FILING AND PROCESSING RETURNS

1. FILING AND PROCESSING RETURNS Presenter LESLIE ZIMMERMAN Assistant Commissioner Payment Operations, NYC Finance Facilitator HOWARD REISS Chief of Staff Payment Operations, NYC Finance

2. FILING AND PROCESSING RETURNS Panelists VIRGINIA CHING Unit Manager, Account Examination Unit JOHN CONRY Senior Director, Payment Center Operations ROBERT CONTARD Unit Manager, Revenue Accounting Unit CASEY D. CRAWFORD Senior Director, Commercial Exemptions LINDA LEVINE Unit Manager, Discrepancy and Billing Unit

3. lll. CITY AND STATE AUDIT UPDATE Facilitators RICHARD W. GENETELLI President, Genetelli Consulting Group BRIAN SCANLON Partner, Ernst & Young LLP Panelists PATRICIA F. CONEYS Director of Income Franchise, Field Audit Bureau NYS Department of State Taxation and Finance PAULINE HYLES Assistant Commissioner, Audit Division, NYC Finance

4. lll. CITY AND STATE AUDIT UPDATE Panelists NONIE MANION Director of Tax Audits NYS Department of Taxation and Finance PETER RABINOWITZ Senior Director, Business Taxes NYC Finance

5. IV. DISPUTE RESOLUTION: ELIMINATING FUTURE CONTROVERSIES Facilitators ALVAN L. BOBROW MARK S. KLEIN Partners, Hodgson Russ LLP Panelists DARA JAFFEE Assistant Commissioner. Legal Affairs, NYC Finance MICHAEL NEWMARK Director, Tax Advocacy & Resolution LegalAffairs, NYC Finance KENNETH T. ZEMSKY Partner, Ernst & Young LLP

6. VI. BUSINESS TAX REFORM ROUNDTABLE Facilitator MICHAEL HYMAN Assistant Commissioner, Tax Policy NYC Finance Panelists PETER FABER Partner, McDermott Will and Emery LLP BARRY H. HOROWITZ Partner, Eisner & Lubin, LLP

7. VII. BUSINESS TAX REFORM PresenterMICHAEL HYMANAssistant Commissioner, Tax PolicyNYC Finance

8. Overview

12. Single-Sales Factor Apportionment of Business Income

14. Estimates based on 2001 sample data.

17. Flow-Through Entities

21. Issues Regarding Flow-Through Entities General Corporation Tax Income-plus-Compensation Alternative Tax Base ·Reformed in the 1990s ·Officers’ compensation add back eliminated ·Income exclusion increased from $15,000 to $40,000 ·Compensation paid to greater-than-5 percent shareholders is still subject to alternative tax ·In TY 2003, two-thirds of the alternative tax was paid by S-corporations Unincorporated Business Tax ·Also reformed in the 1990s Tax relief: ·“Small business” credit increased from $600 to $1,800 ·Partial NYC personal income tax credit adopted for UBT paid Additional Reforms under Discussion ·Adoption of PIT credit for S-corporation owners similar to credit for UBT paid ·Increase in UBT fixed deduction for reasonable compensation for services performed

22. Tax Filing Simplification

26. GCT Tax Filing Simplification Proposal ·For non-allocators with no investment or subsidiary capital and gross receipts less than $250,000 ·Eliminate the income-plus-compensation and capital bases ·Allow filers to use NYS ENI in lieu of NYC ENI (with limited modifications – e.g., add back of GCT deducted on Federal return) ·Allow filers to use a much simplified return ·What to do about S-corporations? NYS has eliminated the differential tax on ENI for S-corporations.

27. Utility Taxation

29. VIII. NATIONAL TRENDS AND DEVELOPMENTS Facilitator IRWIN M. SLOMKA Partner, Morrison & Foerster LLP Presenters MICHAEL DUFFEL Director, California Franchise Tax Board HARLEY T. DUNCAN Executive Director, Federation of Tax Administrators DEBRA PETERSEN Attorney Tax Counsel IV California Franchise Tax Board

30. Tax Activity Across the Nation HARLEY DUNCAN Presenter

31. Purpose • Overview of tax activity across the country • Drivers of that activity • Attempt to separate some fact from fiction • Identify issues to consider

32. Business Tax Activity General Themes/Drivers • Broaden tax base and range of taxpayers • Decrease volatility of corporate tax Average change of 11 percent; maximum of -30 percent

33. Business Tax Activity • Improve competitiveness/business climate • Arrest/reverse long-term decline in effective tax rate Decline of about 40 percent in effective rate

34. Corporate Tax Volatility(Year over Year Change) Source: Rockefeller Institute and FTA

35. Effective Corporate Rate1980-2006

36. General Approaches • Alternative tax/tax base Ohio, Texas, Kentucky • Add-back statutes 15 states • Single sales factor Several states • Combined reporting Vermont and Pennsylvania

37. Alternative Taxes Ohio Commercial Activities Tax • Gross receipts tax replaces net income and franchise tax • 0.23 percent tax rate • Applied to all but financials

38. Alternative Taxes Issues • MTC factor-presence nexus standard • Sourcing receipts – services • Apportionment?? • Filing unit

39. Alternative Taxes Texas Gross Margins Tax • Gross receipts less cost of goods, compensation ($300,000) or 30% • 1 percent rate; 0.5 percent retail/wholesale • Issues • Income tax issue • Long-term viability

40. Alternative Taxes Kentucky • Entity-level tax on flow-throughs • Withholding • Tax based on gross receipts

41. Add-Back Statutes • Effort is to offset effect of intangible holding companies • Multiple states with varying approaches • Issues - Constitutional challenge in Alabama - Potential double taxation? - Disrupting ‘legitimate’ business transactions

42. Single Sales Factor Current Situation • Ten have equally-weighted three factor, and four allows it as an option for certain taxpayers. • Eighteen have double-weighted sales, with nine having it as option for certain taxpayers. • Nine have a single-sales factor, with seven others having it as an option for certain taxpayers.

43. Single Sales Factor Rationale • Promote facility/employee location in the state • Shift burden to those primarily marketing into the state

44. Single Sales Factor Results • Mixed, not consistent • Some Single Sales Factor states lose more than average manufacturing jobs • Major locations not concentrated in SSF states • Effect is not direct and other factors intervene • Need also to account for benefits of expenditures

45. Single Sales Factor Issues • Revenue loss/impact • Constitutionality • Throw-back rule • Marginal impact of being the “next state” • Incentive effect depends on where you are now • Interplay with P.L. 86-272 and potential physical presence nexus standard

46. Combined Reporting • Adopted in Vermont in 2005 • Proposed in Pennsylvania • Coupled with rate reductions and movement toward greater weighting of sales factor • Issues • Change in audit process/issues • Institutional overhead requirement

47. Conclusion • Corporate tax likely to be area of continued attention • Focus on development • Focus on stability and horizontal inequity • Question of whether low-rate, broadly applied taxes are pro-growth and investment

48. Questions? Harley Duncan Federation of Tax Administrators <harley.duncan@taxadmin.org>

49. NATIONAL ISSUES AFFECTING STATE & LOCAL TAX ADMINISTRATION California Franchise Tax Board Presented by Mike Duffel Director, CPA Multistate Audit Field Operations - Out-of-State Offices

50. WHAT’S THE HOT TOPIC IN NATIONAL, STATE, & LOCAL TAX ADMINISTRATION?