2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

The sourcing issue was recently considered by the Circuit Court of Florida’s Second Judicial Circuit in Target Enterprise, Inc. v. Fla. Dept of Rev. on November 28, 2022. Upon judicial review, the Court abated the assessment from the Florida Department of Revenue (“FDOR”), siding with Target Enterprise that the claimed receipts from its sales of services should be attributable to Minnesota, the state where the majority of its payroll costs were incurred during the relevant tax periods, and not the state of Florida. While the Court’s ruling was primarily concerned with the application of the FDOR’s alternative apportionment method and the documentary support issues raised by the FDOR, the Court’s decision in this case nevertheless provides important guidance for Florida taxpayers required to source receipts from the sale of services within the state. Massachusetts Sourcing Recently, the Commissioner of Revenue issued Technical Information Release (“TIR”) 22 14 offering the Commissioner’s interpretation of the decision in VAS Holdings & Investments LLC v. Commissioner of Revenue and seemingly limiting the application of the decision rendered to other taxpayers.

In VAS Holdings & Investments LLC v. Commissioner of Revenue , the Supreme Judicial Court held that Massachusetts law adheres to the unitary business principle in determining how to apportion income. The court further held the Commissioner had violated Massachusetts law when he attempted to apportion and tax gain recognized by a non-resident S corporation that sold an interest in a pass-through entity with operations in Massachusetts based on the apportionment factors of the pass through entity and with which the S corporation was not engaged in a unitary business. While the TIR provides some critical insight into the Massachusetts Department of Revenue’s position, the decision rendered in VAS Holdings & Investments LLC v. Commissioner of Revenue should now be the standard for sourcing gains recognized in Massachusetts from similar sales. New Jersey Sourcing The “Joyce” rule has been supplanted. All types of combined reporting groups are now required to use the “Finnigan” apportionment method and compute New Jersey sourced receipts by including all combined group members’ receipts in the sales factor numerator, regardless of whether the member has a nexus with New Jersey.

New York Sourcing In the Goldman Sachs v. NYC Tax Appeals Tribunal Tax case, the Court addressed how capital gains should be sourced when out-of state businesses sell interests in pass-through entities. The Court upheld New York City’s application of the investee apportionment or allocation method, which looks to an investee’s activities in a state instead of the investor’s activities when apportioning the tax. The Appellate Court in the Goldman Sachs v. NYC Tax Appeals Tribunal Tax case dismissed the Taxpayer’s appeal. It held that the New York City Tax Appeals Tribunal’s decision to uphold a tax assessment on the taxpayer corporation’s gain from the sale of an indirect interest in a limited liability company (“LLC”) was rational even where the out of-state taxpayer corporation had no property or employees in New York City, and was only a limited partner in a partnership that owned an interest in an LLC that conducted business in New York City. Moreover, the taxpayer corporation and the LLC were not engaged in a unitary business. Nonetheless, the Appellate Court upheld the New York City Department of Finance’s position, requiring the taxpayer corporation to apportion the gain from the disposition of its LLC interest using the LLC’s apportionment factor of one hundred percent.

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