Multistate Tax Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. Our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes. Tax Controversy Even with thorough tax planning, some companies may find themselves under examination or in litigation with state and local governments. To minimize the impact of tax examinations and tax litigation, our professionals: • Work closely with tax officials to reduce assessments during and after an audit. • Prudently litigate tax assessments through all levels of appeal. • Provide experienced negotiation services for all types of tax settlements, including “high-risk” controversies. We assist clients with the following Tax Controversy services: Service

Description

Tax Types

Audit Defense • Outsource • Negotiation • Resolution • Support

Represent the client to achieve maximum reduction in audit assessments by working directly with government tax agents and using audit best practices, including up-front sample period negotiation, detailed review and analysis of agent findings and error ratios, legal research, negotiation of issues, and filing protests and appeals, as necessary.

Sales, use, gross receipts, income, franchise, real property, personal property, unclaimed property

Managed or Participatory Audits

Perform the audit for a client (after receiving a notice of audit or pro-actively approaching the government) rather than the government tax agent in states that provide for managed or participatory audits. Benefits provided typically include penalty waiver, significant interest waiver and control of the audit process by McDonald Hopkins.

Sales, use, gross receipts in those states that provide for these types of audits

Tax Appeals

Represent the client in the appeal of tax assessments or denied refund claims from tax administrative appeals through the state and U.S. Supreme Court, as necessary.

Sales, use, gross receipts, income, franchise, real property, personal property, unclaimed property

High-Net Worth Individual-Audit Defense and Appeals

Defend against income tax audits and assessments related to various types of deferred compensation, stock options, or changes in tax domicile. Includes working with tax officials to negotiate settlements or litigation of assessments to any level of appeal.

Personal income tax, state and local

High Risk Controversy

Assist clients in developing their legal positions and pursuing favorable settlement of certain highrisk audit positions and tax assessments when litigation risks and costs are high.

Any tax type that has been assessed or has been proposed for assessment

McDonald Hopkins Multistate Tax

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Tax Evaluation The myriad of multistate tax laws can be difficult to comply with on a consistent basis. Our professionals assist clients with evaluating their current multistate tax positions to determine if they are entitled to any refunds or have any possible exposures. Our professionals: • Partner with our clients to analyze tax filings and tax payments made to vendors to determine if the appropriate amount of tax has been paid. • Work with the applicable multistate and local taxing jurisdiction to obtain refunds of any overpayments. • Develop strategies to resolve any exposures identified as part of the evaluation. • Assist clients with addressing the causes of the refunds or exposures so they can be in compliance prospectively. We assist clients with the following Tax Evaluation services: Service

Description

Tax Types

R.A.C.E. -Refund Analysis & Compliance Evaluation

Provide a “reverse” tax audit service designed primarily to identify refund and overpayment opportunities, secondarily to identify areas of significant risk.

Sales, use, gross receipts, income, franchise, real property, personal property, unclaimed property

CAT ScanTM

Conduct a proactive analysis of a client’s Ohio Commercial Activity Tax (CAT) payments and filings to determine optimal filing positions, identify potential refunds, and mitigate future exposure.

Sales, use, gross receipts, income, franchise

Multistate Nexus Review

Analyze a client’s activities to determine those states in which the client has filing requirements (i.e., nexus) and an estimated tax risk computation.

Sales, use, gross receipts, income, franchise, real property, personal property, unclaimed property

Voluntary Disclosure

Negotiate with state and local jurisdictions to mitigate historical tax obligations for a client that has failed to file for various taxes where an obligation exists. Benefits typically include penalty waiver and limited look-back periods.

Sales, use, gross receipts, income, franchise, real property, personal property, unclaimed property

Due Diligence

Analyze a target’s tax audit exposure and potential successor liability issues relating to the client’s purchase of target.

Sales, use, gross receipts, income, franchise, real property, personal property, unclaimed property

In-House Training

Design and deliver a customized sales and use tax training program specific to the client’s industry and work environment. The client benefits by avoiding tax overpayments and unexpected tax liabilities in the future.

Sales, use

Tax Compliance Matrix

Research and complete an easy to use, determination tool for use in tax compliance by the client’s accounting and/or tax personnel. Provides management with the necessary back-up for more in-depth analysis when necessary and allows for efficient updating for future law/regulatory changes.

Sales, use, gross receipts, income, franchise

TM

McDonald Hopkins Multistate Tax

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Tax Planning We believe that even in an environment of increased scrutiny of tax structures and increased enforcement efforts by government tax officials, significant tax saving opportunities still exist. We work proactively with clients to: • Identify and implement tax reduction strategies consistent with business operations. • Review existing tax planning structures to ensure their integrity upon examination. • Minimize multistate tax consequences of business transactions. We assist clients with the following Tax Planning services: Service

Description

Tax Types

Multistate Tax Planning

Review a client’s operations, identify alternative legal structures, and implement those structures to take advantage of state tax benefits.

Sales, use, gross receipts, income, franchise, real property, personal property, unclaimed property

Residency Planning

Perform an analysis of the impact of changing one’s tax domicile, especially in light of the sale of a business or pending retirement of a high-ranking company leader. Assist individual clients with the specific steps necessary to effectively establish tax domicile in another state.

Personal income taxstate and local

UCO-Use Tax Compliance Optimizer-Effective Rate Agreements

Simplify and lower the cost of a client’s use tax compliance by developing an effective tax rate agreement with the state taxing authority.

Use

Business Expansion Planning

Analyze (on a proactive basis) multijurisdictional opportunities and exposures associated with business expansion (gross business volume, new products, new marketing methods or new locations).

All appropriate taxes for industry

Relocation Analysis

Analyze and compare state and local tax costs related to alternate locations being considered by a client.

All appropriate taxes for industry

State and Local Credits and Incentives

Review client’s tax filings to determine the availability of unclaimed state and local tax credits or incentives. Assist a company with obtaining tax incentives when expanding an existing facility or building a new facility.

All appropriate taxes for industry as well as other nontax incentives

McDonald Hopkins Multistate Tax

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Tax Policy Businesses today struggle with ever-changing tax laws and government policies in multiple jurisdictions. Our multistate tax professionals have a wealth of experience in dealing directly with government leaders in most states and Washington D.C. to address tax policy matters. Working closely with professionals in our Government Affairs Practice, we work with clients to: • Develop and advocate strategic tax policy positions. • Monitor and impact tax law developments and trends. • Negotiate valuable tax incentives to support business expansion and growth. We assist clients with the following Tax Policy services: Service

Description

Tax Types

Tax Policy Advocacy

Draft legislation language and lobby state and local officials to enact legislation that protects the interests of our client, promotes a more positive tax environment, or clarifies applicability of existing tax laws.

All taxes

Industry Tax Impact Analysis

Develop a white paper analysis related to current or proposed tax laws which apply to an industry for consideration by government policy makers.

All taxes

Association Tax Counsel

Operate as “special tax counsel” for a business association, which includes monitoring and analyzing state legislative and tax developments.

All taxes

Multistate Tax Services Team: McDonald Hopkins LLC

David M. Kall 216.348.5812 [email protected] Mark D. Klimek 216.348.5453 [email protected] Susan Millradt McGlone 216.430.2022 [email protected] Jason M. Smith 216.430.2033 [email protected] Michael G. Caputo (non attorney professional) 614.458.0025 [email protected] Rebecca M. Kuhns (non attorney professional) 614.458.0043 [email protected]

Steven C. LaTourette 202.559.2600 [email protected] Jennifer LaTourette 202.559.2600 [email protected] McDonald Hopkins Government StrategiesLLC Although McDonald Hopkins Government Strategies™ LLC is owned by the law firm McDonald Hopkins LLC, McDonald Hopkins Government Strategies™ LLC is not a law firm and does not provide legal services. Accordingly, the retention of McDonald Hopkins Government Strategies™ LLC does not create a client-lawyer relationship and the protections of the client-lawyer relationship, such as attorney-client privilege and the ethics rules pertaining to conduct by lawyers, do not apply.

McDonald Hopkins LLC Carl J. Grassi President

Chicago

Cleveland

Columbus

300 N. LaSalle Street Suite 2100 Chicago, IL 60654 312.280.0111

600 Superior Avenue, East Suite 2100 Cleveland, OH 44114 216.348.5400

250 West Street Suite 550 Columbus, OH 43215 614.458.0025

Detroit McDonald Hopkins PLC

Miami

West Palm Beach

200 South Biscayne Blvd. Suite 2600 Miami, FL 33131 305.704.3990

505 S. Flagler Drive Suite 300 West Palm Beach, FL 33401 561.472.2121

39533 Woodward Avenue Suite 318 Bloomfield Hills, MI 48304 248.646.5070

mcdonaldhopkins.com

Multistate Tax CAT Scan™ Reduce the symptoms of unhealthy tax costs Our CAT Scan™ is a minimally invasive, comprehensive one-day process, specifically designed to provide a proactive analysis of a client’s business structure and activities, along with their CAT compliance, to determine optimal filing positions, identify potential refunds, and mitigate future exposure. 1. Initial Exam Our experienced tax professionals will review the operations of the business to gain an understanding of its principal transactions and legal structure. 2. CAT Scan™ We will review important aspects of the CAT law with the company’s tax staff, including a detailed discussion of the CAT’s compliance requirements. 3. Diagnosis By comparing the company’s operation with the CAT law, we will work with the company to identify important decision points that should be addressed in order to maximize the healthy aspects and minimize the unhealthy aspects of the tax law.

Do You Need a CAT Scan™? One-Day Ohio Commercial Activity Tax (CAT) Check-Up Since July 1, 2005, Ohio’s CAT has created a unique set of symptoms for taxpayers to diagnose when complying with their state and local tax burden. Because the CAT is a new system of business taxation in Ohio and the United States, there are numerous opportunities to misdiagnose compliance issues even for the experienced tax professional. Adding to the complexity of the tax structure, the Ohio Department of Taxation (ODT) is aggressively auditing for CAT with over 70 trained auditors. To assist our clients and friends in making important compliance and planning decisions related to the CAT, our Multistate Tax Services Practice offers our own type of a CAT Scan™. (see left column)

Why choose McDonald Hopkins as your tax health advisor? The professionals in our Multistate Tax Services Practice are experienced in representing clients on all aspects of the CAT. These same professionals will perform your CAT Scan™, using their knowledge and experience to ensure a clean bill of tax health for your company. To further discuss the benefits of or to schedule a CAT Scan™, please contact your McDonald Hopkins professional or a member of our Multistate Tax Services Practice. (see reverse)

McDonald Hopkins Multistate Tax – CAT Scan™

Multistate Tax Services Team: David M. Kall 216.348.5812 [email protected] Mark D. Klimek 216.348.5453 [email protected] Susan Millradt McGlone 216.430.2022 [email protected]

McDonald Hopkins LLC Carl J. Grassi President

Chicago

Cleveland

Columbus

300 N. LaSalle Street Suite 2100 Chicago, IL 60654 312.280.0111

600 Superior Avenue, East Suite 2100 Cleveland, OH 44114 216.348.5400

250 West Street Suite 550 Columbus, OH 43215 614.458.0025

Detroit McDonald Hopkins PLC

Miami

West Palm Beach

200 South Biscayne Blvd. Suite 2600 Miami, FL 33131 305.704.3990

505 S. Flagler Drive Suite 300 West Palm Beach, FL 33401 561.472.2121

39533 Woodward Avenue Suite 318 Bloomfield Hills, MI 48304 248.646.5070

mcdonaldhopkins.com

Multistate Tax R.A.C.E.™–Refund Analysis & Compliance Evaluation R.A.C.E. is completed based on a partnership with our clients with the goal of identifying and recovering any overpaid tax with a minimal effort on our clients’ part. We also will notify you of any unpaid tax discovered during our analysis. After the R.A.C.E. is won, we can work with you to fix the root causes of the overpayments/ underpayments so we only need to run the R.A.C.E. once. R.A.C.E. can be performed for the following taxes: • Sales • Use • Real Property • Personal Property • Gross Receipts • Income • Franchise • Unclaimed Property

Sometimes it feels like state and local tax compliance is an all out competition! Trying to keep up with state and local tax law changes, understanding new services or products being sold or purchased by your business, and managing state and local tax audits seems like a never ending race. McDonald Hopkins’ Multistate Tax Services Practice can help you win that race with our R.A.C.E.-Refund Analysis & Compliance Evaluation service! Benefits of running a R.A.C.E. Recovering overpayments with little risk and effort is the main benefit from running a R.A.C.E. R.A.C.E. is a win-win because the overpayments recovered can be used to pay for the consulting services. At a minimum, R.A.C.E. provides a “check-up” for your compliance practices and positions. R.A.C.E. may also identify underpayments that you may resolve prior to discovery by a state tax auditor who may assess the tax with penalties and interest. Finally, R.A.C.E. provides the basis for continued future savings by identifying the root causes of the non-compliance. Who is a good candidate for R.A.C.E.? If you are paying substantial state and local taxes (left column), then you are a good candidate for R.A.C.E. Successful R.A.C.E.s have been run for businesses in the following industries: manufacturing, retail, construction, insurance, banking, leasing, restaurant, hotel, printing, transportation, distribution and wholesale. If you are currently under audit (or have recently been audited), then you are a perfect candidate for R.A.C.E. as we can work with the state tax auditors to potentially offset any identified liability. Even if you have never been audited, you are a perfect candidate since the R.A.C.E. will give you a “check-up” on your past compliance.

McDonald Hopkins Multistate Tax – R.A.C.E.-Refund Analysis & Compliance Evaluation

Stages of a R.A.C.E. R.A.C.E. is performed in three stages to ensure the maximum amount of value is provided with the minimum amount of your time and resources.

Why choose McDonald Hopkins? Professionals from McDonald Hopkins’ Multistate Tax Services Practice are uniquely qualified to run your R.A.C.E. as they have experience working in industry and tax consulting. Our professionals have the necessary experience to quickly understand your business, assist in identifying refunds, and communicating with state and local tax department officials to expedite the recovery of your refunds. To further discuss the benefits of or to schedule a R.A.C.E., please contact your McDonald Hopkins professional or a member of our Multistate Tax Services Practice.

Stage 1: Initial exam Our experienced tax professionals will review the operations of the business to gain an understanding of its principal transactions, legal structure, past compliance procedures, internal controls, past and current audit history, and past refund history. The goal of Stage 1 is to estimate any potential overpayments or underpayments to determine how we will run the rest of the R.A.C.E. We will move to Stage 2 when there is mutual agreement regarding the issues to pursue. Stage 2: Documentation review Based on Stage 1, we will develop and implement an action plan to review and capture the appropriate detail to document the amounts to be requested as part of any refund claim. All refund claims will need your approval before we proceed to Stage 3. Stage 3: Refund management Based on Stage 2, we will complete and file the necessary refund claims or amended returns along with the necessary support documentation. Our focus is to provide the appropriate information to the taxing jurisdiction so that it can make informed decisions without needing additional documentation. We will monitor the refund claims to ensure they are processed as expeditiously as possible.

Multistate Tax Services Team: David M. Kall 216.348.5812 [email protected] Mark D. Klimek 216.348.5453 [email protected] Susan Millradt McGlone 216.430.2022 [email protected]

McDonald Hopkins LLC Carl J. Grassi President

Chicago

Cleveland

Columbus

300 N. LaSalle Street Suite 2100 Chicago, IL 60654 312.280.0111

600 Superior Avenue, East Suite 2100 Cleveland, OH 44114 216.348.5400

250 West Street Suite 550 Columbus, OH 43215 614.458.0025

Detroit McDonald Hopkins PLC

Miami

West Palm Beach

200 South Biscayne Blvd. Suite 2600 Miami, FL 33131 305.704.3990

505 S. Flagler Drive Suite 300 West Palm Beach, FL 33401 561.472.2121

39533 Woodward Avenue Suite 318 Bloomfield Hills, MI 48304 248.646.5070

mcdonaldhopkins.com

December 17, 2015

Multistate Tax Update   Illinois: Airbnb expands tax collection initiative On Dec. 10, 2015, Airbnb, the self­described “trusted community marketplace for people to list, discover, and book unique  accommodations around the world,” was excited to announce that starting on Jan. 15, 2016, it will be paying its fair share of  taxes in Illinois. The state imposes a Hotel Operators' Occupation tax at the rate of 5 percent of 94 percent of the gross rental  receipts.  Airbnb’s announcement follows its mid­November pledge to “work with cities to help ensure the efficient collection of tourist  and hotel taxes.” We addressed this community compact in our Nov. 19, 2015, Multistate Tax Update.  The company’s commitment to the entire state of Illinois follows its tax collection and remittance efforts in Chicago, pursuant  to which Airbnb expects to contribute approximately $2.5 million in tax revenue to the Windy City by February 2016. Chicago  imposes a 4.5 percent hotel accommodations tax.  Airbnb explains itself as follows:  W e’re happy to be taking this important step that helps our host community and makes Illinois stronger. Home  sharing allows people to turn what is generally one of their greatest expenses, housing, into a tool to help make  ends meet. Most Airbnb hosts are middle class residents who share their homes to pay the bills. Meanwhile,  Airbnb guests generate sustainable, local economic activity that supports small businesses who previously  haven’t benefitted from tourism…based on data from July 2014 to June 2015, found that Airbnb generated $209  million in economic activity in Chicago.  Airbnb collects and remits hotel and tourist taxes from guests on behalf of hosts in Amsterdam, Chicago, Malibu, North  Carolina, Oakland, Oregon, Palo Alto, Paris, Philadelphia, Phoenix, Portland, Rhode Island, San Diego, San Francisco, San Jose,  Florida, and Washington D.C., and is collaborating with policymakers on similar initiatives around the globe. 

Delaware: Business­friendly climate leads to loss of billions in revenues for other states In a December 2015 report by the Institute on Taxation and Economic Policy (ITEP), the authors call out Delaware as an  onshore tax haven that costs other states billions in tax revenues, not unlike “notorious zero­tax Caribbean islands like the  Cayman Islands and Bermuda.” As a consequence, there is a total tax gap of $450 billion. The IRS defines a tax gap as the  amount of true tax liability faced by taxpayers that is not paid on time. About $376 billion of this gap is the result of  underreported income, according to an IRS Estimate of 2006 liabilities, the latest year for which figures are available.  The report points out that Delaware now has more companies than people. With just 935,000 residents, it has the fourth  smallest state population, but as of 2014, more than 1.1 million companies. 65 percent of Fortune 500 companies are  incorporated there. This figure dwarfs the number of subsidiaries in the two states that contribute the most to the U.S. gross  domestic product, California and Texas, which have only 1,160 and 1,540 Fortune 500 subsidiaries, respectively.  Also based on 2014 statistics:  l

85 percent of Fortune 500 companies reported having at least one subsidiary in Delaware  

l

These companies reported having more than 19,000 Delaware subsidiaries  

l

58 percent of all reported U.S. subsidiaries, and 30 percent of total reported subsidiaries, are located in Delaware  

What makes a “tax haven?”  The report cites the Organization for Economic Cooperation and Development’s identification of four key features of a tax  haven:  1.

Minimal or no taxes on specific types of income.  

2.

Laws that encourage financial secrecy and inhibit the provision of information to tax and law enforcement authorities.  

3.

Lack of transparency in legislative, legal, or administrative practices.  

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4.

No requirements that activities in the state be “substantial,” suggesting that a jurisdiction is trying to attract  investment or transactions that are driven primarily by tax considerations.  

Focusing on the first three of these, the report discusses how they work and what can be done to remedy the losses.  The “Delaware loophole"  Characterized as “glaring,” the so­called Delaware tax loophole enables companies to pay zero tax on income relating to  intangible assets held by a Delaware holding company or a passive investment company. Such income includes interest and  investment income, as well as that related to intellectual property, like trademarks and patents.  This loophole allows corporations to set up Delaware­based holding companies and pay the holding companies for the use of  the intellectual property, without incurring income tax liability on the earnings of the intellectual property. In addition,  corporations are allowed to deduct those payments as legitimate business expenses, which reduces their income tax liabilities  in their home states. This practice has cost states $9.5 billion over a decade in lost revenues, declared the report, quoting a  2012 New York Times estimate. Individual firms were able to reduce their state income tax liability by 15 to 24 percent, saving  on average $3.2 to $4.2 million annually.  The retailer Toys“R”Us, Inc. offers a good example of how companies leverage the Delaware loophole. There are 865  Toys“R”Us and Babies“R”Us stores in the United States and Puerto Rico, and more than that number of international and  licensed stores. The toy and baby products giant is headquartered in Wayne, New Jersey, but has a Delaware­based  subsidiary, Geoffrey LLC.  The retail stores in each state pay Geoffrey LLC for use of the company’s trademarks and trade names, like its mascot,  Geoffrey the Giraffe, income for which Geoffrey LLC does not pay Delaware taxes. In addition, the stores deduct those  payments on their state tax returns. This arrangement allowed Toys"R"Us to avoid approximately $2.75 million of state taxes,  while Geoffrey LLC gained $55 million in untaxed royalty income.  Another scheme involves the combination of Passive Investment Companies (PIC) with Real Estate Investment Trusts (REITs),  under which a firm moves all of its real estate assets into a Delaware­based PIC. For retailers with large amounts of real  estate, like big box retailers, there is potential to save millions in taxes. Wal­Mart, which has more than 5,000 stores in the  United States, saved about $350 million in state taxes between 1998 and 2001.  Financial secrecy, lack of transparency  The report argues that another reason for Delaware’s tax haven status is “the ease with which an anonymous company can  be created.” Anonymity works by making it difficult, or impossible, for authorities to trace taxable income from legal activities,  or laundered income from illegal activities, to the beneficial owners. Indeed, the report points out that “setting up a company  in Delaware requires less information than signing up for a library card,” making it “one of the easiest jurisdictions in the world  to set up an untraceable shell company.” Ultimately, these laws prevent authorities from prosecuting those that use  anonymous shell companies to evade taxes and/or launder money.  Although Delaware lawmakers have passed laws in an attempt to reduce this secrecy, key information is still unavailable to  the public, is otherwise difficult to access, and allows owners to skirt the process.  What can be done?  Beyond the tax loophole and secrecy/lack of transparency, the report points out that Delaware’s business friendly climate  contributes significantly to its success as a tax haven. Its dedicated corporate court system has produced legal precedent that  favors management over shareholders, and it is easy and fast to form business entities there.  Of course, Delaware lawmakers could pass laws to make it much harder for corporations to evade their tax liabilities, but they  have not. Instead, lawmakers outside of Delaware have taken action. One step is the adoption of an “addback rule” that  requires businesses to add payments made to related companies for interest or intangible assets back into their taxable  income. However, most jurisdictions have crafted exceptions to the rule. In addition, there is a lot of variation in these  measures from one state to another. Both of these circumstances make it easy to shift income to states where it will face the  least amount of tax.  A better solution, which about half of states have implemented, requires companies to report the income and expenses of all  of their out­of­state subsidiaries for the purpose of determining corporate income tax. Known as “combined reporting,” the  report declares this to be the most effective way to prevent tax avoidance.  Finally, ITEP would like to see Congress pass a law mandating that states require beneficial ownership information from  businesses. The Incorporation Transparency and Law Enforcement Act would make it easier to investigate tax evasion and  illicit financial flow. It has bipartisan support federally, but Democratic Delaware senators oppose it; the state receives  approximately 25 percent of its revenues from franchise taxes and other business fees, so has an interest in maintaining the  status quo. Despite this, 31 state lawmakers have signed a letter encouraging the act’s passage.  Until something changes, those 31 lawmakers are stuck with Delaware’s “reputation for attracting shady businesses.”    

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South Carolina: Department of Revenue announces expiration of certain tax provisions A law enacted in 2011, codified under section 12­36­2691 of South Carolina’s code, allowed businesses to disregard the  ownership, lease, or utilization of a distribution facility in the state, including those of a third­party or affiliate, when  determining whether that firm had sufficient nexus—or physical presence in the state—to be subject to sales and use taxes.  In Information Letter #15­19, the South Carolina Department of Revenue (SCDOR) announced the expiration of this  distribution facility “safe harbor” for nexus purposes. Accordingly, Code Section 12­36­2691 no longer applies on the earlier of  either:  l

Jan. 1, 2016;  

l

the effective date of any law enacted by Congress that allows a state to require that its sales tax be collected and  remitted even if the taxpayer does not have substantial nexus with that state; or  

l

when the person fails to meet the following requirements:  ¡

Placing a distribution facility in service after Dec. 31, 2010, and before Jan. 1, 2013.  

¡

Making a capital investment of at least $125 million after Dec. 31, 2010, and before Dec. 31, 2013.  

¡

Creating at least 2,000 full­time jobs, with a comprehensive health plan, for those employees after Dec. 31, 2010,  and before Dec. 31, 2013, and then maintaining at least 1,500 full­time jobs and with a comprehensive health  plan for those employees until Jan. 1, 2016.  

The result of the expiration of this provision means that owning, leasing, or utilizing a distribution facility, including a  distribution facility of a third­party or an affiliate, within South Carolina is considered in determining nexus for South Carolina  sales and use tax purposes.  Separately, in Information Letter #15­18, the SCDOR announced that the time to file an eligibility notice for certain sales and  use tax exemptions has expired. This applies to the following exemptions:  l

l

Computer equipment: When used in connection with a manufacturing facility when both of the following occur:  ¡

The taxpayer invests at least $750 million in real or personal property or both comprising or located at the facility  over a seven­year period.  

¡

The taxpayer creates at least 3,800 full­time new jobs at the facility during that seven­year period.  

Construction materials: When used in the construction of a new or expanded single manufacturing or distribution  facility (or one that serves both purposes) when both of the following occur:  ¡

The taxpayer invests at least $750 million in real or personal property or both comprising or located at the facility  over a seven­year period.  

¡

The taxpayer creates at least 3,800 full­time new jobs at the facility during that seven­year period.  

The exemption for construction material used in the construction of a new or expanded single manufacturing or distribution  facility with a capital investment of at least $100 million is still available.  l

Fuel used for test flights and certain transportation of aircraft: When the fuel is used for test flights of aircraft by the  manufacturer of the aircraft, or used in the transportation of an aircraft prior to its completion from one facility of the  manufacturer to another facility of the manufacturer, not including the transportation of major component parts for  construction or assembly or transportation of personnel, when both of the following occur:  ¡

The taxpayer invests at least $750 million in real or personal property or both comprising or located at the facility  over a seven­year period.  

¡

The taxpayer creates at least 3,800 full­time new jobs at the facility during that seven­year period.  

These exemptions continue to be available to eligible taxpayers who notified the SCDOR before Oct. 31, 2015. 

New Jersey: Lawmakers considering legislation that punishes corporate inverters Late last month, the pharmaceutical behemoths Pfizer and Allergan announced the completion of their $160 billion merger  plan “to form the world’s biggest drug company by sales, in a deal that is mostly, if not exclusively, about tax,” reported  Fortune Magazine. An Allergan press release disclosed that under the terms of the deal, the businesses will be combined and  renamed “Pfizer plc,” and will trade on the New York Stock Exchange using the PFE ticker. The new company will maintain  Allergan’s legal domicile in Ireland, locate its principal executive offices in Dublin, but base its global operations in New York.  Noting that the portfolio of drugs include the well­known Botox and Viagra, along with a pneumonia vaccine and treatments  for Alzheimer’s and rheumatoid arthritis, Fortune characterized the merger as “the largest so­called inversion deal ever.” The  deal allows U.S.­based Pfizer to reincorporate overseas and avoid U.S. tax liability while remaining, for all other intents and  purposes, an American company.  Allergan operates its administrative headquarters out of Parsippany, New Jersey. Incensed by “handouts to wealthy  corporations that avoid tax obligations,” New Jersey Sen. Shirley Turner has been working to prevent taxpayer funds from  being used to subsidize companies that engage in tax­avoidance schemes, like inversions.In a mid­September press release, 

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the senator quoted a study by the U.S. Public Interest Research Group revealing that states lost more than $39 billion in tax  revenue in 2011, and that New Jersey was among the top five losers.  To stop this, the senator introduced S­2361, most recently amended on Dec. 7, 2015. This act would render an inverted  domestic corporation ineligible for various types of financial aid, like state economic development grants and reimbursement of  taxpayer­subsidized programs, such as Medicaid.  In addition, the legislative language now precludes inverters from receiving development contracts. To this end, it requires  any applicant for a development subsidy to provide a standing certificate attesting to the legal status of the applicant, among  other things. The language also now obliges any corporate recipient of a development subsidy that becomes an inverted  domestic corporation during the term of a development subsidy to pay back the total value of the development subsidy.  Sen. Turner has also introduced legislation to prohibit the state’s pension board from investing in companies that have  exploited the inversion tax loophole.  In reporting on the merger, Bloomberg recognized that New Jersey may be the first state to punish inverters. However, Gov.  Chris Christie and other state Republicans oppose such prohibitions, preferring to deter overseas moves by lowering taxes.  This is a position at odds with the Democratic controlled Senate that could result in a show down. Bloomberg notes that  Dublin’s corporate tax rate is 12.5 percent, versus the 35 percent tax rate in the U.S.  New Jersey has awarded Pfizer with $48.28 million in various incentives, according to Sen. Turner. Bloomberg quoted her as  wanting to “send a strong message to Pfizer as well as any other corporate deserters looking to do the same thing…They are  parasites living off of our taxpayers, and it’s not like they’re going bankrupt by any means.”  For additional information regarding these subjects, or any other multistate tax issues, please contact:   David M. Kall  216.348.5812  [email protected]   Chad Arfons  216.348.5455  [email protected] 

Multistate Tax Services Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can  be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including  tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside  government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex  multistate taxes. 

   Carl J. Grassi, President   600 Superior Avenue, East, Suite 2100, Cleveland, Ohio 44114  

Chicago   312.280.0111  Fax: 312.280.8232  

Cleveland   216.348.5400  Fax: 216.348.5474   Detroit   248.646.5070  Fax: 248.646.5075  

Columbus   614.458.0025  Fax: 614.458.0028   Miami   305.704.3990  Fax: 305.704.3999  

West Palm Beach   561.472.2121  Fax: 561.472.2122  

© 2016 McDonald Hopkins LLC All Rights Reserved. This publication is designed to provide current information for our clients,  friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than  specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before  using this discussion as a basis for a specific action.  

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December 10, 2015

Multistate Tax Update   Illinois: Governor revives two tax credit programs In an effort to balance investment in the state with taxpayer benefits, Illinois Gov. Bruce Rauner has announced that he will  be reviving two programs that had been suspended at the beginning of the fiscal year, which began on July 1. The first is the  Economic Development for a Growing Economy (EDGE) tax credit program, and the other is the Film Tax Credit program.  As has been widely reported over the last several months, Illinois is facing a very difficult fiscal situation and is now  approaching six months without a budget in place. In July we wrote that under these circumstances, Illinois cannot spend any  money on programs that require an annual appropriation, including most state programs and services, like education,  Medicaid, addiction, and child care services, the senior meal program, parks, museums, and casinos.  At the end of October, The New York Times described the situation as “the consequence of a long simmering ideological and  political dispute” between the Republican governor and Democrats who control both chambers of the legislature. The paper,  citing state comptroller’s figures, reported that by the end of 2015, Illinois will have about $8.5 billion in unpaid bills, partly  because of the expiration of a temporary increase in income tax.  The EDGE tax incentives are typically used to offer a special tax incentive that encourages companies to locate or expand  operations in Illinois when a firm is actively considering a competing location in another state. The hope is that the incentives  allow the company to reduce the costs of doing business in Illinois when compared with similar costs in other states. This is  the tax incentive program that was used to lure ConAgra from Omaha to Chicago as part of its $300 million efficiency plan,  which we described in October. That relocation was controversial because ConAgra’s chief executive, Sean Connolly, claimed  that the move to Chicago was “strictly about company strategy” he did not consider competitive pitches or incentive offers  from Omaha.  Similarly, the Chicago Tribune criticized the EDGE program for handing out millions of dollars of tax breaks for corporations that  eliminated jobs and became smaller, and for allowing companies to “reap lucrative rewards and then relocate to other states  without penalty or repayment.”  Gov. Rauner has taken what the administration characterizes as a more fiscally responsible approach to EDGE agreements by  enacting certain policy changes, including the following:  1.

No longer supporting “Special EDGE” agreements that only benefit certain companies that can afford lobbyists.  

2.

No longer providing tax credits for job retention, only for capital investment and net new job creation.  

3.

Requiring that tax credits can only be obtained for jobs created above a baseline of all existing employees located  within the state, rather than just the baseline of employees located at the specific project location. In the past, a  company that signed an EDGE agreement for an expansion project in a certain location only needed to maintain a  requisite number of employees at that specific facility in order to meet its requirements. Laying off employees at a  different facility in the state, or even closing it, would not have impacted its ability to continue receiving taxpayer funded  benefits for the facility for which it was receiving the EDGE agreement.  

4.

Prohibiting more than one tax credit on the same facility. Previous administrations allowed multiple EDGE deals on jobs  created at the same facility.  

5.

Focusing on marketing Illinois’ assets, rather than leading with the tax incentives.  

As for the Film Services Tax Credit, it was put in place in December 2008. It is scheduled to sunset in May 2021, and will be  renewable in five­year increments after that.  The goal of the Tax Credit Act is to promote growth and job opportunities, and stimulate diversity in production hiring by  attracting local vendors, union leaders, and filmmakers to the Illinois film industry. Like EDGE, this program was suspended  when the new fiscal year started.  Benefits of the Film Services Tax Credit include the following:  1.

30 percent of the qualified Illinois Production Spending.  

2.

30 percent credit on Illinois salaries up to $100,000 per worker.  

3.

Tax credit can be carried forward five years from when originally issued by Illinois Film Office.   Page 1

3.

Tax credit can be carried forward five years from when originally issued by Illinois Film Office.  

4.

Applicants will receive an additional 15 percent tax credit on salaries of individuals making at least $1,000 in total  wages that live in an economically disadvantaged area (at least 13.8 percent unemployment).  

Despite the governor’s announcement, EDGE and film tax credits for new projects will not be certified or eligible for claim until  lawmakers pass a budget for fiscal year 2016. 

Massachusetts: Officials take action on daily fantasy sports contests In our Nov. 5 Multistate Tax Update, we described how several states—like Massachusetts, Kansas, Florida, Washington,  Nevada, Michigan, and California—are struggling to confront the regulation of Daily Fantasy Sports (DFS). The crux of the issue  is whether DFS constitutes gambling such that it can be regulated and taxed like other kinds of gaming activities.  Regulating DFS  In Massachusetts, there is little regulatory guidance, but the topic was on the agenda at the Massachusetts Gaming  Commission’s Oct. 29, 2015, public meeting. Now, just one month later, Massachusetts Attorney General Maura Healey has  issued a draft regulation hoping to protect consumers who play DFS from unfair and deceptive acts and practices that may  arise in the gaming process, and to protect the families of those players “to the extent that they may be affected by unfair  and deceptive practices that lead to unaffordable losses.”   The draft regulation, which applies to DFS operators doing business in the state, defines DFS as “[a]ny contest in which the  offer or award of a Prize is connected to the statistical performance or finishing position of one or more individual participants  in an underlying amateur or professional competition, but does not include offering or awarding a Prize to the winner of or  participants in the underlying competition itself.”   Any enterprise that does not collect compensation in connection with the contest, or in which no prize is awarded, no entry  fee is collected, or the maximum prize is valued at no more than the lowest possible entry fee, is not considered to be DFS.   Additionally, under the terms of the draft regulation, DFS operators are obligated to comply with all tax laws, like those  pertaining to withholdings and disclosures to tax authorities and to DFS consumers. In the on­boarding process and again at  the time of award of any prize of more than $600, operators are required to disclose potential tax liabilities, along with  penalties for failure to pay.  Beyond these topics, the draft regulation covers several others, like the prohibition of minors, compliance with data security  rules, restrictions on advertising, and protections for gambling addicts.  The Office of the Attorney General has issued a Notice of Public Hearing informing the public that it will hold the hearing and  accept oral and written comments on Tuesday, Jan. 12, 2016.  Tax rules changes  Technical Information Release 15­14, issued by the Massachusetts Department of Revenue on Nov. 20, 2015, describes  changes to the personal income tax calculation, income tax withholding, and income reporting rules with respect to wagering  income. The release does not address DFS specifically, but points out that the state allows a new deduction “for losses from  wagering transactions that were incurred at a licensed gaming establishment, or a racing meeting licensee or simulcasting  licensee, only to the extent of the gains from such transactions.”  In addition, the release explains the increase in the threshold for personal income tax withholding on certain game winnings,  and the revised requirements for determining if the winner owes unpaid taxes or child support.  Finally, the release notes that the described changes do not affect income calculation, withholding, or reporting rules for  lottery winnings. 

Michigan: Agreement with Fiat helps stabilize the budget Background  A December 2015 report by Pew Charitable Trusts, Reducing Budget Risks, considered the unpredictable nature of specific  state tax incentive programs. The cost of some of these programs has increased “by tens or hundreds of millions of dollars,”  requiring lawmakers to make tough choices between increasing taxes and cutting spending in order to keep their budgets  balanced.  Opining that “these problems are not inevitable,” the report’s authors attributed the instability to the increasing costs of  economic development tax incentives, which, theoretically, encourage business growth and job creation. But these incentives  also decrease corporate tax revenues.  P e w’s researchers came up with two strategies that can help states accomplish their economic development and job growth  goals without “budgetary surprises.” First, states should gather high quality data on the costs of incentives by forecasting  and monitoring costs, and share this information with the relevant stakeholders.    

Page 2

Second, states should design incentives in ways that reduce fiscal risk, such as the following:  1.

Capping how much programs can cost each year.  

2.

Controlling the timing of incentive redemptions.  

3.

Requiring lawmakers to pay for incentives through budget appropriations.  

4.

Restricting the ability of companies to redeem more in credits than they owe in taxes.  

5.

Linking incentives to company performance.  

6.

Requiring businesses to provide advance notice of program participation.  

Michigan  The Pew report used Michigan as an example of how these incentives can cause budget challenges. It reported that when  Gov. Rick Snyder signed the fiscal year 2015 budget, lawmakers thought projected revenues would cover spending. However,  within four months, they discovered that the budget would actually be out of balance by millions of dollars.  This was due largely to the tax incentive program within the Michigan Economic Growth Authority (MEGA) Board, which was  created in 1995 and rolled into the Michigan Strategic Fund (MSF) in 2012. MEGA was authorized to promote economic growth  and job creation, which it did, in part, by amending certain business tax credits. In a press release, House Democratic Leader  Tim Greimel (D­Auburn Hills) explained that MEGA had gotten “out­of­control,” and that it would devour up to $9.4 billion of  state revenue over the next 20 years. But because of the structure of the tax credits, it was impossible to predict the  amounts and timing of these credits. Consequently, corporate recipients were asked to renegotiate their MEGA agreements in  a way that would allow the state to plan more effectively.  One result of these renegotiations is the deal that Michigan and Fiat Chrysler Automobiles (FCA) came to, through MSF, which  promises to help stabilize the state’s budget, as numerous outlets reported just before Thanksgiving.  Ultimately, FCA consented to claim no more than $1.9 billion of tax credits during the life of the agreement, which will now end  two years earlier, in 2029 rather than 2031. Ford Motor Company and Michigan reached a similar arrangement in June, under  which Ford went along with a $2.3 billion cap on its tax breaks; Ford also committed to making an additional investment of  $3.1 billion, noted The Detroit News at the time. The paper put Michigan’s long­term tax liability at $9.3 billion but growing.  The actual amount of FCA’s credit was originally estimated to be $1.3 billion. The Detroit Free Press pointed out that even  though the compromise increased the credit amount, which is based on the value of the jobs saved with increased wages, the  certainty and the mandate that FCA invest $1 billion by 2029, will “prevent blowing a hole in future state budgets.”  The Pew report described how Michigan came to find itself in such a dire situation:  Many of the credits causing fiscal challenges were authorized in 2010 as part of long­term deals with distressed  automakers, without protections to limit the program’s cost. The state badly underestimated the number of jobs the  companies would create and the salaries they would pay because of flawed wage growth assumptions that state  officials had used and the surprisingly strong recovery of the auto industry. Since the companies were paying more in  wages to their workers, they earned more tax credits.  According to the report, Louisiana faced a similar circumstance when it implemented a tax exemption for horizontal natural gas  drilling in 1994. Once energy companies discovered large deposits of natural gas in 2008, they began to drill regularly,  increasing both economic activity and costs to the state, from $285,000 in fiscal year 2007 to $239 million in fiscal year 2010.  In contrast is New York’s brownfields clean up project, which was also extremely expensive but did not produce any of the  hoped for economic development benefits.  In the end, Gov. Snyder’s press release touted Michigan’s agreement with FCA as “an essential step in helping us better  manage our state budget, while finding common ground that will ensure the company will continue to invest and create jobs  in our state for years to come.”  For additional information regarding these subjects, or any other multistate tax issues, please contact:   David M. Kall  216.348.5812  [email protected]   Chad Arfons  216.348.5455  [email protected] 

Multistate Tax Services Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can  be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including  tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside 

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government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex  multistate taxes. 

   Carl J. Grassi, President   600 Superior Avenue, East, Suite 2100, Cleveland, Ohio 44114  

Chicago   312.280.0111  Fax: 312.280.8232  

Cleveland   216.348.5400  Fax: 216.348.5474   Detroit   248.646.5070  Fax: 248.646.5075  

Columbus   614.458.0025  Fax: 614.458.0028   Miami   305.704.3990  Fax: 305.704.3999  

West Palm Beach   561.472.2121  Fax: 561.472.2122  

© 2016 McDonald Hopkins LLC All Rights Reserved. This publication is designed to provide current information for our clients,  friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than  specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before  using this discussion as a basis for a specific action.  

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December 3, 2015

Multistate Tax Update   States extend historic preservation tax credits North Carolina  An article in The News & Observer this past summer opined on the state of historic tax credits in the Tar Heel State. The article  cited a legislator who lamented the fact that in the economic development arena, “South Carolina is eating our lunch,” and the  president of Preservation North Carolina, Myrick Howard, agreed that North Carolina is losing its advantage in the  preservation of architectural and historic resources.  Myrick attributed this to the December 2014 sunset of tax credits that made it easier to rehabilitate historic structures.  Indeed, he declared, the effects of the tax credit were tangible: The private sector spent nearly $2 billion to revive key areas  throughout the state, like downtown Durham, Raleigh, Winston­Salem, Asheville, Salisbury, Mount Airy, New Bern, and  Edenton during the existence of the tax credit.  However, tax credits are not without controversy. Some opponents claim that these kinds of tax credits go against tax reform  and leave local governments without skin in the game. Nevertheless, support for the tax credits is generally widespread, and  Howard observed, “[p]robably no tax incentive in North Carolina has generated a better return for the state in jobs, economic  development, and community livability and pride. Without this incentive, North Carolina is losing out; jobs and investors are  leaving the state in droves. Buildings are sitting empty.”  Recognition of the economic impact of the credits is evident in the 2015­17 budget. Lawmakers renewed the tax credits on  income producing properties, effective Jan. 1, 2016. They also allocated $8 million of general funds for the biennium.  The budget specifies that a taxpayer who is allowed a federal income tax credit for making qualified rehabilitation  expenditures for a certified historic structure is allowed a state tax credit as follows:  l

15 percent for expenses up to $10 million  

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10 percent for expenses between $10 million and $20 million  

The budget also establishes the following bonus credits:  l

A development tier bonus of 5 percent of qualified rehabilitation expenditures, up to $20 million if the certified historic  structure is located in a development tier one or two area.  

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A targeted investment bonus of 5 percent of qualified rehabilitation expenditures, up to $20 million, if the certified  historic structure is located on an eligible targeted investment site.  

The maximum amount of credit allowed is $4.5 million. Additionally, the tax credit may not exceed the amount of tax owed by  the taxpayer, and any unused portion of the credit may be carried forward for 9 years.  These credits are scheduled to sunset on Jan. 1, 2020.  Georgia  Similarly, the Peach State revised its tax credit for the rehabilitation of historic structures by way of House Bill 308.  Effective Jan. 1, 2016, Georgia will allow a tax credit for the rehabilitation of certain certified historic structures, up to $5  million. If the project creates 200 or more full­time permanent jobs, or $5 million in annual payroll within two years of the  placed in service date, the project is eligible for credits of up to $10 million. It should be noted that the credit for certified  historic homes is capped at $100,000 in any 120­month period.  All or a portion of any historic preservation tax credits claimed, but unused, may be transferred or sold to another Georgia  taxpayer under certain conditions.  “Many states are improving their Historic Tax Credits to revitalize historic areas. A big change to look out for is the  transferability of state credits, which can help developers partially finance a project,” mentioned a PRNewswire article. 

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Michigan: Governor signs the state’s largest investment in transportation funding in 50 years Gov. Rick Snyder has signed a package of bills “implementing the state’s legislative solution to infrastructure funding.” This  leaves “Michiganders [with] safer roads and stronger bridges to travel on...Now we have a commonsense plan of action to  improve our roads and make government more efficient and accountable,” touted a Nov. 10, 2015, governor’s office press  release.  Key components of the package include the following:  l

HB 4738: Enacting a 7.3 cents increase on the current 19 cent fuel tax, bringing it up to 26.3 cents per gallon for all  motor fuels, including diesel and natural gas, starting Jan. 1, 2017. Beginning Jan. 1, 2022, the tax rate will be indexed  to inflation, to ensure ongoing viability of the increase.  

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HB 4614: Applying the truck fuel tax to natural gas, and gas used by interstate trucks, starting Jan. 1, 2017.  

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HB 4616: Tying the tax rate on diesel fuel to the same level as the tax on gasoline, making the per­gallon rate equal  for all fuels.  

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HB 4736: Increasing registration and truck weight fees by 20 percent. It also creates an annual plug­in hybrid vehicle  surcharge of $30, and an annual electric vehicle surcharge of $100.  

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HB 4737: Restricting the administrative expenses of Michigan’s State Trunkline Fund at the Michigan Department of  Transportation to 8 percent of expenditures, down from 10 percent. HB 4737 also requires warranties on all local road  projects over $2 million.  

The State Trunkline Fund is a bond financing program for transportation projects. This law also creates a task force to study  materials and methods for longer lasting roads.  In order to offset the impact of these increases on taxpayers, lawmakers enacted two additional bills:  l

HB 4370: Effective with the 2018 tax year, increases the homestead property tax credit from $1,200 to $1,500 and  expands the eligibility for the credit from households earning $51,000 or less to those earning $61,000 per year or less.  It also extends part of that credit to renters, at the rate of 23 percent of rent paid, up from 20 percent.  

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Senate Bill 414: Rolling back the individual income tax rate in any year that the state General Fund revenue exceeds  1.425 times the rate of inflation, beginning in 2023.  

The last time Michigan implemented an infrastructure plan was in 1997. Gov. Snyder noted that this one raises 20 percent  more revenue, and includes a mechanism for adjusting for inflation to ensure sustainability and maintain buying power.  Approximately 61 percent of the revenue will go to local road agencies in communities across the state, and the remaining 39  percent will be dedicated to state highways. Detroit will be permitted to use up to 20 percent of its funding for mass transit,  and all other localities may use up to 10 percent for the same purpose.  MLive noted that the gas tax and vehicle registration increases would generate $600 million in annual revenue, and that  starting in 2019, the state will allocate another $600 million in general fund revenue.  Despite the much needed infrastructure solution, House Minority Leader Tim Greimel (D­Auburn Hills) characterized the  infrastructure plan as “a sham. It's a joke. It's pretense…not a real fiscally responsible solution." Likewise, Senate Minority  Leader Jim Ananich (D­Flint) complained that “[t]his plan won't fix our roads. It will, however, create new problems that will  need to be fixed later.”  On the other hand, MLive quoted Senate Majority Leader Arlan Meekhof (R­West Olive) who conceded that while the task of  funding infrastructure was not easy, "[f]rom the very beginning, it was very clear that fixing Michigan's roads would be a key  to fixing Michigan…I'm proud of all my colleagues."  Michigan was not likely to be able to address the “sorry state of its roads” any other way. In May, voters rejected a ballot  measure that would have increased the gas tax to 41.7 cents. At that time, the House Fiscal Agency estimated that the tax  increase would have generated more than $1.6 billion per year, with $1.2 billion going towards roads, $130 million to mass  transit, $300 million to the school aid fund, and $95 million to local governments. 

Tax Foundation issues its 2016 State Business Tax Climate Index The Tax Foundation describes itself as “the nation’s leading independent tax policy research organization.” As a Washington,  D.C.­based non­partisan, non­profit research think tank, the group publishes a variety of reports on many state and federal  tax topics. The most recent is its popular 2016 State Business Tax Climate Index (Index), which is designed to show how well  states structure their tax systems and provide a roadmap for improvement. The Index does not purport to measure economic  opportunity or freedom, or even the broad business climate, but rather the narrower business tax climate.  This year, the top 10 states are:  1. Wyoming  2. South Dakota  3. Alaska  4. Florida 

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5. Nevada  6. Montana  7. New Hampshire  8. Indiana  9. Utah  10. Texas  The bottom 10 are:  41. Maryland  42. Ohio  43. Wisconsin  44. Connecticut  45. Rhode Island  46. Vermont  47. Minnesota  48. California  49. New York  50. New Jersey  In evaluating each state’s tax climate, researchers considered more than 100 variables. Among these is the presence or  absence of a major tax, like an income tax, the complexity of a state’s tax code, and the extent to which the state imposes  non­neutral taxes with relatively high rates.  Researchers analyzed variables within five categories, which were then weighted by the variability of the 50 states’ scores  from the mean: individual income tax, sales tax, corporate tax, property tax, and unemployment insurance tax.  The following are some interesting observations from the analysis:  Individual income tax: One­third of the total score    This category compares states which tax individual income. The five states which do not impose an individual income tax  and received a perfect score, include Alaska, Florida, Nevada, South Dakota, and Wyoming. These states also ranked  very high overall, at numbers 3, 4, 5, 2, and 1, respectively.  Although Texas and Washington do not have an individual income tax, they do not have perfect scores in this  component because they tax limited liability and S­corporation income through their gross receipts taxes.  California has the highest top income tax rate, 13.3 percent, and an overall ranking of 48. North Dakota, ranked number  26 overall, has the lowest individual income tax rate, 2.9 percent.  Sales tax: 22 percent of the total score    Sales taxes levied on the purchase of goods at the point of sale, and including excise taxes on specific items like liquor,  tobacco, and gas, vary in amount and structure. Researchers looked at actual rates, which, if too high, could cause  business to be lost to lower­tax locations, resulting in lost profits, jobs, and tax revenue. The Index ranked  Delaware first in this category, and Louisiana at number 50.  Colorado, whose 2.9 percent rate is the lowest, ranked 18 overall on the Index. California has the highest sales tax,  7.5 percent, and it ranks 48 overall.  Corporate tax: 18.5 percent of the total score    This category was designed to gauge how a state’s corporate income tax top marginal rate, bracket structure, and  gross receipts rate affect its competitiveness compared to other states, as the extent of taxation can affect a  business’s level of economic activity within a state.  Part of the reason Wyoming and South Dakota achieved the top two spots overall is that neither state levies a  corporate income tax or a gross receipts tax.  In contrast, Iowa’s 12 percent corporate income tax rate qualifies for the worst ranking among states that levy a  corporate income tax, followed by Pennsylvania’s 9.99 percent rate. These states are ranked at numbers 40 and 32  overall, respectively.  Property tax: 14.8 percent of the total score    This component includes taxes on both real and personal property. The Index notes that property taxes are a  significant factor in business location decisions, and that a 10 percent increase in business property taxes decreases  the number of new plants opening in a state by between 1 and 2 percent. Local property taxes are perceived as an  unfair state or local tax in part because when property values fall through no fault of the owners, as they did in the  recent economic downturn, localities respond by increasing the tax rates to make up for lost revenues. 

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New Mexico and Utah had the two most favorable property tax ranks, and overall, they ranked at numbers 35 and 9,  respectively. The states with the least favorable ranks were Iowa and Connecticut. Overall, they ranked at numbers 40  and 44, respectively.  Unemployment insurance tax: 11.13 percent    Every state levies an unemployment insurance (UI) tax. They are complex, variable­rate systems that impose different  rates on different industries and different bases, depending upon such factors as the health of the state’s UI trust fund.  The “shut down” effect of the UI tax is one of its worst features because financially troubled firms, for which survival  may involve laying off employees, actually pay higher marginal rates as they are forced into higher tax rate schedules.  States that had favorable UI rankings have rate structures with lower minimum and maximum rates and a wage base at  the federal level, and have not complicated their systems with benefit add­ons and surtaxes, among other things.  States with the least damaging UI taxes are Oklahoma, Nebraska, Florida, Delaware, and Louisiana. These states rank  33, 27, 4, 14, and 37 overall, respectively.  States with the most damaging UI taxes are Pennsylvania, Rhode Island, Michigan, Massachusetts, and Kentucky.  These states rank 32, 45, 13, 25, and 28 overall, respectively.  States on the move  Several states had notable overall ranking changes this year. For example, Illinois improved significantly, from 31 to 23 overall.  This progression was due to the sunset of corporate and individual income tax increases that were first imposed in 2011 to  address the state’s backlog of unpaid bills.  In North Carolina, the 2013 reforms had a substantial impact on the ranking; the state jumped from number 44 last year to  number 15 this year. Significant changes included cutting the corporate income tax, from 6.9 percent to 6 percent last year,  which fell again to 5 percent in 2015. Additionally, the individual income tax, which lawmakers converted to a single­rate tax of  5.8 percent from a graduated rate tax with a top marginal rate of 7.75 percent in 2014, saw a further modest cut in 2015,  decreasing to 5.75 percent. Further reductions are scheduled through 2017.  Next, although New York retains its rank of number 49 overall for this year, the corporate reform tax package that lawmakers  enacted will likely create an improvement in next year’s position. The enacted changes include reducing the corporate income  tax rate from 7.1 percent to 6.5 percent, and eliminating the capital stock tax, among other things.  Finally, Kansas, which has been in the news frequently this year for its dismal economy caused by overzealous tax cuts, fell  three rungs due to its sales tax increase from 6.15 to 6.5.  For additional information regarding these subjects, or any other multistate tax issues, please contact:   David M. Kall  216.348.5812  [email protected]  Chad Arfons  216.348.5455  [email protected] 

Multistate Tax Services Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can  be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including  tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside  government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex  multistate taxes.                

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   Carl J. Grassi, President   600 Superior Avenue, East, Suite 2100, Cleveland, Ohio 44114  

Chicago   312.280.0111  Fax: 312.280.8232  

Cleveland   216.348.5400  Fax: 216.348.5474   Detroit   248.646.5070  Fax: 248.646.5075  

Columbus   614.458.0025  Fax: 614.458.0028   Miami   305.704.3990  Fax: 305.704.3999  

West Palm Beach   561.472.2121  Fax: 561.472.2122  

© 2016 McDonald Hopkins LLC All Rights Reserved. This publication is designed to provide current information for our clients,  friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than  specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before  using this discussion as a basis for a specific action.  

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Return to: Marketing Department McDonald Hopkins LLC 600 Superior Avenue, Suite 2100 Cleveland, OH 44114 Email to: [email protected]

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State and Local Government Affairs We understand state and local government affairs. The services we often provide to our government affairs clients include: • Government Advocacy • Government Contracting • Government Incentives

The increasing complexity of government, coupled with the reality of turn-over in a term limits era, requires a renewed commitment to navigating through the governmental process. To maximize their own value, businesses today must understand the intricacies of government. While the reasons vary from complying with regulatory and legislative mandates, securing government funding of projects, to obtaining government contracts, more and more companies see the value of employing – directly or through contract – full-time professional staff entrusted with the objective of maximizing the function of government for the company’s particular interest. Our State and Local Government Affairs team’s political and business experience enables us to understand how the government process works from start to finish. Although we have solid relationships with public officials and their staff, our team recognizes that our most important service is being able to understand the needs of the client and then quantify the value of meeting those needs through the public sector. Our approach is to interface with government in a strategic and effective manner, whether we are lobbying for changes in government policy or ensuring a fair and effective procurement process.

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Government Advocacy In today’s climate, the need to understand and navigate the governmental process is greater than ever. Our professionals operate in this space every day and know not only how to maximize opportunities, but also how to avoid pitfalls and dead ends. Collectively, the McDonald Hopkins advocacy team has devoted over 100 years to working in government, giving us the much needed depth and experience necessary to utilize government solutions on behalf of our clients. Our advocacy team has secured more than $50 million in recent years through federal and state appropriations processes, has worked with legislators on dozens of occasions to improve areas of the law that impact our clients, and has saved our clients hundreds of millions of dollars in taxes by advocating positive law changes. Our results speak for themselves. When a business is looking to grow their customer base, selling to government entities cannot be ignored. Billions of dollars worth of goods and services are purchased by the government every year. While this market offers tremendous opportunities for businesses, the difficulty of identifying those opportunities and working through the appropriate regulations may prove too burdensome. Our attorneys and professionals work with our clients to identify contract opportunities, meet the specifications set forth in the contract and submit the necessary information in order to access this important market. Government Contracting As businesses are looking to grow their customer base, selling to government entities can not be discounted. Billions of dollars worth of goods and services are purchased by the government every year. While this market offers tremendous opportunities for businesses, the difficulty of identifying those opportunities and working through the appropriate regulations may prove too burdensome. Our professionals work with our clients to identify contract opportunities, meet the specifications set forth in the contract and submit the necessary information in order to access this market.

McDonald Hopkins State and Local Government Affairs

Government Incentives As businesses continue to operate and grow, the need to secure financing is critical. Government tax incentives, loans and grant programs have become a common source of funding for projects. Our attorneys and professionals, including former Ohio Department of Development officials, are constantly looking at government incentives as opportunities for our clients. We have successfully secured low-interest loans, tax credits and grants for a number of our clients across multiple industries. Based on our experience, we understand how to capitalize effectively on the available dollars in each program that may apply to our client’s situation and can secure funding as expeditiously as possible. Our Approach Government affairs work is so much more than networking with government officials. It requires a strategic process developed by specialists who understand the relationship between policy and politics. A well thought-out and well implemented strategic plan is critical to true success in government affairs. Achieving good government policy without an understanding of the political landscape is very difficult. Our State and Local Government Affairs team has an impressive background and a proven record of balancing good government policy and good politics to help clients attain their objectives. We have earned this record by using our unique approach to government affairs.

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Our approach can best be described as a flexible four -phase process of evaluation, development, implementation, and evolution. Phase I: Evaluation Our team meets with our client to listen and gain an understanding of their business, inventory their concerns and objectives, and assess opportunities. Similarly,we invest time to gain an understanding of the political landscape from relevant officials and other parties regarding the client or the client’s specific issue. Phase II: Development After gaining a thorough understanding of our client’s government objectives and the surrounding landscape,we develop recommendations on how to achieve the client’s objectives. We also develop a customized Government Affairs Action Plan (GAAP) to detail the steps necessary to implement our recommendations.

McDonald Hopkins State and Local Government Affairs

Phase III: Implementation After obtaining approval of the final GAAP from our client, we “fill in the GAAP” by implementing the various steps of the work plan. Phase IV: Evolution As the GAAP is implemented, experience shows that the plan will need to evolve and be responsive to the ever changing political and policy landscape. During regular meetings with our client, we work with to evolve the GAAP. We believe this disciplined approach and the related GAAP is unique and very effective in achieving our client’s goals.

Representative Accomplishments:

Amending the Revised Code In 2012, numerous tax changes to the Ohio Revised Code were proposed. Working with our clients, we gained necessary insight into the genesis of such changes, the public policy rationale of such changes and the impact that those changes may have on our client’s interests were properly maintained in the final result of this legislative initiative. Our understanding of our client’s fact pattern, coupled with our awareness of the goals of the stakeholders enabled us to craft an approach that was achievable, desirable and ultimately successful.

Additionally, our team recently was successful in modifying a section of the revised code which governs sales tax incentives. Working closely with the office of Budget and Management, Department of Taxation and Development Services Agency, we were able to constructively identify challenges to this section of the code due to how it had been originally crafted, and improve the administrative function of this section in a manner that was in our client’s interests while also protecting the administration’s financial considerations.

McDonald Hopkins State and Local Government Affairs

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Grassroots/Advocacy Management The State and Local Government Affairs team serves a number of clients ranging from Fortune 100 corporations to small non-profit trade associations. While we have enjoyed tangible success, such as securing an earmark or altering a section of the Ohio Revised Code, we also have worked tirelessly to advance the recognition and awareness of our clients with key leaders in Ohio. In this regard, we were hired to assist a national coalition on federal patent reform. Our job was to work with the Ohio Congressional Delegation

McDonald Hopkins Government Strategies LLC McDonald Hopkins Government Strategies™, a wholly owned subsidiary of McDonald Hopkins LLC, is focused on providing comprehensive federal government advocacy and strategic services for a wide range of clients. Our team is led by the distinguished former Congressman Steven C. LaTourette, who served nine terms in the United States House of Representatives, and is recognized for his bipartisan approach to finding solutions for complicated issues.

to secure their vote in favor of our client’s interest. Through coalition building, public relations outreach and strategic communication efforts, all but two Members of the Congressional Delegation voted in support of our client. Though this is merely a small sample of the work that we have done on behalf of our clients, it shows the wide breadth of capability at McDonald Hopkins while also demonstrating a commitment to excellence for each task performed on behalf of our clients.

We recognize the importance of understanding the needs of our clients to ensure that we design an approach that is strategic and effective, whether we are lobbying for changes in government policy, ensuring a fair and successful procurement process, or securing funding for a critical project. Our highly experienced team utilizes their knowledge of politics, policy and government to achieve the most beneficial outcomes.

Although McDonald Hopkins Government Strategies™ LLC is owned by the law firm McDonald Hopkins LLC, McDonald Hopkins Government Strategies™ LLC is not a law firm and does not provide legal services. Accordingly, the retention of McDonald Hopkins Government Strategies™ LLC does not create a client-lawyer relationship and the protections of the client-lawyer relationship, such as attorney-client privilege and the ethics rules pertaining to conduct by lawyers, do not apply.

McDonald Hopkins LLC Carl J. Grassi President

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300 N. LaSalle Street Suite 2100 Chicago, IL 60654 312.280.0111

600 Superior Avenue, East Suite 2100 Cleveland, OH 44114 216.348.5400

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