1. AGA/INGA Taxation Committee Meeting June 24, 2008 State Taxes – Year In Review Michael J. Semes, Esquire Blank Rome LLP One Logan Square Philadelphia, PA 19103 215.569.5476 Semes@BlankRome.com

2. 2 Current State of The State Tax Environment Slowing economy Revenue shortfalls Continuing shift to service (away from manufacturing of goods) economy Intergovernmental information sharing

3. 3 States’ Situation – Urgent Need To Raise Revenue Legislation, regulations and rulings –Attempt to close perceived loopholes Nexus Combination Addbacks Apportionment –Additional Reporting requirements Litigation –More aggressive positions –Less willing to settle on reasonable terms Audits –Increased activity –Heightened scrutiny Abandoned and Unclaimed Property

4. 4 Taxpayers’ Situation More burdensome reporting requirements –SOX 404 –FIN 48 Constrained resources Planning more difficult Other?

5. 5 Perfect Storm? Taxpayers: More detailed disclosure +Fewer in-house resources +Budget constraints on outside resources States: More information from taxpayers +Available resources in-house +Hungry for revenue +Willing to take unreasonable positions

6. 6 What’s a Taxpayer to do? Proactive Model, model, model Protect workpapers Lobby –Individually –Trade groups Reactive Defend audits diligently Do not concede valid positions Voluntary Disclosure Agreements

7. 7 State Attacks Nexus –Less than a physical presence –Slight presence Tax base –Combination –Sham –Addbacks Apportionment –Throwback –Throwout –Sourcing –Right to apportion Disclosure –FIN 48 workpapers –Discovery

8. 8 Nexus Legislation MTC Proposal & OH Commercial Activities Tax –$50,000 or 25% of property, –$50,000 or 25% of payroll, or –$500,000 or 25% of gross receipts. MI Business Tax –Physical presence for more than one day or active solicitation –$350,000 of gross receipts NH Economic Presence Legislation –“Significant economic presence” NY Credit Card Bank “Economic Nexus” –1,000 or more NY customers or contracts with NY merchants –NY customers and NY merchants combined total 1,000 –$1,000,000 or more NY receipts

9. 9 Nexus Regulations and Interpretations OR “Substantial Nexus” Regulation –“’Substantial nexus’ for corporate excise and income tax jurisdiction purposes... does not require a taxpayer to have a physical presence.” ME “Economic Nexus” Interpretation –Interprets “full extent permitted by U.S. Constitution” in regulation to mean “economic nexus” may be sufficient.

10. 10 Nexus Litigation Economic Nexus –Lanco and Praxair (NJ) –MBNA (WV) –Geoffrey and Capital One (MA) –Geoffrey (LA) Attributional Nexus –Barnesandnoble.com (CA)

11. 11 Other IHC Attacks The Classics Chicago (MD) Fleet Funding (MA) The TJX Companies (MA)

12. 12 Apportionment Issues Throwback –Disney Enterprises (NY) –Welch Packaging (IN) Throwout –Pfizer (NJ) Sourcing –Fluor Enterprises (MI) Right to apportion –New Jersey Natural Gas (NJ)

13. 13 Taxpayer Lobbying Efforts Business Activity Tax Simplification Act of 2007. –Modernizes P.L. 86-272 Sales Tax Fairness and Simplification Act –Allows SST complying states to require out-of-state sellers to collect sales tax on remote sales. Mobile Workforce State Income Tax Fairness and Simplification Act –Limits employer’s withholding responsibility to states where employee resides or is physically present performing duties for more than 60 days. Telecommuter Tax Fairness Act –Prohibits a state from taxing a non-resident who works from home.

14. 14 Taxpayer Litigation Efforts Northwest Energetic Services (CA) – unapportioned LLC fee is unconstitutional PECO (PA) – state’s desire for more revenue does not trump plain language of statute Sand Lake Properties (KY) – limited partnership not subject to retroactive legislation Sasol North America (MA) – distributive share from partnership apportionable McKesson Water (NJ) - §338(h)(1) gain allocable Sparks Nugget, Inc. (NV) – food purchased to prepare complimentary meals not subject to sales tax

15. 15 What will we be talking about next year???