This Week in State Tax

The Georgia General Assembly has approved H.B. 111 that would reduce the corporate and personal income tax rate from 5.39 percent to 5.19 percent, effective for tax periods beginning on or after January 1, 2025. The measure is awaiting signature by Governor Kemp. In addition to the reducing the current year rate, H.B. 111 also provides that the income tax rate will decline by 0.1 percent annually until the rate reaches 4.99 percent. The scheduled reduction will be delayed by one year if any of the following is true on December 1 each year: (a) the Governor’s revenue estimate for the upcoming fiscal year is not at least three percent greater than the current year estimate; (b) net revenue collections for the prior fiscal year are not higher than each of the previous three fiscal years; or (c) the revenue shortfall reserve fund does not have a balance that exceeds the projected decrease in receipts from the prospective rate reduction. The Office of Planning and Budget is to announce whether each of the thresholds is met by December 1 each year until the tax rate has reached 4.99 percent. For further information on H.B. 111, please contact Greg Aughenbaugh.

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An Illinois appellate court recently affirmed an Illinois Tax Tribunal ruling that a member of the unitary group could not be excluded from an Illinois return as an 80/20 company. Immediately prior to the tax years at issue (2016-2017), the taxpayer, a manufacturer of food and beverage products, underwent a reorganization in which certain foreign activities, including the secondment of expatriate employees to foreign host companies, were centralized under a single disregarded entity. The disregarded entity was then placed below the taxpayer’s domestic subsidiary in the organizational structure. After the change, “employees” of the disregarded entity were treated as foreign employees whose compensation was included in foreign payroll when determining whether the domestic subsidiary would be considered an 80/20 corporation. Under Illinois law, a unitary business group excludes the income of a member whose business activity outside the U.S., as measured by its property and payroll factors, exceeds 80 percent of its total business activity. On audit, the Illinois Department of Revenue (Department) disallowed the 80/20 treatment and included the domestic subsidiary in the taxpayer’s unitary group. The Department’s determination was first upheld by the Illinois Tax Tribunal, and then by a circuit court. The Tribunal and the circuit court both agreed that the payroll of expatriate personnel should not have been charged to the domestic subsidiary through the disregarded entity, and (as such) the domestic subsidiary could not include expatriate personnel payroll in its payroll factor in determining if it meets the requirements of an 80/20 company excluded from the unitary group.

 In upholding these determinations, the Appellate Court of Illinois, First District focused on the disregarded entity’s relationship with the expatriate employees. The court agreed that the disregarded entity was not the bona fide employer of expatriate personnel because the foreign host companies (not the disregarded entity) had “the right to direct, control, and supervise the day-to-day services performed” and to prepare annual performance reviews for final compensation determinations. The disregarded entity had no such control or supervision because it had no managerial or supervisory personnel of its own, and thus, had no ability to ensure expatriates complied with their secondment agreements. In addition, the court found that the foreign host companies truly bore the costs of expatriate services because any amounts paid to expatriates by the disregarded entity were reimbursed by the foreign host companies. Because these employees were not truly employees of the disregarded entity, payroll paid to those employees could not be considered foreign payroll in determining whether it met the 80 percent payroll threshold. Contact Bradley Wilhelmson with questions about PepsiCo, Inc. v. Department of Revenue. See the January 25, 2025, TWIST for a review of the circuit court decision in this matter.

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An Illinois appellate court recently addressed three issues involving a vehicle financing company’s obligation to collect and remit Chicago’s Personal Property Lease Transaction Tax (lease tax) and Use Tax for Titled Personal Property (use tax) on leased vehicles it financed.  Chicago imposes the lease tax on the lease or rental of personal property used in Chicago or on the privilege of using personal property in Chicago that has been leased or rented outside Chicago. The use tax is imposed the use of titled personal property in Chicago when the property is purchased at retail.

The taxpayer, an automobile financing company, took assignments of motor vehicle leases from independent automobile dealers that operated inside and outside Chicago and purchased the vehicles being leased from the dealers. The taxpayer required dealers to enter into “Master Lease Agreements,” which governed the terms of the lease transactions, including the use of the taxpayer’s “SmartLease” form laying  out the vehicle’s value, license and registration fees, other taxes and fees due, monthly lease payments, the amount of the capitalized cost reduction (CCR) payments (i.e., downpayments), and the taxpayer’s rights to the first month’s payment.  The dealer assigned all its rights, title, and interests in the subject vehicles to the taxpayer. The Chicago Department of Finance audited the taxpayer and assessed taxes for failing to remit certain lease and use taxes. After an unsuccessful protest before an ALJ of the City Office of Administrative Hearings and a state trial court, the taxpayer appealed to the Appellate Court of Illinois, First District.

The primary issues before the court were: (1) was the taxpayer or the vehicle dealer responsible for remitting lease taxes on CCR payments; (2) were lease taxes on CCR payments for vehicles leased outside Chicago, but later used in the city (Move-In vehicles), to be prorated for the period following the move; and (3) could the use tax be imposed on Move-In vehicles. The court first agreed with the ALJ that the taxpayer was responsible for remitting the lease tax on CCR payments collected by the dealer from the customer. The court held that the CCR was clearly subject to the lease tax, and that the taxpayer fully controlled all aspects of the lease transaction once it was chosen to provide financing. In addition, the taxpayer was the ultimate beneficiary of the CCR payments as they were credited to the taxpayer in calculating the price it paid for the subject vehicles, and the taxpayer was clearly the lessor when the CCR payment was credited against the purchase price, thus making it the party responsible for taxes on the CCR payments.

Next, the Court reversed the assessment of prorated lease taxes on CCR payments for Move-In vehicles, agreeing with the ALJ that the tax ordinance did not authorize prorated tax remittance for payments made before the tax obligation was triggered by the vehicle's use in Chicago. Since the CCR payments were made at the inception of the lease, the Court determined that the City did not have authority to prorate lease taxes on the CCR payments for Move-in vehicles. Last, the Court upheld the imposition of use tax on Move-In leased vehicles. Agreeing with the ALJ, the Court noted that the use tax is triggered not by the purchase of the vehicle, but by its use in the city. Therefore, when Move-In leased vehicles are registered in the Chicago, use tax obligation applies to lease payments made from the time of registration until the lease term ends. Contact Drew Olson for more information on Ally Financial, Inc. v. Chicago Department of Administrative Hearings.

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The Oregon Tax Court recently held that a national broadcaster had economic nexus in Oregon through its affiliate stations in the state. The contracts between the taxpayer and its affiliates required the taxpayer to provide programming and “branding support” (i.e., use of the taxpayer’s name and logo) to the affiliates in exchange for weekly airtime on each station and forgiveness of monetary obligations under other contracts. The taxpayer earned revenue from its national advertisers when advertisements were aired by Oregon affiliates. Although the taxpayer lacked physical presence in Oregon, and the contracts between the taxpayer and the affiliates were all executed outside the state, the Department of Revenue (Department) determined that the taxpayer had economic nexus with Oregon. Oregon law states that economic nexus exists when a taxpayer “maintains continuous and systemic contact with Oregon’s economy or market,” “receives significant gross receipts attributable to customers in Oregon,” or “receives significant gross receipts attributable to the use of taxpayer’s intangible property in Oregon.”

In its review, the Tax Court determined that economic nexus existed under Oregon law because (1) the taxpayer’s partnerships with its affiliates created a continuous presence of the taxpayer’s programming in Oregon; (2) a portion of the taxpayer’s revenue from its sale of advertising were attributable to Oregon viewers; and (3) the affiliates made use of the taxpayer’s intangible property (i.e., branding and programming) in Oregon. In response to the taxpayer’s constitutional objections, the Tax Court ruled, despite the taxpayer’s lack of physical presence, the revenue from advertisements targeted at Oregon viewers, the use of intangible property in Oregon as a core part of the taxpayer’s business model,  and the intentional use of affiliate contracts to enter the Oregon market satisfied the “minimum connection” requirement of the Due Process Clause and the “substantial nexus” requirement of the Commerce Clause. Having found that the taxpayer had nexus with Oregon, the Tax Court briefly addressed the taxpayer’s argument against the Oregon “interstate broadcaster” apportionment formula (which apportions taxable income based on the location of the broadcaster’s audience), holding that the taxpayer had not demonstrated that application of the statute was unfair. Contact Nisha Mathew with questions about NBCUniversal Enterprise, Inc. v. Department of Revenue.

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