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good afternoon everybody this is David Kasper I'm with the salt group in Fargo North Dakota and joining us later will be Stacey out of our Denver office it's one of the first things that I wanted to get out of the way if I can there we go so our overview today will be we're going to talk a little bit while registering your business and fair amount of time on the wayfarer case and some of the new laws that are coming out Stacey will go through developments in our income tax arena okay well there was a pretty notable court a couple three weeks ago the old quill desert decision has been overturned states are changing rules there's lots of talk in the media about this but there seems to be a bit of a misconception these new rules are in addition to existing rules already if you have physical presence in a state be it through property that you own or lease employees on the ground making sales making repairs any of those sort of things you still possibly have the nexus connection and a need to register for and collect tax in other states but any time in a state especially in North Dakota if you're have an agent someone you've hired to do something for you or an employee in the state that comes down to selling tax litems a trade show if you or someone you've hired come into the state to install assemble service or repair something or the more common delivering goods to North Dakota using your own truck you already have the nexus connection and need to consider whether or not you should be registering those laws have been in effect for many years and they still are just want to review that seems that the economic Nexus rules have been overshadowing these a bit lately the cool decision came out and seven excuse me not the coil the Wayfarer decision overturning quill came out and the very next morning at 7:00 a.m. the state of North Dakota had already changed its website and posted this screen they had already put it out there what their requirements are for remote sellers now odd all states have remote seller rules there's about 15 16 of them that do not all of them have posted their guidance yet but for now we're just going to concentrate on North Dakota as they are our topic for the day note I have put the website link at the top if you wanted to write it down get there later but who is a remote seller anyone who makes sales in North Dakota by using the internet postal mailing by phone I actually purchased some pieces by phone the other day instead of using the website I called the man and made the transaction by fax possibly possibly not but the internet sales also include things you're selling through Etsy eBay Amazon or any other number of formats when you click that link on the North Dakota website the more information this is what the state has posted if you do not meet the small seller exception which is you have less than $100,000 in taxable sales shipped to North Dakota or less than 200 transactions that's would be invoices of taxable sales shipped to North Dakota see if you're not over those thresholds of 100,000 the taxable sales or 200 taxable transactions if you haven't exceeded that threshold and you're not already registered like because you had physical presence at this point you don't need to do any registration but if you have made into the state a hundred thousand in taxable sales or two hundred taxable transactions you are now required by North Dakota State law to register and begin collecting our sales tax this includes the state and all the local taxes on or before October 21 2018 or sixty days after you cross that small seller threshold a free example if you were under that threshold last year and you're under this year say through about July and then July you cross that threshold they're giving you another 60 days to get registered and move forward another part of this way Paige is they offer you some fa Q's at the top highlighted line it says register to collect sales tax in multiple states through the streamlined sales tax registration I'm gonna throw out a big warning here if you use that link you are registering through the streamlined sales tax group which is about 20 states though they've gotten together and when you register there you register for all 24 states not just the ones that you wanted to and maybe not necessarily all the ones with remote seller reporting and you were expected to begin remitting those returns immediately I much prefer the link below it that is apply for a North Dakota sales and use tax permit you can do this online it's pretty straightforward and you are only applying for a North Dakota permit that would be the link I would choose to use in the FAQ section a couple of notable ones that I highlighted the first one what is a remote seller just in case you're curious damn am i doing something that's considered being a remote seller likely if you're shipping any type of taxable product into North Dakota or bringing it in you will be considered a remote seller they also have a section down there that discusses through a marketplace which is referring to the Amazons Etsy's and eBay's looks like we have our first polling question wayfarer remote seller requirements are being adopted by more and more states the consequences for not complying can be significant how aware are you of the states are you very aware heard about it or this is completely new and we'll give it a moment or two you looks like most of us are aware but have not taken action okay the next question becomes if I'm a remote seller what sort of items are gonna be taxable in North Dakota pretty much anything that you can hold in your hands is going to be considered taxable here clothing most tangible property most non farm machinery and equipment if there's an invoice and it has a taxable item on it any associated freight delivery charges on that invoice will also be taxable downloaded software is taxable here as are some maintenance contracts prepared foods or meals are typically taxable and tickets to entertainment such as movie tickets and concerts are also taxable most tangible items are taxable here very very few services are subject to tax so sales tax is calculated based upon where the purchaser receives the item North Dakota is what they refer to as a destination based State if you pick up an item at the store you pay the taxes in effect at that store where you set your hands on the item if you order something over the phone or the internet and it is shipped to you in Jamestown you have received the item and taken possession in Jamestown it should be taxed using the tax in a fair at the destination of Jamestown if the item is shipped from North Dakota to another destination say Minnesota North Dakota tax does not apply North Dakota is only taxing items where the purchaser is taking possession in the state throughout the year we do get quite a few questions regarding the dreaded sales tax audit audits go through a pretty standard pattern you'll receive a notice they want to come and audit there will be an initial meeting to discuss what they're looking for what the expectations are we'll provide some initial documents the auditor will then request a bunch of information from you and they may process that information using statistical sampling they may just pick certain months and use that to forecast over the other periods during this time you use your resources to prove whether or not certain items were taxed or should be taxable after you've done what you feel you can do typically in a summary of audit findings comes out it's a listing of all the items that the auditor believes were taxed incorrectly usually it's accompanied by a total dollars and a break out of the penalty and interest one thing to note that in North Dakota interest on a sales tax audit is calculated at 1% per month or about a 12 percent annual interest rate in a lot of in audits back aways that interest can be just about as much as the actual tack do but something think about after you have received this notice or it any point during the audit always have someone else review the auditors findings think of this as asking for like a second opinion from a different doctor there's a lot of reasons these audit findings may not be representative of what's actually happened perhaps the auditor doesn't understand your business maybe you're in heating and air conditioning the invoices they were looking at were complete Greek to them and they just looked to see whether or not they had tax auditors me documentation sometimes auditors interpret the tax rules differently than other people do just because the auditor is there and their people work and doing their job they are there to review your records as efficiently as possible and see if you owe any money or if the state owes you any money but typically auditors are not there to educate you about tax rules especially if they could benefit you the reason I say have somebody else look at them I have yet to look at an audit findings from pretty much any state and not make a reduction in it by Mat methods as simple as getting invoiced copies getting a better understanding on records explaining it differently to the auditor so please if you get an audit findings and it's got a substantial dollar amount on it reach out to somebody and ask them to take a look at it there's no point paying for something that's you really shouldn't have to and typically you can make a reduction in the audit notice one thing we do is people sell their business or they just close up shop and they forget to deal with the sales tax license they were so concerned with selling assets getting the deal done they did not close out their sales tax permit and then of 60 days later the notices from the states start where is this return where is that return North Dakota closing out a sales news tax license is pretty straightforward when you're supposed to complete your final sales tax return and they're all pretty much online now within 15 days of closing the doors or the sale the business usually if you've done in order to code a sales tax return you see a box up near the top that says will this be your final return don't ever mark that unless it's actually your final return if you've sold the business they will ask you to provide the new owners information that's all there is to closing out that sales tax permit so if you sell your business closed it whatever changes please do not forget to close out that permit and before I turn it over to Stacey I just want to let everybody know that we do have a webinar coming up at noon August 2nd where we will be reviewing the initial 10 or 12 states that have issued guidance on remote sellers and tax collection Stacey all right thank you David okay so I mentioned I'm going to launch into a few income tax topics for North Dakota you know similar if you've been in our other state presentations kind of similar flow here but in the wake of Wayfarer we've got some things maybe that we might need to think about from an income tax side particularly after they're released in Nexus and normally and generally income tax Nexus standards are completely different from geotechnics standards however now with wayfarer and the economic rules they're starting to look a little bit alike however I did want to just kind of highlight some nuances and we can you know we'll talk about North Dakota North Dakota specifically here but just wanted to have people take away a few things think about particularly like I said in light of Wayfarer and how this might impact income tax Nexus but generally thinking for income tax Nexus in North Dakota from a policy standpoint the corporate income tax applies to corporations that are quote-unquote engaged in business in the state or have North Dakota sources of an income well interestingly enough North Dakota doesn't specifically define engaged in business but they from a policy standpoint have a view guidelines on what is a nexus creating activity and a lot of these are related to physical presence so you know kind of again akin to our sales tax Nexus if you have physical presence for it in this in North Dakota you're going to have sales tax mixes and income taxes so presence of agents or independent contractors so it doesn't necessarily have to be w-2 employees it could be a third party that's acting on your behalf credit checks are reports by third parties any kind of repair services whether that's by an employee or a third party little negotiations and closings and they do have a few minor rules around if you if you're an out of state if you have an out of state server and you're selling Cod based Computer Services again it's all around physical presence but it would be in that situation if you had employees that were soliciting services in the state or hired to set up or configure those services and then owning leasing or renting spaces on a server in North Dakota so those all kind of seem very obvious physical presence maybe not so much on the cloud computing that might be a little bit of a something that you might be surprised at however keep in mind that it's all related to the employees or independent reps that might be providing those kind of services in the state on on a cloud-based computer service the heck's now the state currently has some guidance and again this is all kind of policy driven right now where they say okay well we've got a few things that we said we know create Nexus but then we've got a few things that we say do not create Nexus so employee training seminars recruiting hiring evaluations local media advertising catalogs direct mail advertising and then having bank accounts in the state and then with our out-of-state servers if you could before those kind of businesses if you're granting North Dakota customers access to software on the internet or you're selling those kind of cloud-based computer services to North Dakota customers and you have an out-of-state server then those activities by themselves will not create Nexus again keep in mind that any kind of physical presence related to those types of activities would create Nexus but when I want to call your attention to and just like I said at the outside just something to keep in mind is that we've got a situation where North Dakota does not for income tax purposes have what's called sector presence Nexus so there's a lot of things out there we've talked about California I said in Denver Colorado and Colorado has a factor presence Nexus as well for income tax purposes and it is very similar to the economic Nexus standards for sales tax however the thresholds in a lot of cases are higher and so like for Colorado in California if you sell over $500,000 of a new make $500,000 of sales into Colorado or California then those days say that you have Nexus for income tax purposes well North Dakota does not have a similar rule for income tax purposes but as you recall they do say that your you would be subject to the corporate income tax if you're deriving income from North Dakota sources so what we could tend to see in the future and you know this is a little bit of uncharted territory yet but what we can see in the future is that we with our states that don't have as factor presence Nexus for income tax purposes but they have a fairly broadly defined doing business standard we could see that if we have tax payers that exceed the nexus threshold for sales tax that that state could then argue while you're exceeding the threshold for income tax - because you're deriving income from our state so that's something like I said it's unchartered territory we're not sure how the states are going to react with that however I just want to caution people that we could start to see this and we could also start to see Nexus questionnaires come out to taxpayers particularly as it relates to registering for sales tax and what they what these states could start doing is then sending Nexus questionnaires and saying okay what are you doing for income tax purposes in our state and therefore then we could start down this path of having to file both okay so even though so it can be a little bit more complicated from an income tax perspective and something that doesn't apply on the sales tax side is public lady six to 72 so we may have a situation where okay we
re deriving income from estate but let's say we're actually selling tangible goods into the state well North Dakota has a pure income tax as a net income based tax and so therefore public law 86 to 72 applies and if you're not familiar with what that is or refresher public lady 1672 applies to businesses that sell tangible personal property it would apply to businesses that all they're doing in North Dakota is soliciting sales of tangible personal property and those orders are accepted and approved and shipped from outside North Dakota so it's a very narrow exception but what it does is it protects that income and then the taxpayer wouldn't necessarily have to wouldn't have a an income tax liability in North Dakota so like I said though this is just on the income tax side doesn't apply to sales taxes and it's only for the sale of goods and so it's very narrow and you can't you can't be doing other activities or the employee or the rep cannot be doing other activities like credit checks approving orders on the spot providing services etc because that would kick them out of public ITCC seventy-two protection so even though like I said we may have Nexus per se where we've got a physical presence or we're deriving income from the state the next step in the process is well what am i selling and do I have a liability based upon what I'm doing in the state and what I'm selling and it's honestly a very similar analysis on the sales tax side as well if you think about it because we might be exceeding those economic threshold however is what we're selling actually taxable from a sales tax perspective so it's a similar analysis on the income tax latitude okay so now our next polling question do you have employees or agents traveling into North Dakota providing services yes no I don't know but I better check based upon some of the information I'm hearing on this webinar oK we've got something to do a lot that don't and actually not that many of it don't know so that's great people are on top of their activities in the state that's great okay moving on okay so I'm going to talk at first about the corporate tax regime and then I'll talk a little bit about pastures but it's here on the corporate tax side from a when you have an affiliated group of corporations North Dakota is a default worldwide unitary filing and what is unitary and unitary is kind of a lofty term and means a lot of different things depending upon the state there's a lot of case law around what constitutes an unitary business but suffice it to say that technically it is a group of corporations and they don't have to meet the definition of an affiliate for federal income tax purposes the rules around ownership percentages and just intercompany activities and just activities in general of the entities that are related all go into what is the unitary business and it's not just one particular factor there's a lot of cases like I said out there not just in North Dakota but in other states that have unitary rules that have set some precedents around okay a unitary business typically falls into four entities that fall into unitary unitary business generally have similar characteristics around Unity's of ownership unit ease of operation and unit ease of use and that's these ative these are the prongs that North Dakota uses now another state to use some of these prongs and a few other other test economies of scale and Center some of those words you've probably heard phrases you've probably heard around a unitary business but generally speaking if you have a group of corporations and again doesn't have to be an affiliate per se as defined under the IRC but if it's more than 50% owned and it's in the similar line of business or its steps in a in a vertical process if they're centrally managed if they have similar Board of Directors if they have financing decisions that are approved by the parent for example there's a lot of interplay amongst the Edit EES so much so that they really cannot operate autonomously or they don't operate autonomously and this is this is again a very subjective test versus its qualitative not quantitative so it's not necessarily a black-and-white answer depending upon your tax payer situation however they do have some guidelines here around you know like I said and same general line of business vertically integrated or centrally managed so those are some of the bigger tests for North Dakota now like I said it's a default worldwide unitary filing so that would mean that if you have a group of corporations that operate in or perhaps you have foreign subs or perhaps your your owned by a foreign parent then from a default perspective and your unitary then you would file one big group in North Dakota and then apportion your income to the state based upon the worldwide income however North Dakota does provide a water's edge election there are some stipulations around that it can be made on an original timely filed return including extension so that's kind of nice it's not one that has a separate election that's filed separate Montana is one that has that and so you can file it with the return however it is binding for five years so you're in a situation where you know if you're looking at doing this you might want to run some numbers because it can become a math exercise perhaps it's in your best interest to file on a worldwide basis because you've got all these glosses and if you once you make that water's edge election you're not able to apply worldwide losses to a water's edge or vice-versa so sometimes you have to have a little bit of a crystal ball to know okay well if I make this election finding for five years and then I am stuck with it so it can be something that I would recommend that taxpayers take a look at members of a water's edge filing will include u.s. incorporated affiliates excluding 80/20 s AG distance its export trade companies and any non-us incorporated entity if an affiliated corporation owns over 50% of its building stock and it's more than 20% of its property and payroll is in the US okay so from a federal conformity standpoint the starting point for the corporate income tax return in North Dakota is line 30 of the 1120 there as a graduated rate scale you've got 1.4 1% on taxable income up to 25 grand and then up to 4.3 1% on taxable income above 50 keep in mind that if you do make that water's edge election that you have to pay a three and a half percent surtax on the taxable income that's calculated on a water's edge basis so just keep that in mind again if you're in the situation where you're not quite sure if you're going to make that election because you'll want to do the math to incorporate that additional three and a half percent surcharge okay then that takes us to our next polling question what is the current maximum corporate income tax rate for water veg filers in North Dakota this is zero three point five percent seven point eight one percent or nine point nine nine percent all right a little bit of trick question so the surcharge is three and a half but the total rate is seven point eight one percent so we kind of got half and half there so okay moving a lot maybe okay all right so I'm going to talk a little bit about apportionment for the income tax so generally speaking up until 16 taxpayers were required to use an equally weighted three factor formula then there became an election that was available where a single sales factor was kind of being phased in so for 16 and 17 taxpayers that made this election for the more heavily weighted sales factor they had a double weighted sales factor for 15 and 17 so that meant you had some weighted sales and your denominator was four now again this is only for Korps pasture nordic is not are not entitled to this so similar to the water's edge election we've got a binding election for this and it's the same time period so it's five consecutive tax years now for 2018 under the election again it has to be under this more heavily weighted sales factor election then the abortion factor is going to be property factor plus payroll factor plus six times sales factor and your divisor is eight and then after 18 is fully phased in to a single sales factor but again only under the election anybody who does not make the election is under the equally weighted three factor formula and I don't spend a lot of time on property and payroll per se when it comes to the apportionment factor just because those are kind of their more straightforward where we see some opportunities or more complexity is in the sales sir however North Dakota's fairly straightforward sales of tangible personal property is based on destination so it is a sale to a North Dakota customer and it's shipped to North Dakota customer then that is a North Dakota sale for purposes of the sales factor however there is a throwback rule so if you are shipping from North Dakota and you do not have or you're not taxable in the jurisdiction of the customer then that sale may have to come back to North Dakota so what does that mean so basically that means North Dakota's rule is fairly consistent with the you disavow on this which means that if you have a sale that originates from North Dakota it's to the US government then it's going to come back to North Dakota because generally speaking the US government nobody knows really where that is right and so that's really the theory around that so that's going to go back to origination secondly if you have a sale to a jurisdiction in which you do not have Nexus or you're not filing a return then that sale would come back so for example if you've got a situation where you're selling to say that a North Dakota company who's selling to Colorado and that North Dakota company does not have Nexus in Colorado in that pile of Colorado return then that sale to Colorado would get thrown back to North Dakota similarly if you had a situation where you had a sale to Wyoming but let's say you had Nexus in Wyoming so Wyoming doesn't have an income tax well that doesn't matter then that sale would actually not get thrown back to North Dakota because it because the company has Nexus and Wyoming and therefore it would be considered a Wyoming sale so that's kind of how the throwback rule can work in North Dakota is like I said a more if it follows the you tiptoe rule which is fairly traditional with respect to the throw back and on the sales of other than tangible personal property and serve this is where we get a little bit of gray area and we talked about other states where they're moving towards market-based sourcing so usually that equates to if the benefit of the services received in a state then then that sale of the service would go to that state North Dakota has not passed legislation or adopted those rules yet so they still operate under the cost performance rules which means that if the greater costs performing the service occurs in North Dakota the North Dakota would want a hundred percent of the sale so you have a situation where and this happens in lots of states and I know that there's a lot of talk out there about this being completely unfair and I get it but when we're talking about state taxes sometimes fairness is goes out the window a little bit but what can happen and when you have the sale of services that let's say for example Colorado where I said Colorado is a partial or a proportional class performance state which basically means at least as of right now 2019 we're going to change however right now let's say that a a tax payer performs some of the service for a customer in Colorado the Colorado would say well we want that piece of time that the tax payer was there performing that service well what if the majority greater than 50% of the cost performing the service for that customer an entirety occurred in North Dakota well that would mean that then North Dakota would want a hundred percent of it and then Colorado would still want their piece for the time that was spent here so that's where if you can get whipsawed and we see tax payers where that occurs and it remains to be seen perhaps North Dakota will change some market-based sourcing but I think as we've as you may imagine and what we're seeing right now is that we've got so many states including North Dakota that are so focused on the economic Nexus rules true for sales tax that we may not see so much movement on the income tax side and also in that vein some of you out there might be wondering about tax reform you know we've got all these federal tax reform provisions and what might North Dakota might what might North Dakota be doing on that well their legislature did not meet to discuss these those provisions and so we're in a situation where whatever they conform to as of last year they are conforming to still and so though I believe there's their time frame to me is next year and so we might see situations where they address 955 they address guilty they address some of these other provisions that are part of federal tax reform but for right now everything is status quo okay so I'm going to talk us for a couple minutes about pass-through entities and North Dakota is fairly straightforward as it relates to past Trinity and the entities themselves so partnerships as Corpse are not subject to tax in North Dakota at the entity level the income that is sourced in North Dakota that those entities distribute so then the income that is generated in North Dakota from those entities is distributed out to the partners and shareholders and they are the ones that are subject to individual income tax in North Dakota s corpse file of form 60 partnerships file Form 58 they do impose non-resident withholding so a lot of states have done with it withholding because they want to get their money what happens and what's happened over time and why states have instituted non-resident was holding and that long time ago they were just getting partnership or escort returns from the from the entities and sometimes the partners themselves were not filing so in order to protect themselves the the states started instituting non-resident withholding so that they would get money and basically what that means is that the entities paid is known as a holding on behalf of the partners and shareholders and in North Dakota's case if you if you entity that has Northwestern I'm sorry a taxpayer that has North Dakota distributed income of $1,000 or more than non-resident withholding is required they do allow composite returns for pass-through entities and you only have to have one member so there's situations where we have you know wholly-owned of the corpse and those entities can file compile the returns on behalf of their shareholders you do not have to have more than two or two or more and our taxpayer shareholders to be able to file a composite and then as I mentioned earlier when we're talking about the single factor or single sales factor election or the more heavily weighted sales factor election that was only attributable to the corporate tax regime for pass-through entities the apportionment factor is still evenly weighted three factor okay so now that takes us to our next polling question North Dakota imposes which taxes on pass-through entities a minimum tax an annual filing fee all of the above or none of the above all right actually it's none of the above all right and then I believe our next slide is our last polling question which is really just kind of a more for the audience to tell us which kind of presentations you would like to see from us in the future would usually like more information about economic Nexus implications for sales tax collecting and remitting state income tax implications of federal tax reform or surviving a state sales and use tax audit and as David said we do have our Wayfair presentation coming up on August so we really encourage everybody to register and if your schedules permit register and participate in that it's definitely a changing landscape for the sales tab for sales tax collection and we've got a lot of states that are coming on board with various enactments and we've got enforcement dates that are you know kind of all over the board right now and we're going to provide you to all of that information on that webinar okay so got our results here so we're
ind of split all evenly here which is great so that gives us really good information for us I can't tell you um since I tend to focus a lot on the income tax state income tax side here and I Bailey that from a federal tax reform standpoint and some of you are probably well aware of this but the states are slow to to give us any guidance and we've got some states out there that is perhaps given us some guidance on some provisions so for example I've seen some states provide guidance on 965 for example but then we don't really know about anything else we've got some states out there that have you know if they're for example if they if they're an AGI state so for individual contacts purposes that they start with AGI then they've probably provided some and I think probably and some have at this point provided some guidance with respect to what do we doing about the standard deduction so we've seen some movement on that as well but I will say that the states have are slow and that information is trickling and we've got legislators that we've only got a few states where legislators me continually most everybody else's legislature has has adjourned and so we're in a situation where we're probably going to see more information later this year earlier next year and we'll obviously provide information as it becomes available but with that we're actually done with our presentation a little early and so we're happy to open this up to questions that anybody has so Tara I think that means I pass it back to you
