financial institu tions is not aware of its status in certain states. W hile special tax rules aimed at financial institutions can cover a wide spectrum, as mentioned earlier, special apportionment rules and tax rates are among the most common areas where a deviation from general corporate tax rules can be found. Beginning in 2013, California shifted to the application of a single-sales-factor apportionment formula for most busi nesses.22 However, the state continues to apply an evenly weighted three-factor apportionment formula for banks and financial corporations.23 In addition to the special apportionment rules applied to banks and financial corporations in California, which are similar to the Massachusetts rules described above, the state imposes the tax on a bank or financial corporation's net income at a rate 2 percentage points higher than the general corporate tax rate.24 Colorado is an example of another state in which there is not a separate taxing regime for financial institutions, but where special apportionment rules apply.25 Under Colorado's financial in stitutions apportionment regime, specifi cally enumerated revenue streams must be included under a single-sales-factor formula, including revenue from various types of leases, interest from loans (both secured and not secured by real prop erty), revenue from loan servicing fees and credit card receivables, and revenue from investment assets and activities.26 T he states described above provide a sample of the various special rules and adjustments that are imposed on finan cial institutions by states that otherwise do not subject financial institutions to a separate taxing regime, but there are many other states that also impose spe cial rules aimed at financial institutions. through congressional action, so busi nesses should keep abreast of continu ing developments. The information contained herein is general in nature and based on authori ties that are subject to change. McGladrey L L P guarantees neither the accuracy nor completeness o f any information and is not responsiblefo r any errors or omissions, or fo r results obtained by others as a result of reliance upon such information. McGladrey L L P assumes no obligation to inform the reader o f any changes in tax laws or otherfactors that could affect information contained herein. This column does not, and is not intended to, provide legal, tax, or accounting advice, and readers should consult their tax advisers concerning the application o f tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, fo r purposes o f avoid ing tax penalties that may be imposed on any taxpayer. This column represents the views o f the authors only and does not necessarily represent the views orprofessional advice of McGladrey LLP. Conclusion In sum, an increasing number of states apply some form of economic or factorpresence nexus and also impose special tax rules on financial institutions. Hence, it is advisable that businesses engaged in financial activities, including any form of lending through loan generation or loan acquisition, leasing, or other related activities be aware of whether they may be considered a financial institution for tax purposes in the states in which they have any business activity or custom ers. However, there is the potential for relief from economic nexus provisions, either in individual states through state court decisions or in all states Contributors Sarah McGahan is a senior manager with the state and local tax group of KPMG LLP's Washington National Tax practice. LutofAwdeh is a director and Richard Gowen is a manager, both with the state and local tax group of McGladrey LLP's Boston Office. For more information about this column, contact Mr. Awdeh at lutof.awdeh@ mcgladrey.com or Mr. Gowen at richard.gowen@mcgladrey.com. 20. Me. Rev. Stat. tit. 36, 5206. 24. Cal. Rev. & Tax. C ode 23186; Cal. Rev. & Tax. C ode 23181 (a). 21. Fla. Stat. 220.63. 25. 1 Colo. C ode Regs. Spec. Reg. 7 A . 22. Cal. Rev. &Tax. C ode 25128.7. 26. Id. 23. Cal. C ode Regs. 25137-4.2(b). 704 S e p te m b e r 2 0 1 5 T h e Tax A d v is e r Copyright of Tax Adviser is the property of American Institute of Ceritified Public Accountants and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use