State and local tax: Top stories of 2015

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State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
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SALT Top Stories of 2015
2015 was notable in large part due to a series of decisions issued by state and federal
courts which could pave the way for future resolution of several gray areas in state and
local taxation. For example, the U.S. Supreme Court issued several major decisions
impacting state and local taxes, including Obergefell v. Hodges and Comptroller of the Treasury v.
Wynne. In Obergefell, the Court held that same-sex couples had the right to marry. States
that did not recognize same-sex marriage prior to the decision issued guidance on filing
returns after Obergefell. In Wynne, the Court determined that the failure of Maryland law to
allow a credit against county personal income tax for Maryland residents for their pass-
through income from an S corporation’s out-of-state activities that was taxed by other
states was unconstitutional. The costly financial impact of the decision is emerging as
Maryland starts issuing refunds. The amount of interest to be paid is unclear and a class
action complaint on this issue has already been filed.
At the state level, both New York and Vermont issued decisions that helped practitioners
gain insight in those states on what constitutes a unitary business. Meanwhile, Alabama is
testing the boundaries of a 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota,
by promulgating a regulation that challenges the nexus requirement of physical presence.
Practitioners may see the first challenges to this move in 2016 as the regulation takes
effect at the beginning of next year. In addition, many states enacted either click-through
nexus statutes, affiliate statutes or both. The states are clearly moving faster on this issue
than Congress, where little progress was made on the federal remote seller nexus bills in
2015.
The Multistate Tax Compact three-factor apportionment election controversy continued
in 2015 as a series of taxpayer-unfavorable decisions were issued. The most anticipated
and watched case, Gillette Co. v. Franchise Tax Board, is expected to be decided in early
January 2016. Meanwhile, the Multistate Tax Commission (MTC) made progress on both
its Arm’s-Length Adjustment Service (ALAS) and model market-based sourcing
regulations in 2015. The success of the MTC’s ALAS program is contingent on ten states
participating in the program. With only six states currently enlisted, it remains to be seen
whether the MTC will be able to get the additional states needed to commit to the
program.
On the political front, Illinois and Pennsylvania continue to work on resolving their
budget issues and a resolution by the end of 2015 does not look promising. Meanwhile,
three jurisdictions, Nevada, Connecticut and the District of Columbia, faced strong
Release date
December 17, 2015
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opposition from the business community and had to revisit legislation enacted in 2015.
Voters in Nevada may get the opportunity to decide the fate of the state’s unpopular
commerce tax in 2016 if enough signatures are obtained to get the question on the
November ballot. Also, the use of revenue targets as a means to lower tax rates found
favor in North Carolina and the District of Columbia, which utilized these provisions in
the past year.
1. Alabama tests boundaries of Quill
In recent years, taxpayers, practitioners and tax authorities alike have recognized the fact
that Quill Corp. v. North Dakota1 was decided during a different technological era, and that
perhaps in today’s electronic economy, the result requiring that a taxpayer have physical
presence to be subject to the collection and remittance requirements of a state sales and
use tax might be different. In Direct Marketing Association v. Brohl, a U.S. Supreme Court
case in which the Tax Injunction Act (TIA)2 did not bar a challenge in federal court of
Colorado’s sales and use tax notice and reporting requirements for out-of-state (remote)
retailers, Justice Anthony Kennedy addressed the Quill issue in a concurring opinion.3
Stating that the “legal system should find an appropriate case” for the U.S. Supreme Court
to reexamine Quill, the concurring opinion was regarded as a pointed invitation, the likes
of which are rarely seen in the jurisprudential context.
The Alabama Department of Revenue swiftly responded to Justice Kennedy’s invitation
by promulgating a regulation4 that directly challenges the U.S. Supreme Court’s decision in
Quill by requiring out-of-state sellers to collect and remit sales tax in the absence of a
physical presence in the state.5 The regulation took effect October 22, 2015 and applies to
transactions occurring on or after January 1, 2016.6
While the regulation will be implemented in the coming months, the road to the U.S.
Supreme Court is long and uncertain. Once the impact of the regulation becomes
substantial, a lawsuit may be filed testing the validity of the regulation. The lawsuit would
then need to work its way through the appellate process, be appealed to the U.S. Supreme
Court and be heard by the Court. In the meantime, out-of-state sellers will be forced to
collect and remit the tax while that viable challenge emerges.
Under the regulation, out-of-state sellers will be required to collect and remit sales and use
tax if they meet two conditions: (a) prior calendar year retail sales of tangible personal
property in the state are greater than $250,000, based on the previous year’s sales; and (b)
1 504 U.S. 298 (1992).
2 28 U.S.C. § 1341.
3 135 S. Ct. 1124 (2015) (Kennedy, J., concurring). For a discussion of this case, see GT SALT
Alert: U.S. Supreme Court Holds Challenge to Colorado’s Sales and Use Tax Notice and Reporting
Requirements Not Barred by Tax Injunction Act.
4 ALA. ADMIN. CODE r. 810-6-2-.90.03.
5 For further information on this regulation, see GT SALT Alert: New Alabama Regulation to
Require Out-of-State Sellers to Collect Sales and Use Tax Contrary to Supreme Court Precedent.
6 Notice – To all persons, firms and corporations making retail sales of tangible personal property into the State of
Alabama, Alabama Department of Revenue, Nov. 17, 2015.

the seller performs one or more of the activities listed in Alabama Code Section 40-23-
68(b).7
The activities described in Section 40-23-68(b) generally include:
• Maintaining, occupying or using an Alabama place of business (by itself or through a
subsidiary or agent).
• Qualifying to do business or registering with the state to collect the sales and use tax.
• Utilizing employees, agents, salesmen or other personnel operating in Alabama to sell,
deliver or take orders for the sale of tangible personal property or services taxable
under the Alabama sales and use tax law, or otherwise soliciting and receiving
purchases or orders by agents or salesmen.
• Soliciting orders for tangible personal property by mail if substantial and recurring,
and if the retailer benefits from banking, financing, debt collection, telecommunication
or marketing activities occurring in Alabama, or benefits from authorized installation,
servicing or repair facilities located in Alabama.
• Using a franchisee or licensee operating under its trade name.
• Soliciting orders for tangible personal property through advertising disseminated
primarily to Alabama customers; advertising transmitted or distributed over an
Alabama cable television system; or through a telecommunication or television
shopping system intended for broadcast to Alabama customers.
• Maintaining any contract with Alabama that would allow Alabama to require
collection and remittance of sales and use tax under the U.S. Constitution.
• Distributing catalogs or other advertising matter resulting in orders from Alabama
residents.8
As an alternative to following the statutory provisions in the Alabama Code regarding use
tax collection, reporting and remittance obligations, sellers potentially may apply the
provisions under the Simplified Sellers’ Use Tax Remittance Program.9 A few details with
respect to the Program should be noted, considering that other states ultimately may look
to the Program as a template for improving compliance in this area.10 Admittance into the
Program requires the seller to complete an application process with the Department.11
Sellers must go through an approval process.12 Under the Program, the simplified sellers’
use tax rate is 8 percent of the sales price of any tangible personal property sold or
delivered into Alabama by an eligible seller.13 Purchasers and sellers will not be liable for
any additional state or local use tax if they collect and remit the 8 percent tax.14
Specifically, the rate is capped at 8 percent, regardless of whether the actual combined rate
7 ALA. ADMIN. CODE r. 810-6-2-.90.03(1).
8 ALA. CODE § 40-23-68(b)(1)-(10).
9 ALA. ADMIN. CODE r. 810-6-2-.90.03(2).
10 For additional information regarding the Program, see Notice – To all persons, firms and corporations
making retail sales of tangible personal property into the State of Alabama, Alabama Department of Revenue,
Nov. 17, 2015; ADOR Offers Simple Way for Internet Sellers to Remit Use Tax, Alabama Department of
Revenue, Sep. 4, 2015.
11 ALA. CODE § 40-23-192(c).
12 Id.
13 ALA. CODE § 40-23-193(a).
14 Id.

is greater.15 A taxpayer that pays a higher use tax under the Program than the actual tax
imposed in the area where the sale was delivered can apply for a refund or credit.16 Sellers
will be allowed to “keep a percentage of collections as compensation for compliance.”17
This discount is 2 percent of the amount of the use tax collected and timely remitted.18
The program also provides an amnesty provision.19 Eligible sellers will be granted amnesty
for any uncollected remote use tax on sales in Alabama for the twelve-month period
preceding the effective date of the sellers’ participation in the Program.20
2. Impact of Wynne decision begins to emerge
The financial impact of the U.S. Supreme Court’s decision in Comptroller of the Treasury v.
Wynne is emerging, both in Maryland and in other states.21 In Wynne, the U.S. Supreme
Court held that the Maryland tax system impermissibly exposed taxpayers to the possibility
of double taxation, and violated the fair apportionment requirement of the dormant
Commerce Clause because it failed the internal consistency test. Maryland acted to cure
the constitutional infirmity by enacting corrective legislation with retroactive and
prospective effect, allowing a credit for Maryland residents against county personal income
tax for income taxed by other states.22 The cost to counties within Maryland of the Wynne
decision has been estimated at $200 million, and the state estimates that approximately
55,000 taxpayers are eligible for Wynne refunds.23 As of September 28, 2015, the Maryland
Office of the Comptroller has refunded approximately $53 million resulting from 4,000
claims.24 Additionally, the tax revenues of Maryland counties are expected to realize a $42
million annual loss on a prospective basis.25
But these numbers may change given the uncertainty surrounding the payment of interest
on the refund claims. For 2015, the interest rate for refunds is generally 13 percent.26
Maryland enacted legislation in 2014 that provides for a dramatically lower interest rate for
Wynne refunds.27 The Comptroller is directed to set the annual rate for an income tax
refund that is a result of the final decision under Wynne at a percentage that equals the
average prime rate of interest quoted by commercial banks to large businesses during fiscal
year 2015, based on a determination by the Board of Governors of the Federal Reserve
Bank. This would result in an interest rate of 3.25 percent. However, the legislation
15 ALA. CODE § 40-23-193(c).
16 ALA. CODE § 40-23-196.
17 Notice – To all persons, firms and corporations making retail sales of tangible personal property into the State of
Alabama, Alabama Department of Revenue, Nov. 17, 2015.
18 ALA. CODE § 40-23-194.
19 ALA. CODE § 40-23-199.
20 Id.
21 135 S. Ct. 1787 (2015). See GT SALT Alert: U.S. Supreme Court Holds Lack of County Personal
Income Tax Credit for Taxes Paid to Other States Violates Commerce Clause.
22 H.B. 72, Laws 2015.
23 Press Release, Office of Maryland Governor Larry Hogan, Sep. 28, 2015.
24 Id.
25 Bill Turque, Supreme Court: Maryland Has Been Wrongly Double-Taxing Residents Who Pay Income Tax to
Other States, THE WASHINGTON POST, May 18, 2015. This estimate appears to be based on the
refund claims that have already been filed with the Maryland Comptroller. Because some Maryland
residents may not have been aware of the litigation, or chose to wait until the U.S. Supreme Court’s
decision until commencing the process to file refund claims, this final amount may be greater.
26 General Notice, Maryland Comptroller of the Treasury, Oct. 17, 2014.
27 Ch. 464 (S.B. 172), § 16, Laws 2014.

implementing the Wynne interest rate requires that the rate be “rounded to the nearest
whole number” and thus, the interest actually being paid is 3 percent, according to a
spokeswoman for the Maryland Comptroller.28
The lower interest rate for Wynne refunds has resulted in a class action complaint being
filed in the Circuit Court for Baltimore City.29 The complaint alleges that the “retroactive
application of a lower interest rate applicable only to Wynne claims is an unconstitutional
taking, and deprives Plaintiff and all other similarly situated Maryland taxpayers of their
vested right in interest that accrued on their refund requests prior to the enactment of the
lower interest rate, without due process or just compensation.”30 Following the filing of
the class action compliant, the Comptroller revised a frequently asked questions document
to state that any taxpayer receiving a refund with 3 percent interest that believed that a
higher interest rate was appropriate would need to make a special claim for the excess
interest.31
Other states have begun to reexamine their state and local income tax statutes in the wake
of Wynne. On August 10, 2015, the Kansas Department of Revenue issued a notice
acquiescing to the Wynne decision and allowing Kansas residents the ability to take a credit
for taxes paid to other states and localities within those states, both on a prospective and
retroactive basis.32 On October 16, 2015, the Iowa Department of Revenue also
conformed to the Wynne decision and expanded the application of the individual income
tax credit that Iowa residents may take for taxes paid to other states.33 Under the
Department’s new practice, the credit may be taken against Iowa local income surtaxes in
addition to Iowa state income tax. Furthermore, the credit now also includes income taxes
paid to local jurisdictions in other states. Because the change is being applied on both a
prospective and retroactive basis, Iowa residents may have income tax refund
opportunities. Under both the Kansas and Iowa guidance, the scope of local income taxes
included within each state tax credit statute is not clear.
While the above discussion highlights the administrative and financial impact of the Wynne
decision for both the state and taxpayers, the case is also having an impact beyond state
and local individual income tax.34 In First Marblehead Corp. v. Commissioner of Revenue,35 the
U.S. Supreme Court issued a summary disposition on October 13, 2015 that granted a
taxpayer’s petition for certiorari, vacated the judgment, and remanded the case to the
28 Kathy Lundy Springuel, ‘Wynne’ Refund-Related Law Attacked by Class Action, BLOOMBERG BNA
WEEKLY STATE TAX REPORT, Nov. 20, 2015.
29 Holzheid v. Comptroller of the Treasury of Maryland, No. _______ (Circuit Court for Baltimore City,
filed Nov. 13, 2015).
30 Id.
31 See Frequently Asked Questions, Maryland Comptroller (revised Dec. 7, 2015).
32 Notice 15-15, Credit for Taxes Paid to Another State, Kansas Department of Revenue, Aug. 10, 2015.
See GT SALT Alert: Kansas Department of Revenue Provides Post-Wynne Guidance on Credits for
Taxes Paid to Other States.
33 The Wynne Decision, Iowa Department of Revenue, Oct. 16, 2015. See GT SALT Alert: Iowa
Department of Revenue Addresses Wynne by Issuing Guidance on Credits for Taxes Paid to Other
States.
34 See GT SALT Alert: U.S. Supreme Court Vacates and Remands Massachusetts Case for Further
Consideration Based on Wynne.
35 23 N.E.3d 892 (Mass. 2015).

Massachusetts Supreme Judicial Court (MSJC) for further consideration in light of the
Wynne decision.36 First Marblehead concerned the Massachusetts financial institutions tax
and the apportionment of income of a taxpayer that facilitated student loans. The MSJC
held that, for purposes of the Massachusetts financial institution excise tax, the
apportionment of income of a taxpayer that facilitated student loans did not violate the
internal or external consistency tests. The basis for the remand lies in the internal
consistency analysis performed by the MSJC. The MSJC’s internal consistency analysis was
cursory and did not consider whether the hypothetical adoption of the same law by all of
the states would violate internal consistency. The Supreme Court’s action in First
Marblehead may encourage other taxpayers to seek review of decisions where courts did not
properly apply the internal consistency test.
3. Remote seller nexus bills
Two remote seller nexus bills were introduced into Congress earlier this year, The
Marketplace Fairness Act of 201537 and the Remote Transactions Parity Act of 2015.38
Both bills currently show no signs of movement through Congress before the end of the
year. Perhaps sensing that the momentum to pass federal legislation in this area has stalled,
and in line with prior enactments in many other states, a flurry of action on the issue of
sales and use tax nexus took place at the state level in Michigan, Tennessee, Nevada,
Washington and Ohio. While the legislation enacted by the states shows signs of similarity
in intent, the wording of each is not identical, with some states focusing on click-through
nexus, others focusing on affiliate nexus, and a handful covering both. As a result,
companies that maintain only tangential contacts through affiliates or associates with these
states will face a potentially significant compliance burden.
The view that a standardized approach might make sense took hold in several states,
including Nevada, Washington and Ohio, which utilized language closely aligning with
New York’s click-through nexus statute. The New York statute has been held by the New
York State Court of Appeals, the state’s highest court, to pass constitutional muster,
specifically that it does not facially violate either the Commerce or Due Process Clauses of
the U.S. Constitution.39 In addition, Nevada’s affiliate nexus provision mirrors the version
adopted by Colorado.
Michigan enacted legislation, effective October 1, 2015, that implements both click-
through nexus and affiliate nexus provisions.40 The click-through nexus provision creates a
presumption of nexus for out-of-state sellers that have an agreement to pay a Michigan
resident for providing a link to the seller’s Web site. The affiliate nexus provision creates a
36 136 S. Ct. 317 (2015).
37 S.698.
38 H.R.2775.
39 Overstock.com, Inc. v. New York State Department of Taxation and Finance, 987 N.E.2d 621 (N.Y. 2013);
cert. denied, 134 S. Ct. 682 (2013). For a discussion of this case, see GT SALT Alert: New York State
Court of Appeals Holds Click-Through Nexus Statute Is Facially Constitutional and GT SALT
Alert: U.S. Supreme Court Declines to Consider Whether New York’s Click-Through Nexus
Statute is Facially Constitutional.
40 Act 553 (S.B. 658), Act 554 (S.B. 659), Laws 2014. See GT SALT Alert: Michigan Enacts Sales
and Use Tax Click-Through Nexus and Affiliate Nexus Provisions.

presumption of nexus for out-of-state sellers if a person or affiliate in Michigan performs
certain activities for the seller.
The click-through nexus presumption may be rebutted by the seller by demonstrating that
the Michigan residents with whom the seller has an agreement did not engage in any
solicitation or any other activity within Michigan that was significantly associated with the
seller’s ability to establish or maintain a market in the state for the seller’s sales of tangible
personal property to purchasers in the state.41 The affiliate nexus presumption may be
rebutted by demonstrating that a person’s activities in Michigan are not significantly
associated with the seller’s ability to establish or maintain a market in the state for the
seller’s sales of tangible personal property to purchasers in the state.42
Meanwhile, Tennessee adopted its rebuttable click-through nexus provision as part of the
Revenue Modernization Act which made sweeping changes to the state’s tax system.43
Under its incarnation of click-through nexus, a dealer is presumed to have substantial
nexus with Tennessee if the dealer enters into an agreement with one or more persons
located in the state under which the person, for a commission or other consideration,
directly or indirectly refers potential customers to the dealer, whether by a link on an
Internet Web site or any other means.44 The dealer’s cumulative gross receipts from these
transactions in the state must exceed $10,000 during the preceding 12 months.
Nevada also enacted legislation in 2015 implementing click-through nexus and affiliate
nexus provisions.45 Beginning October 1, 2015, an out-of-state retailer is presumed to be
doing business in Nevada and is required to impose, collect and remit sales and use taxes if
the retailer enters into an agreement with a resident of Nevada under which the resident
receives consideration for referring potential customers to the retailer through a link on
the resident’s Internet Web site or otherwise.46 This presumption, which is rebuttable by
the retailer, only applies if the cumulative gross receipts from sales by the retailer to
customers in Nevada through all such referrals exceed $10,000 during the preceding four
quarterly periods ending on the last day of March, June, September and December.47
Effective July 1, 2015, the affiliate nexus provision creates a rebuttable presumption of
nexus for out-of-state retailers if a component member of a controlled group has physical
presence in Nevada and performs certain activities.48
Rebuttable click-through nexus provisions enacted by Washington and Ohio in 2015 are
similar to the provisions implemented by Nevada.49 Beginning September 1, 2015, an out-
of-state retailer is presumed to be doing business in Washington and is required to impose,
41 MICH. COMP. LAWS §§ 205.52b(4); 205.95a(4).
42 MICH. COMP. LAWS §§ 205.52b(2); 205.95a(2).
43 H.B. 644, Laws 2015. See GT SALT Alert: Tennessee Enacts Major Legislation Expanding
Nexus, Adopting Market-Based Sourcing.
44 H.B. 644, § 27.
45 Ch. 219 (A.B. 380), Laws 2015. See GT SALT Alert: Nevada Enacts Rebuttable Presumption of
Sales and Use Tax Nexus.
46 Ch. 219 (A.B. 380), Laws 2015, §§ 3.1; 6.1.
47 Id.
48 Ch. 219 (A.B. 380), Laws 2015, §§ 2; 5; 7.
49 See GT SALT Alert: Washington Enacts Tax Changes, Including Click-Through Nexus; GT
SALT Alert: Ohio Enacts Budget Including Click-Through Nexus Provisions.

collect, and remit sales and use taxes if the retailer enters into an agreement with a resident
of Washington under which the resident receives consideration for referring potential
customers, directly or indirectly, to the retailer through a link on the resident’s Internet
Web site or otherwise.50 This provision only applies if the cumulative gross receipts from
sales by the retailer to customers in Washington through all such referrals exceed $10,000
during the preceding calendar year.51
In Ohio, beginning July 1, 2015, an out-of-state retailer is presumed to be doing business
in Ohio and is required to impose, collect and remit sales and use taxes if the retailer
enters into an agreement with one or more Ohio residents under which the resident, for a
commission or other consideration, directly or indirectly refers potential customers to the
seller, whether by a link on a Web site, an in-person oral presentation, telemarketing or
otherwise.52 This presumption, which is rebuttable by the seller, applies only if the
cumulative gross receipts from sales to consumers referred to the seller by all such
residents exceed $10,000 during the preceding twelve months.53
In Vermont, effective December 1, 2015, online retailers will be subject to the state’s
“click through advertising” law and will be required to collect and remit sales tax.54 The
law impacts “retailers who do not have a physical presence in Vermont, but that contract
to advertise on websites of individuals or businesses located in Vermont.”55 The law was
implemented by 2011 legislation that provides that “a remote vendor will be presumed to
have Vermont nexus for purposes of collecting sales tax if it has agreements with residents
to refer customers that led to sales in excess of $10,000 in the previous year.”56 The law
was contingent upon the Attorney General making a determination that 15 or more states
have similar provisions.57 This requirement was met in October 2015.58
4. Compact litigation continues
One of the most prominent corporation income tax topics in 2015 centered around the
ability of taxpayers to use the Multistate Tax Compact’s three-factor apportionment
formula in lieu of a state’s statutory apportionment formula. The potential loss of
substantial amounts of revenue was a common theme (and a defense raised by state tax
authorities) in these cases. The most watched case involving this issue, Gillette Co. v.
Franchise Tax Board, was still undecided at year’s end, with oral arguments being heard by
the California Supreme Court on October 6 and a decision expected in early January 2016.
50 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 202. An out-of-state retailer engaging in such
agreements with Washington residents would also be presumed to have substantial nexus for
purposes of Washington’s B&O tax.
51 Id.
52 OHIO REV. CODE ANN. § 5741.01(I)(2)(g).
53 Id.
54 Updated: Statement of Vermont Department of Taxes on Vermont Click Through Nexus Law, Vermont
Department of Taxes.
55 Id.
56 Id.; VT. STAT. ANN. tit. 32 § 32-9701(I).
57 Id.; Act 45 (H.B. 436), Laws 2011, § 37(13).
58 Id.

The spate of taxpayer-unfavorable decisions in this area in 2015 was not surprising, given
developments in Michigan regarding the Compact in 2014. The Michigan Supreme Court
actually had ruled in favor of IBM and allowed the company to use the Compact’s three-
factor apportionment election.59 However, Michigan subsequently enacted legislation that
retroactively repealed the Michigan statutes adopting the Compact effective January 1,
2008.60 Based on the Supreme Court decision, the Michigan Court of Claims initially
granted IBM’s motion for summary disposition. However, the Court of Claims granted the
Department’s motion to reconsider and motion for summary disposition because the
legislation specifically precluded IBM’s three-factor apportionment election.61 The decision
proved troubling because, given the strength of IBM’s case, the primary reason for the
retroactive legislation was the $1.1 billion in refunds that otherwise would have had to be
paid to taxpayers, many of which are primarily located outside Michigan.
Other state courts quickly followed suit in denying taxpayer challenges. The Minnesota
Tax Court granted the Minnesota Commissioner of Revenue’s motion for summary
judgment and denied a taxpayer’s election to use the equally-weighted three-factor
apportionment formula provided in the Compact.62 The history of the Compact in
Minnesota presented different factual issues from other Compact cases that are being
litigated because, back in 1987, Minnesota repealed Articles III and IV of the Compact
which contained the provision allowing taxpayers to elect to use the equally-weighted
three-factor apportionment formula.63 As a result, Kimberly-Clark, the taxpayer litigating
the issue, had a difficult and heavy burden to convince the Tax Court that it needed to
restore the provisions of Articles III and IV which had been repealed. The Tax Court
decision represents a significant victory for the state because the attorney for the state had
advised the Tax Court that a decision against the state would require the state to
potentially pay $700 million in refunds to similarly situated taxpayers who would file
amended returns electing the use of the equally-weighted three-factor apportionment
formula. The Tax Court did not reference this statement in its opinion. The case is on
appeal before the Minnesota Supreme Court and oral arguments will be held January 11.
The Texas Court of Appeals affirmed a trial court’s decision that a taxpayer cannot elect to
use the equally-weighted three-factor apportionment formula provided by the Compact,
and therefore must use a single receipts factor to compute its Revised Texas Franchise Tax
59 International Business Machines Corp. v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014), reh’g
denied, 855 N.W.2d 512 (2014). For a discussion of this case, see GT SALT Alert: Michigan
Supreme Court Allows Multistate Tax Compact Three-Factor Apportionment Election for 2008
MBT Return.
60 Act 282 (S.B. 156), Laws 2014. For a discussion of this legislation, see GT SALT Alert: Michigan
Enacts Legislation Designed to Eliminate Multistate Tax Compact Apportionment Election
Refunds Allowed by IBM Case.
61 International Business Machines Corp. v. Department of Treasury, Michigan Court of Claims, No. 11-
000033-MT, April 28, 2015. See GT SALT Alert: Michigan Court of Claims Reconsiders and Rules
Against IBM in Multistate Tax Compact Three-Factor Apportionment Case.
62 Kimberly-Clark Corp. v. Comm’r of Revenue, Minnesota Tax Court, File No. 8670-R, June 19, 2015.
See GT SALT Alert: Minnesota Tax Court Denies Use of Multistate Tax Compact’s Equally-
Weighted Three-Factor Apportionment Formula Election.
63 Id.

(RTFT).64 The Court concluded that the RTFT is not an income tax under the definition
of the Compact, and therefore the Compact’s three-factor election does not apply.
Likewise, the case has been appealed by the taxpayer to the state’s highest court, while
numerous administrative-level decisions issued by the Texas Comptroller continue to deny
relief to taxpayers on this issue.
Finally, the Oregon Tax Court granted the Oregon Department of Revenue’s motion for
summary judgment and denied a taxpayer’s election to use the equally-weighted three-
factor apportionment formula provided by the Compact.65 The state of Oregon was a full
member of the Compact for the 2005-2007 corporate excise (income) tax years at issue,
but the state enacted legislation in 1993 directing that inconsistencies between the
Compact provisions and the Oregon apportionment statutes be construed in favor of the
Oregon statutes. The Court determined that the 1993 legislation was enacted for the
purpose of disabling the Compact election and did not violate the U.S. or Oregon
Constitutions or federal statutory law. As a result, the taxpayer could not make the
apportionment election under the Compact.
These defeats reflect the diminishing odds of taxpayer victories on this issue. The taxpayer
win in Gillette in California is being challenged and the lengthy wait for the verdict could
signal a potential reversal. Additionally, states that may face successful challenges by
taxpayers might look to Michigan as a template for how to respond to an adverse finding.
5. Budget delays continue in Illinois and Pennsylvania
While most states managed to clear budgetary issues on a timely basis in 2015, Illinois and
Pennsylvania seem unable to do the same. Illinois is facing a budget crisis stemming from
a “long-simmering ideological and political dispute” between Republican Governor Bruce
Rauner and the Democrat-controlled legislature.66 At the heart of the dispute is the
governor’s desire for reform before talking taxes, according to Carol Portman, president of
the Taxpayers’ Federation of Illinois.67 Reform means a statewide property tax freeze,
workers’ compensation reform, tort reform, term limits for elected officials and
redistricting reform.68 The revenue crisis is partially the result of the expiration on January
1, 2015 of temporary increases in the state’s personal and corporate income tax rates.69
64 Graphic Packaging Corp. v. Hegar, 471 S.W.3d 138 (Tex. Ct. App. 2015). See GT SALT Alert: Texas
Appeals Court Denies Use of Compact’s Three-Factor Formula As Revised Texas Franchise Tax Is
Not Considered an Income Tax.
65 Health Net, Inc. v. Department of Revenue, Oregon Tax Court, No. TC 5127, Sep. 9, 2015. See GT
SALT Alert: Oregon Tax Court Denies Use of Multistate Tax Compact’s Three-Factor
Apportionment Formula Election.
66 Julie Bosman, One State’s Struggle to Make Ends Meet: Why Illinois Is Without a Budget, THE NEW
YORK TIMES, Oct. 26, 2015.
67 Michael Bologna, Illinois Lawmakers Moving Slowly on Tax Legislation Despite Budget Crisis,
BLOOMBERG BNA DAILY TAX REPORT, June 24, 2015.
68 Id.
69 Michael Bologna, Illinois Gov. Rauner Suggests Widening Sales Tax Base to Curb Budget Shortfall,
BLOOMBERG BNA DAILY TAX REPORT, Feb. 5, 2015; Julie Bosman, One State’s Struggle to Make
Ends Meet: Why Illinois Is Without a Budget, THE NEW YORK TIMES, Oct. 26, 2015.

The state comptroller said that the state “is spending more money than it is taking in” and
predicted “about $8.5 billion in unpaid bills by the end of the year.”70
Casualties of the budget delay include the Economic Development for a Growing
Economy (EDGE) Tax Credit, the Film Production Tax Credit and certification of 49
enterprise zones that will become effective January 1, 2016.71 These programs are currently
available but the grant programs under the control of the Department of Commerce will
remain suspended until the budget is enacted. This means that companies may now apply
for these incentives but tax credits will not be disbursed until the budget is signed.
Meanwhile, Pennsylvania is having its own budget crisis and, as of this week, no resolution
has been reached. Despite a constitutional mandate to pass a budget by June 30,
Pennsylvania has not had a budget for the second half of this year. The budget impasse
stems from fundamental differences between first-year Democratic Governor Tom Wolf
and a Republican-controlled state legislature in part over proposed tax increases. Governor
Wolf initially proposed increases in both personal income and sales taxes and a new
severance tax on natural gas drilling in the Marcellus Shale region in order to increase
funding for education, while at the same time providing extensive property tax relief.72
Ultimately, the legislature did not support the tax increases and Governor Wolf was forced
to drop nearly all of them in arriving at a compromise budget framework with Republican
leaders in late November.73
Most recently, the budget debate has moved to the legislature and both the House and
Senate have each put forth competing proposals.74 The Senate proposal, which Governor
Wolf supports, lacks detail on how revenues would be generated, but many believe that
the tax package will include an increase to the state sales tax, an expansion of the sales tax
base to include currently-exempted goods and services, or a combination of both.75 The
House bill, on the other hand, relies on $1 billion in taxes on cigarettes, tobacco products
and online gambling.76 As the impasse continues, non-profit organizations, counties and
school districts have been forced to borrow money or make cuts to continue operating
without state aid.77 However, lawmakers remain optimistic that they can resolve the budget
stalemate by the end of this week.78
70 Julie Bosman, One State’s Struggle to Make Ends Meet: Why Illinois Is Without a Budget, THE NEW
YORK TIMES, Oct. 26, 2015.
71 See GT SALT Alert: Illinois Resumes Operation of EDGE and Film Production Incentive
Programs, But Tax Credit Payouts Remain Suspended. For information about these programs, see
Administration Takes Step Forward on Job Creation Tax Credits, Office of Illinois Governor Bruce
Rauner, Nov. 10, 2015.
72 Leslie A. Pappas, Pennsylvania Legislature Splinters Over Budget, BLOOMBERG BNA DAILY TAX
REPORT, Dec. 11, 2015.
73 Id.
74 Maria Koklanaris, Pennsylvania House, Senate Pass Competing Spending Plans, TAX ANALYSTS STATE
TAX TODAY, Dec. 9, 2015.
75 Charles Thompson, Could this be the week? Protracted Pa. state budget talks to center on final issues this
week, PennLive.com, Dec. 12, 2015.
76 Maria Koklanaris, Pennsylvania House, Senate Pass Competing Spending Plans, TAX ANALYSTS STATE
TAX TODAY, Dec. 9, 2015.
77 Chris Palmer, Fate of Pa. budget now rests with House, Philly.com, Dec. 14, 2015.
78 Id.

6. Unitary business interpretations
In 2015, courts in New York, Minnesota and Vermont issued opinions that provided
guidance on what constitutes a unitary business for tax purposes.
On May 19, the New York State Tax Appeals Tribunal determined that certain members
of a taxpayer group were permitted to file Article 9-A corporate franchise tax returns on a
combined basis, in part because they met the unitary business requirement.79 The
importance of this case lies in the insight the decision provides on what constitutes
“unitary” in New York. While New York’s tax reform marked the official move to
mandatory combined reporting for unitary businesses under common ownership, the New
York legislature did not provide a statutory definition for the term “unitary.” Furthermore,
New York case law on unitary determinations is underdeveloped in comparison to other
jurisdictions.
The taxpayer group in this case, the SunGard Group, largely consisted of four
corporations, as well as their subsidiaries. The SunGard Group’s primary line of business
was providing information technology sales and services, such as data processing,
information availability, software solutions, and software licensing. Significant centralized
corporate-level functions and services existed between members of the group. No charges
were imposed between related entities with respect to the services provided. Also, the
SunGard Group maintained a centralized budgeting system, centralized debt, and, in
particular, a centralized cash management system that allocated funds to underfunded
entities on an interest-free basis. The SunGard Group went through a reorganization and
initially filed their corporate franchise tax returns for the 2005 short period and the 2006
calendar on a separate entity basis. The Group then filed amended returns for the same
period on a combined basis and sought refunds of the franchise tax and the MTA
surcharge of almost $2.2 million. The refunds were denied and SunGard filed petitions for
review with the New York State Division of Tax Appeals (DTA). An administrative law
judge for the DTA denied SunGard’s petition finding that SunGard failed to satisfy the
unitary business requirement to file on a combined basis and also failed to meet the
distortion requirement. The SunGard Group filed an exception to the ALJ’s determination
to the Tribunal. The Tribunal reversed the ALJ’s determination and concluded that,
excepting certain entities acting as holding companies, the SunGard Group met the capital
stock, unitary business, and distortion requirements for the periods at issue and were,
therefore, permitted to file combined franchise tax returns.
The decision stresses the importance of revisiting the issue of whether a unitary
relationship exists for all taxpayers under common ownership filing franchise tax reports
in light of the new reporting requirements effective for tax years beginning on or after
January 1, 2015. In addition, for prior tax periods, the decision’s discussion regarding
distortion may prove instructive. Specifically, the Tribunal looked to the cash management
system and financing obligations to make its finding of distortion. Taxpayers may consider
how these aspects match their facts for any audits or challenges from tax years prior to
79 Matter of SunGard Capital Corp., DTA Nos. 823631, 823632, 823680, 824167, 824256, N.Y.S. Tax
App. Trib., May 19, 2015. See GT SALT Alert: New York Tribunal Determines Article 9-A
Taxpayers Unitary and Allowed to File Franchise Tax Return on Combined Basis.

2015. Further, the decision may impact both ongoing audits as well as future reporting
requirements and ASC 740 determinations for group filers.
Finally, the decision provides some guidance as to the issue of instant unity. The New
York State Department of Taxation and Finance has previously indicated on the
Frequently Asked Questions section of its Web site that the determination as to whether a
corporation was instantly unitary with a taxpayer upon being acquired was a “facts and
circumstances determination upon acquisition.”80 As this decision includes a unitary
determination with respect to entities that were recently acquired, it provides valuable
insight into a particular fact pattern.
Meanwhile, a decision of the Minnesota Tax Court involving the same taxpayer highlights
the importance of statements made by employees during the audit phase of a
controversy.81 SunGard Data Systems, Inc. was found to be unitary with many of its
subsidiaries by the Minnesota Commissioner of Revenue and assessed additional income
tax because an employee from the taxpayer verbally commented, during an audit, that the
company was unitary with those subsidiaries. Based on the statement, the Commissioner
issued a Notice of Change in Tax assessing more than $600,000 in additional tax and
interest. SunGard filed a motion for summary judgment arguing, in part, that the
Commissioner’s reliance on the statement was improper based on the fact that the
employee’s statement was undocumented and based on opinion, not fact. The Court
denied SunGard’s motion for summary judgment finding that there was genuine issue of
material fact for trial, based on the fact that the employee that made the statement
regarding unity was a relatively high-level executive that was asked to meet with the
Department.
On appeal, the Tax Court granted the Commissioner’s motion to dismiss because
SunGard failed to produce any evidence against the Commissioner’s order.82 SunGard did
not present any evidence to show that the employee lacked the authority to make the
comment or that the comment was not made. Most importantly, SunGard did not present
any evidence “to establish that SunGard did not operate as a unitary business during the
years in question.”
In stark contrast, on November 20, 2015, the Vermont Supreme Court affirmed a lower
court holding that a ski resort was not unitary with a parent company that primarily
operated insurance businesses.83 The taxpayer win in AIG is unique in that it reflects the
80 New York State Department of Taxation and Finance, Corporate Tax Reform FAQs,
http://www.tax.ny.gov/bus/ct/corp_tax_reform_faqs.htm (June 15, 2015).
81 SunGard Data Systems, Inc. v. Commissioner of Revenue, Minnesota Tax Court, Docket No. 8461-R,
March 5, 2015.
82 SunGard Data Systems, Inc. v. Commissioner of Revenue, Minnesota Tax Court, Docket No. 8461-R,
Aug. 11, 2015.
83 AIG Insurance Management Services Inc. v. Department of Taxes, Vermont Supreme Court, Docket No.
2014-312, Nov. 20, 2015, aff’g, Vermont Superior Court, Docket No. 589-9-13, July 30, 2014. For a
discussion of the Vermont Superior Court decision, see GT SALT Alert: Vermont Superior Court
Holds Tax Commissioner Incorrectly Determined Insurance Company and Ski Resort Were
Unitary.

ability to have common ownership and not be unitary. The decision provides an
opportunity for taxpayers to review their filing positions in this area.
AIG Insurance Management Services, Inc. (AIG) was a conglomerate that owned more
than 700 businesses worldwide. Nearly all of AIG’s businesses concerned general
insurance, life insurance and retirement services, financial services, or asset management.
However, AIG also owned a subsidiary, Mount Mansfield Company (MMC), which
owned, operated and conducted business as Stowe Mountain Resort, a Vermont ski resort
with summer attractions and a year-round lodging and conference business. AIG did not
own any other business similar to a ski resort.
In the lower court decision, the testimony of the parent company’s witnesses described the
ski resort as a discrete business enterprise unrelated to the parent company’s insurance and
financial businesses. Because the Vermont Tax Commissioner did not offer a reason to
disregard the testimony and presume the businesses were unitary, the record could only
support a conclusion that the Commissioner’s finding of a unitary relationship was outside
the constitutional boundaries of the unitary business principle.
On appeal, the Vermont Supreme Court reviewed the applicable combined reporting
statute and regulations84 and determined that AIG was able to show that there were no
economies of scale, the two businesses were not functionally integrated and the parent
company did not direct the policy of operations of the subsidiary. Vermont regulations
define a unitary business, provide guidance on determining the existence of an
interdependence of functions and “adopt the decisional law of the U.S. Supreme Court.”
The Vermont Supreme Court explained that the U.S. Supreme Court does not adopt a
bright-line test but instead looks to “several indicators to determine if the subsidiary
derives contributions to its income resulting ‘from functional integration, centralization of
management, and economies of scale.’”85
For purposes of economies of scale, the Vermont Supreme Court noted that there was
“no opportunity for common centralized distribution or sales, and no economy of scale
realized by their operations” because the two businesses were so dissimilar: MMC was a
ski resort and AIG was in the insurance and financial service business. In order to find
centralization of management, the Court explained that the key inquiry is “’whether the
management role that the parent does play is grounded in its own operational expertise
and its overall operational strategy.”86 The Court noted that there was “no overlap in
officers between the entities.” Furthermore, the Court noted that there was no evidence
showing that AIG had actual control over its subsidiary through its power to make board
and management appointments. In finding that there was no functional integration, the
Court said that the parent and the subsidiary: (1) operate in different lines of business and
are not part of a vertically integrated business; (2) do not engage in joint purchasing or
84 VT. STAT. ANN. tit. 32, § 5811; VT. CODE R. 1-3-104:1.5862(D).
85 Citing F.W. Woolworth Co. v. Taxation & Revenue Dep’t, 458 U.S. 354, 364 (1982) (quoting Mobil Oil
Corp. v. Comm’r of Taxes, 445 U.S. 425, 438 (1980)).
86 Citing Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 180 n.19 (1983).

other common activities; and (3) do share advertising and offices or services.87 The Court
also found that the financing that AIG provided to MMC was “more of an investment
than an operational function.”
7. Businesses exert pressure on Connecticut, Nevada and District of
Colombia to repeal legislation
Three jurisdictions are dealing with the fallout from notable legislation enacted in 2015
that proved unpopular with the business community.
On August 11, 2015, the District of Columbia City Council approved Act 21-148,88 which
amended several key provisions in the FY16 Budget, including a “tax haven list” that
specifically listed jurisdictions considered to be tax havens by the District of Columbia.89
The list was comprised of 39 countries, including the British Virgin Islands, the Cayman
Islands, Luxembourg, and the U.S. Virgin Islands.
The designation of a jurisdiction on a tax haven list may have significant consequences. In
determining corporate income tax liability on a water’s-edge unitary combined reporting
basis, the combined income includes the entire net income and apportionment factors of
any member doing business in a tax haven.90 Thus, the scope of combined reporting is
expanded by including entities that conduct business in these jurisdictions, and in many
cases, the combined group’s overall District corporate income tax liability increases.
The tax haven list was met with contention from the business community as well as
representatives from countries identified on the tax haven list. Opposition to the tax haven
list was spearheaded by U.S. Congresswoman Stacey Plaskett, who represents the U.S.
Virgin Islands and worked with members of Congress and City Council Chairman Phil
Mendelson.91 Additionally, the Council On State Taxation (COST) addressed a letter to
Chairman Mendelson, calling the tax haven list “an attempt to arbitrarily apply
discriminatory treatment to corporations doing business in the District of Columbia, based
on the countries in which their affiliates conduct business.”92
In response, the District of Columbia enacted emergency legislation, entitled the Fiscal
Year 2016 Second Budget Support Clarification Emergency Amendment Act of 2015,
repealing the tax haven list from the FY16 Budget, as amended by Act 21-148, after only
being in effect for less than two weeks.93 The District’s emergency legislation eliminating
87 The Court noted that AIG paid market prices for the conferences and events held at the ski
resort and that AIG employees did get discounts at the ski resort.
88 D.C.B. 21-158.
89 See GT SALT Alert: District of Columbia Acts to Repeal Tax Haven List.
90 D.C. CODE ANN. § 47-1810.07(a)(2)(G).
91 Press Release, Office of U.S. Congresswoman Stacey Plaskett, Representing U.S. Virgin Islands,
Nov. 5, 2015. Congresswoman Plaskett explained that “[a]lthough at first glance this was merely a
measure in the District of Columbia’s legislature, the fact that DC’s budget is approved and adopted
by the U.S. House of Representatives would have been tacit support of Congress to DC’s adverse
designation of the Virgin Islands.”
92 Email from Douglas L. Lindholm, RE: Concerns with Subtitle O, “Combined Reporting Clarification,” in
the Fiscal Year 2016 Budget Support Act of 2015, Council on State Taxation (June 12, 2015), available at
http://cost.org/WorkArea/DownloadAsset.aspx?id=90311.
93 Act 21-202 (D.C.B. 21-472), Laws 2015, expiring Feb. 21, 2016.

the tax haven list is not final. In the District, emergency legislation is valid for 90 days,94
after which it will expire and must be revisited. Emergency legislation generally transitions
into temporary legislation. Temporary legislation remains in effect for no longer than 225
days. Final (or permanent) legislation will make the repeal valid until modified by other
legislation. Despite the broad opposition to the tax haven list, Chairman Mendelson has
voiced his continuing support for clearer guidelines regarding tax havens.95
It will be interesting to see if other states, in the next legislative session, show signs of
interest in creating a tax haven list. While states may find the tax haven list an attractive
vehicle and a supplement to a list of qualitative factors of tax havens that have been used
by several states in recent years to aid in these types of classifications, they are likely to
receive negative feedback from countries that are listed because of the stigma of such
characterization.
In 2015, Nevada also enacted legislation that proved unpopular with businesses, though
the fate of such legislation will not be decided for some time.96 The enactment of the
Nevada commerce tax was a very unlikely step taken by a jurisdiction that traditionally has
been viewed as one of the most business-friendly jurisdictions in the United States.
According to budgetary estimates, the new commerce tax alone is expected to raise $1.1
billion in new and extended taxes, with much of the revenue being earmarked for
education spending.
Under the new commerce tax, beginning July 1, 2015, each business entity engaging in a
business in Nevada during a taxable year with annual Nevada-sitused gross revenue
exceeding $4 million is required to file a commerce tax return and pay the commerce tax.97
The tax is imposed on each “business entity,” including corporations, partnerships, limited
liability companies, and limited liability partnerships, on a separate company basis.98 The
commerce tax does not apply to certain businesses specifically excluded from the
“business entity” definition, including passive entities. Taxable Nevada gross revenue
exceeding the $4 million annual threshold is subject to tax at a rate based upon the specific
industry in which the business entity is primarily engaged.99
The fate of the tax, however, is far from assured, as Nevada taxpayers are currently trying
to get the commerce tax repealed via voter referendum.100 Supporters of the repeal
94 How a Bill Becomes a Law, Council of the District of Columbia, http://dccouncil.us/pages/how-a-
bill-becomes-a-law.
95 Raymond Hainley, DC repeals tax-haven list, THE ROYAL GAZETTE, Nov. 9, 2015.
96 See GT SALT Alert: Nevada Enacts Budget Bill Including New Commerce Tax.
97 Ch. 487 (S.B. 483), Laws 2015, § 20. The term “taxable year” is defined to include the 12-month
period beginning on July 1 and ending on June 30 of the following year. Ch. 487 (S.B. 483), Laws
2015, § 12.
98 Ch. 487 (S.B. 483), Laws 2015, § 4.1. The term “business entity” also includes a proprietorship,
business association, joint venture, business trust, professional association, joint stock company,
holding company and any other person engaged in business. Id.
99 Ch. 487 (S.B. 483), Laws 2015, § 23. For purposes of the specific tax rates applied, the commerce
tax statute references industries by their 2012 North American Industry Classification System
(NAICS) category.
100 Sandra Chereb, Referendum challenging Nevada commerce tax allowed to proceed, LAS VEGAS REVIEW-
JOURNAL, Dec. 2, 2015.

recently scored a victory as Carson City District Court Judge James Wilson held that the
referendum could proceed and was not “flawed.”101 In order to be on the November 2016
ballot, supporters must get 55,000 signatures by the June 21, 2016 deadline.102
Meanwhile, Connecticut is facing a backlash against its recently enacted mandatory
combined reporting provision. Connecticut’s initial budget bill, H.B. 7051, was passed by
the legislature on June 3 at the conclusion of the regular legislative session by a slim
margin,103 despite significant efforts from large Connecticut-based corporations to thwart
its passage. Before the initial budget bill was signed into law by Governor Dannel Malloy,
several prominent Connecticut-based companies voiced significant concern regarding its
tax implications and threatened to move their operations outside the state.
As a result, the Connecticut legislature was called into special session to enact S.B. 1502
implementing the budget and altering some of the more controversial provisions included
in the original law, specifically delaying the implementation of the unitary combined
reporting requirement. On June 30, Governor Malloy signed two bills enacting the budget
legislation.104 Under the legislation, for years beginning on or after January 1, 2016, unitary
combined reporting is required for corporations who are members of a combined
group.105 Prior law which allowed elective combined or unitary reporting will be rendered
obsolete.106
However, the state is revisiting their new combined reporting law after General Electric
and other large businesses threatened to move their corporate headquarters.107 On
December 8, lawmakers passed a fiscal package in a one-day special legislative session that
contained significant amendments to the mandatory combined reporting requirements.108
The package “made changes important to GE and other companies to send the right
signal to the business community,” according to Democratic Senate Majority Leader Bob
Duff.109 While GE has not indicated whether the “approved amendments addressed the
company’s concerns,” the governor is expected to sign the bill.110
101 Id.
102 Id.
103 The legislation was approved by the Senate by a 19-17 vote just before the scheduled expiration
of the legislative session on June 3. House members had approved the bill by a vote of 73-70 earlier
the same day. See GT SALT Alert: Connecticut Enacts Sweeping Tax Reform Including Mandatory
Unitary Reporting Requirement.
104 Public Act 15-244 (H.B. 7061), Laws 2015; S.B. 1502, Special Session, Laws 2015.
105 Id.
106 CONN. GEN. STAT. §§ 12-222(g)(2); 12-217n(b)(2); 12-223a(e); 12-223f(b).
107 Christopher Keating, Connecticut Fighting To Keep GE Headquarters, HARTFORD COURANT, Nov.
16, 2015.
108 Martha W. Kessler, Facing GE Threats, Connecticut Lawmakers Amend Tax Laws, BLOOMBERG BNA
DAILY TAX REPORT, Dec. 10, 2015.
109 Id.; see S.B. 1601, December Special Session, 2015.
110 Id.

8. North Carolina and District of Columbia set, and hit revenue
targets
Increasingly, states are pegging corporate income tax rate adjustments to overall state tax
revenue targets. In 2015, this policy resulted in a benefit that will be recognized by
taxpayers in the near future.
In 2013, North Carolina enacted significant tax reform lowering individual and corporate
income tax rates, broadening the sales tax base, and limiting the ability of local
jurisdictions to institute and apply local business privilege taxes/fees.111 Originally, North
Carolina lowered the corporate income tax rate from 6.9 percent to 6 percent effective for
tax years beginning on or after January 1, 2014, and to 5 percent for tax years beginning on
or after January 1, 2015. Additional reductions to 4 percent for 2016 tax years and 3
percent for 2017 tax years were provided in the 2013 legislation, but were tied to specific
revenue goals for the fiscal years ending June 30, 2015 and 2016, respectively, reported by
the North Carolina Comptroller.112 For the corporation income tax rate to be reduced to 4
percent for the 2016 tax year, net general fund collections for the 2014-2015 fiscal year had
to exceed $20.2 billion. For the corporation income tax rate to be reduced to 3 percent for
the 2017 tax year, net general fund collections for the 2015-2016 fiscal year would have
had to exceed $20.975 billion. The law specified that the Secretary of the North Carolina
Department of Revenue was required to notify taxpayers of the rate decrease.113 On July
28, 2015, North Carolina Governor Pat McCrory announced the state had met the
necessary revenue target for the fiscal year ended June 30, 2015 to lower the corporate
income tax rate from 5 percent to 4 percent effective for tax years beginning on or after
January 1, 2016.114
Following a lengthy budget negotiation, North Carolina took additional steps to reduce the
corporation income tax rate. House Bill 97 acted to codify the change in the corporation
income tax rate from 5 percent to 4 percent for 2016 and also made changes to the rate
reduction trigger. When net General Fund tax collected in any fiscal year exceeds $20.975
billion, the tax rate will be decreased to 3 percent effective for the tax year beginning the
following January.115 Consistent with the procedure that resulted in the reduction of the
corporation income tax from 5 percent to 4 percent, a rate reduction to 3 percent must be
communicated to taxpayers by the Secretary of Revenue.116
Meanwhile, the District of Columbia accelerated its corporate income tax rate reductions
as a result of meeting revenue targets.117 The rate reductions were originally part of
legislation enacted in 2014. On July 14, 2014, the District of Columbia Council adopted
111 Ch. 316 (H.B. 998), Laws 2013; N. C. GEN. STAT. § 105-130.3. For a discussion of this
legislation, see GT SALT Alert: North Carolina Enacts Legislation Reducing Income Tax Rates,
Expanding Sales Tax to Service Contracts.
112 Ch. 316 (H.B. 998), Laws 2013; N. C. GEN. STAT. § 105-130.3A.
113 Id.
114 Press Release, Office of North Carolina Governor Pat McCrory, July 28, 2015. See GT SALT
Alert: North Carolina Lowers Corporate Income Tax Rate, Now the Lowest Top Corporate Rate in
the United States.
115 N. C. GEN. STAT. § 105-130.3C(a).
116 See GT SALT Alert: North Carolina Enacts Significant Income, Franchise and Sales Tax
Legislation, Contingent Upon Further Legislative Action.
117 Act 21-148 (D.C.B. 21-158), Laws 2015, amending D.C. CODE ANN. § 47-181.

the Fiscal Year 2015 Budget Support Emergency Act of 2014, overriding a veto by then-
Mayor Vincent Gray.118 Among other things, the legislation reduced the corporate income
tax and unincorporated business tax rates. For the taxable year beginning after December
31, 2014, the corporate income tax rate is set at 9.4 percent.119 Similarly, the
unincorporated business tax rate is reduced to 9.4 percent for the tax year beginning after
December 31, 2014.120 The legislation provided that the rate could decrease further in
future tax years if specific tax revenue thresholds are met and corresponding budgets
include the reductions.121
9. MTC works on arm’s length adjustments and market-based
sourcing
The MTC continued its efforts in attempting to provide tools to states in the areas of
arm’s length adjustments and model market-based sourcing regulations. These
developments, while still incomplete, provide taxpayers with detail on what hot-button
issues could be ripe for examination by state tax authorities at the audit level.
On May 7, 2015, the MTC’s Executive Committee approved its “Design for an MTC
Arm’s-Length Adjustment Service.” The goal of the program, known by the acronym
ALAS, is to help states deal with related-party income shifting issues, and the program
requires at least ten states to participate.122 Six states to date – Alabama, Iowa, Kentucky,
New Jersey, North Carolina, and Pennsylvania – expressed an interest in becoming charter
ALAS members. Specifically, ALAS intended to provide participating states with enhanced
services to audit corporate taxpayers’ transfer pricing agreements and intercompany
contracts. With ALAS in place, states would be expected to become better equipped to
recover lost tax revenue resulting from perceived improper shifting of income due to
inadequate transfer pricing studies and lapsed intercompany agreements.
The program requires a budget of $2 million annually over the charter period with the cost
to each state being $200,000 if the MTC gets ten states to participate.123 The program
envisions that ALAS will be developed through three stages.124 The first stage, the “pre-
launch stage,” was to have been completed by July 2015 and the “critical activity” in this
stage was state recruitment.125 The “Design for an MTC Arm’s-Length Adjustment
Service” provided that if “a sufficient number of states do not commit by July 2015, but
prospects remain for achieving that number, all of the stages and dates in this design
would need to be adjusted until the requisite state support is attained.”126 Although the
program requires ten states to participate, MTC Executive Director Gregory S. Matson has
118 Act 20-377 (D.C.B. 20-849), Laws 2014. See GT SALT Alert: District of Columbia Enacts
Budget Including Single Sales Factor Apportionment, Market-Based Sourcing.
119 D.C. CODE ANN. § 47-1807.02(a)(5).
120 D.C. CODE ANN. § 47-1808.03(a)(5).
121 D.C. CODE ANN. § 47-1807.02(a)(6).
122 Design for an MTC Arm’s‐Length Adjustment Service, Multistate Tax Commission (approved by
Executive Committee May 7, 2015).
123 Id.
124 Id.
125 Id.
126 Id.

indicated that “a nine-member group may work depending on the states.”127 At present, it
appears that ALAS is moving forward even without the requisite number of states. On
December 11, the Executive Committee approved the creation of an Arm’s-Length
Adjustment Service Committee.128
The MTC has devised two approaches to assist states in their transfer pricing audit
processes. Under the first approach, the MTC will actively leverage its economic and
technical expertise to conduct analyses of taxpayer-provided transfer pricing studies and,
where appropriate, recommend alternatives to taxpayer positions taken based on those
studies. Under the second approach, the MTC will educate and train state-employed staff
and provide an array of resources at staff disposal. The overall goal of providing such
resources is to help states improve their tax administrative and compliance processes,
expand audit coverage for related party transactions in the MTC Audit Program, and
provide assistance to states in developing and resolving cases.129
The MTC’s draft market-based sourcing regulations, released on November 30, 2015, were
approved by the Commission’s Uniformity Committee on December 10, 2015.130 The
rules were based on market-based sourcing regulations issued by Massachusetts, and other
states potentially may utilize these rules in the near future.131 Full adoption by the MTC
would require approval by the MTC’s Executive Committee, and may be undertaken next
summer.
The draft regulation begins by providing general principles of application that a taxpayer
should follow, including determining “its method of assigning receipts in good faith.”132
Reg.IV.17 provides detailed “assignment rules that apply sequentially in a hierarchy.”133 If
a state of assignment cannot be fixed, there are reasonable approximation rules.134 The
regulation addresses, among other things, the sourcing of receipts from the sale, rental,
lease or license of real property135 and the rental, lease or license of tangible personal
property.136 Detailed rules and examples are provided for the sourcing of receipts from a
sale of a service.137
127 Jennifer McLoughlin, Multistate Commission to Consider Model Sourcing Regulations, BLOOMBERG
BNA DAILY TAX REPORT, Dec. 14, 2015.
128 Id.
129 Design for an MTC Arm’s‐Length Adjustment Service, Multistate Tax Commission (approved by
Executive Committee May 7, 2015), available at: http://www.mtc.gov/getattachment/The-
Commission/Committees/ALAS/Draft-of-Final-Design-Design-for-ALAS.PDF.aspx (accessed on
April 16, 2015).
130 Amy Hamilton, MTC Market-Based Sourcing Rules Clear First Hurdle In Adoption Process, TAX
ANALYSTS STATE TAX TODAY, Dec. 11, 2015.
131 Jennifer McLoughlin, MTC Releases Draft of Market-Based Sourcing Regulations, BLOOMBERG BNA
DAILY TAX REPORT, Dec. 4, 2015.
132 Multistate Tax Commission Allocation and Apportionment Regulations, Reg. IV.17.(a).(4)
(Draft).
133 Id.
134 Multistate Tax Commission Allocation and Apportionment Regulations, Reg. IV.17.(a).(5)
(Draft).
135 Multistate Tax Commission Allocation and Apportionment Regulations, Reg. IV.17.(b) (Draft).
136 Multistate Tax Commission Allocation and Apportionment Regulations, Reg. IV.17.(c) (Draft).
137 Multistate Tax Commission Allocation and Apportionment Regulations, Reg. IV.17.(d) (Draft).

The Council On State Taxation has already released a letter highlighting some areas of
concern.138 COST opposed the “use of a ‘throwout’ provision for a taxpayer that is not
taxable in another jurisdiction” and expressed concern about the “reasonable
approximation” rules.139 Specifically, the organization felt that the reasonable
approximation rules “are being promulgated in a manner that places taxpayers and tax
agencies on an uneven footing during the return filing and audit processes.”140 A final vote
on the draft regulations may occur in 2016.141
10. U.S. Supreme Court issues landmark decision in Obergefell
On June 26, 2015, the U.S. Supreme Court, in a landmark decision, held that same-sex
couples “may exercise the fundamental right to marry in all States.”142 Furthermore, “there
is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed
in another State on the ground of its same-sex character,” the Court said.143
Independent of the significant social ramifications of the ruling, Obergefell largely resolved
many of the intricate personal income tax implications in states that historically did not
recognize same-sex marriage. Thirteen states that impose personal income taxes did not
recognize same-sex marriage prior to the ruling: Alabama, Arkansas, Georgia, Kansas,
Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio and
Tennessee.144 Affected taxpayers that were married in a state that recognized same-sex
marriage and were able to jointly file federal income tax returns (following the 2013
Windsor145 decision striking down federal restrictions against same-sex marriage contained
in the Defense of Marriage Act) had significant issues in filing state income tax returns in
these states that did not recognize same-sex marriage. Essentially, these taxpayers were
required to prepare two pro forma separate federal income tax return filings in order to file
two separate state income tax returns. Often, filing on a separate basis resulted in
additional taxation than would have resulted through a joint tax return filing.
Following Obergefell, the states that previously did not recognize same-sex marriage have
issued written guidance or issued a statement addressing filing treatment of same-sex
couples, providing certainty to those impacted.146 In addition, taxpayers that were married
138 COST Comments on Proposed Section 17 Model Market Sourcing Regulations, Council On State Taxation,
Dec. 9, 2015.
139 Id.
140 Id.
141 Amy Hamilton, MTC Market-Based Sourcing Rules Clear First Hurdle In Adoption Process, TAX
ANALYSTS STATE TAX TODAY, Dec. 11, 2015.
142 Obergefell v. Hodges, 135 S. Ct. 2584 (2015).
143 Id.
144 Christopher Brown, States Update Joint Filing Policies for Same-Sex Couples, BLOOMBERG BNA
DAILY TAX REPORT, Aug. 18, 2015. See also The State of Marriage Equality In America, Maryland
Office of the Attorney General, April 2015. It should be noted that Texas and South Dakota, which
historically did not recognize same-sex marriage, do not impose a state income tax.
145 United States v. Windsor, 133 S. Ct. 2675 (2013).
146 Christopher Brown, States Update Joint Filing Policies for Same-Sex Couples, BLOOMBERG BNA
DAILY TAX REPORT, Aug. 18, 2015. See Alabama Department of Revenue, Tax Guidance: Alabama
Income Tax Filing Status for Same-Sex Couples; Arkansas Department of Finance and Administration,
Arkansas State Revenue Tax Quarterly Newsletter (Oct./Nov./Dec. 2015); Georgia Department of
Revenue, Guidance For Same-Sex Couple Filing in Georgia (July 14, 2015); Kentucky Department of
Revenue, Web Publication – Same Sex Couples; Louisiana Department of Revenue, Revenue Information

but previously could not file jointly in these states will have the opportunity to amend
prior year returns that are still open under the statute of limitations to change their filing
status from separate to joint, resulting in potential refund opportunities.
________________________________________________________
The information contained herein is general in nature and based on authorities that are subject to change.
It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by
Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific
circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant
Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant
Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that
could affect information contained herein. No part of this document may be reproduced, retransmitted or
otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying,
facsimile transmission, recording, re-keying or using any information storage and retrieval system without
written permission from Grant Thornton LLP.
This document supports the marketing of professional services by Grant Thornton LLP. It is not written
tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject
of this document should contact Grant Thornton or their tax advisor to discuss the potential application of
this subject matter to their particular facts and circumstances. Nothing herein shall be construed as
imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter
addressed.
Bulletin No. 15-028 (July 2, 2015); Michigan Department of the Treasury, Notice – Michigan Income Tax
filing Status For Married Same-Sex Couples (July 1, 2015); Mississippi Department of Revenue, Notice
80-15-002: Notice Income Tax Filing Status For Married Same-Sex Couples (Aug. 3, 2015); Nebraska
Department of Revenue, Nebraska Department of Revenue Issues Income Tax Return Guidance To Same-Sex
Married Couples (July 7, 2015); Nebraska Department of Revenue, Revenue Ruling 22-15-2: Filing an
Original or Amended Nebraska Individual Income Tax Return as a Same-Sex Married Couple (July 7, 2015);
North Dakota Office of the State Tax Commissioner, North Dakota Income Tax Filing Status For
Same-Sex Spouses (July 13, 2015); Ohio Department of Taxation, Individual Income Tax – Information
Release IT 2015-01 (July 2, 2015).

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