At the Multistate Tax Commission’s (MTC) spring meetings the committees:
- received a presentation on TCJA changes;
- decided to continue working on a model Finnigan statute; and
- discussed federal legislation that could impact the states.
Litigation Committee Discusses GILTI, FDII, and BEAT
The Litigation Committee received a presentation entitled “GILTI, FDII, BEAT and Repatriation: What the State Should be Doing in Response to the New Territorial Tax System Created by the TCJA” by Stephanie Do and Micheal Hilkin from Evershed Sutherland.
The presentation provided suggestions to MTC members on how their states should respond to the Tax Cuts and Jobs Act. The new provisions discussed include the:
- one-time repatriation transition tax;
- tax on global intangible low-taxed income (GILTI);
- foreign-derived intangible income deduction (FDII); and
- base erosion and anti-abuse tax (BEAT).
These provisions represent a shift from a worldwide tax system to a modified territorial tax system.
Don’t Adopt the Provisions or Adopt All the Provisions
The presenters’ suggested that states should either not adopt the provisions or adopt the entire scheme. Conforming could lead to more aggressive state taxation than federal taxation. If states only conform to parts of the federal structure it could also lead to more aggressive state taxation.
State Constitutionality of GILTI
One concern when adopting global intangible low taxed income (GILTI), IRC Sec. 951A, is that it could subject some companies to far higher tax bills than other companies taxed in the state.
This could lead to discrimination concerns similar to those in Kraft v. Iowa. In Kraft, the U.S. Supreme Court found an Iowa law allowing a deduction for dividends received from domestic, but not foreign, subsidiaries violated the foreign commerce provision of the U.S. Constitution.
The presenters noted that application of Kraft will vary among the states.
Conforming to the Entire Federal Scheme
At the federal level taxpayers have the advantage of foreign tax credits, a federal tax rate reduction, and the IRC Sec. 250 foreign-derived intangible income deduction (FDII). Unless states adopt all these provisions taxpayers could end up paying more in taxes than before the adoption of the TCJA.
Uniformity Committee Continues Work on Finnigan Model Statute
The Uniformity Committee adopted a motion to return a draft model Finnigan Method: Combined Reporting Statute to the working group. The focus of the group will be developing options for the treatment of NOLs.
Treatment of Net Operating Losses
The draft model allows net operating loss sharing with some limitations to prevent abusive practices. The committee received comments from a state that raised issues with NOL sharing:
- carry forwards; and
The commenter suggested that the NOL changes were not necessarily required and the model statute should not contain specific loss and credit sharing rules. If the statute was going to contain NOL rules, the commenter thought more time should be spent considering the provisions.
The committee discussed several different options. Among those were:
- developing a white paper discussing treatment of NOLs; and
- drafting more than one version of the model NOL language and letting states choose.
The committee decided to develop several versions of the model NOL language for states to choose from. The committee determined this approach would:
- promote consistency for taxpayers; and
- allow states to meet their policy choices.
Federal Legislation Possibly Impacting the States
The Executive Committee discussed the possibility of federal legislation that may impact the states. Several of the bills were introduced in response to TCJA changes made to the state and local tax (SALT) deduction. The presenter mentioned that the prospect of federal legislation being passed did not seem high.
Even a bipartisan bill, the Mobile Workforce State Income Tax Simplification Act of 2019, had dim prospects. New York has concerns with the legislation. New York members hold several leadership positions in the U.S. Congress that could prevent passage.
There have also been several bills introduced that seek to alter the state and local tax deduction cap. The legislation includes bills to:
- fully restore the deduction, the SALT Deductibility Act; and
- repeal the limitation on the deduction, the SALT Fairness Act and
- repeal the limitation on the deduction, the State and Local Tax Deduction Fairness Act of 2019.