Transportation Industry: Traveling Thru Taxes

1 Transportation industry : Traveling Thru Taxes Bill Backstrom Juli Dorrough Partner Vice President-Tax Jones Walker, LLP JB Hunt Transport Services, Inc. New Orleans, LA Lowell, AR. 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina Session Description This session is an introduction to the Transportation industry and some of the state and local tax issues that both asset-based (trucking, rail, airlines and maritime) and non- asset-based (freight brokers and freight forwarders) Transportation intermediaries face We will cover topics such as nexus, apportionment, other income tax issues and federal laws relative to Transportation industries The session is geared toward tax professionals interested in learning about the Transportation industries and will be a great refresher for those already practicing in Transportation fields 2017.

2 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 2. Learning Objectives After attending this session, you should be able to Obtain a general understanding of the Transportation industry Distinguish between asset based and non-asset based Transportation intermediaries and the types of services provided by each type of business Understand how Transportation companies apportion their income Identify activities that will create income tax nexus in a state and how those nexus-creating activities differ from other industries Be familiar with other income tax issues the Transportation industry faces 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 3. The Transportation industry Encompasses Many Modes of Transportation & Types of Services: Movement of people or freight on ground, air or waterways Railroads Trucking 3 PLs Maritime Airlines 2017.

3 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 4. Types of Trucking Companies Truckload Drayage LTL Private Carriers How do Owner Operators fit into the puzzle ? 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 5. Other Types of Transporters Maritime Common carriers Contract carriers Businesses that lease or rent maritime assets to Transportation companies Airlines Railroads 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 6. How Do Non-Asset Based Transportation Entities Differ From Those That Are Asset Based ? Non-asset based Transportation entities, commonly known as 3rd-party logistics companies, intermediaries, or 3 PLs, arrange the movement goods from producers to sellers 2017.

4 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 7. Non-Asset Based Transportation Entities Work in every mode of Transportation Earn revenue from the service of connecting shipper to carrier Many traditional Transportation companies also have 3PL operating divisions or subsidiaries 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 8. Key Income Tax Issues for Transportation Companies Nexus Tax Base Apportionment of Tax Base Federal Laws Applicable to Transportation Industries 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 9. Nexus 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 10.

5 Nexus General Principles Commerce Clause Requires a substantial nexus with the taxing State . Due Process Clause Requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.. State Statutes Generally contain nexus standards, such as doing business in the state, owning property in the state or deriving income from sources in the state.. 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 11. What Creates Nexus in the Transportation industry ? MTC De Minimis Nexus Standard (special rules for trucking). No nexus unless company: owns or rents any real or personal property in the state (beyond mobile property);. makes any pick-ups or deliveries within the state;. travels more than 25,000 mobile property miles within the state.

6 Makes more than twelve trips into the state Ex. La. 47 (C)(2) (does not include the 25,000. mobile miles provision). 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 12. Nexus Motor Carriers Examples of Non-Nexus Cases Some states ( , Wisconsin, Virginia and Massachusetts) held that interstate motor carriers were subject to income tax because their trucks passed through the state, even though the companies had no employees or tangible property permanently located in the state and executed no contracts in the state 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 13. Nexus - Railroads Examples of Non-Nexus Cases Courts in Georgia and Kentucky held that the state could not impose an income tax on a railroad car company whose only contact with the state was the movement of its cars through the state by railroads to which the cars were leased Examples of Nexus Cases In cases with similar facts, courts in Arkansas, Oklahoma and Oregon held that the car companies were subject to income tax 2017.

7 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 14. Nexus Issues for Transportation Industries Solicitation of Sales Not protected under 86-272. Factor presence nexus in states with market-based sourcing (for non-asset based carriers). 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 15. Apportionment 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 16. Apportionment General Principles Settled law that the entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspect of interstate affairs.. Commerce Clause requires that income tax must be fairly apportioned and fairly related to the activities in the state Due Process Clause requires a rational relationship between the income attributed to the State and the intrastate values of the enterprise.

8 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 17. Apportionment General Principles Supreme Court Test for Fair Apportionment Both of two components must be satisfied Internal consistency the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the unitary business income being taxed, and External consistency the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated.. 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 18. Apportionment General Principles Supreme Court allows broad discretion to states to adopt apportionment formula, but will strike down an apportionment formula if: Taxpayer proves by clear and cogent evidence that income attributed to the taxing jurisdiction is in fact out of all appropriate proportions to the business transacted in that State, or The apportionment formula leads to a grossly distorted result.

9 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 19. Apportionment General Principles UDITPA Provisions Divides income into business income and non-business income Business income is income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business organizations.. All other income is nonbusiness income . 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 20. Apportionment General Principles UDITPA Provisions (cont.). Nonbusiness income is allocated to the state that is deemed to be the situs of such income Business income is apportioned pursuant to a three-factor formula Sales, property and payroll Equally weighted Many states have modified the standard.

10 Three-factor formula ( , single sales factor or weighted factors). 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 21. Apportionment General Principles UDITPA Provisions (cont.). UDITPA provisions generally are incorporated into the Multistate Tax Compact Compact is administered by the Multistate Tax Commission ( MTC ). MTC promulgates regulations interpreting UDITPA. Some states have adopted all or a portion of the MTC regulations 2017. 2017 IPT Annual IPT Conference Annual Charlotte, Conference NorthNorth Charlotte, Carolina Carolina 22. Apportionment General Principles UDITPA Provisions (cont.). UDITPA apportionment formula designed for manufacturing and mercantile businesses UDITPA contemplates that states will enact special legislation ( , apportionment formula) for certain industries Some states have enacted special apportionment provisions for certain Transportation industries By statute, regulation or pursuant to UDITPA 18 equitable apportionment authority 2017.