Federal Legislation Policy Discussion TeleStrategies Wednesday, May 18, 2016 David S. Prebut Jennifer Jensen

www.pwc.com

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Why Federal Activity

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Sales Base Digital Goods

Digital Goods Non-Taxable

Digital Goods Taxed by Statute

Digital Goods Taxed by DOR

Position or Case Law

WA

ID

AZ NM

LA AL

ME

HI

CT

DE

MA

AK

AR

CO

MD

CA KS

FL

GA

IA

IL

MI

MN

MO

MT

NC

SC

VA WV

WY

OK

NY

PA

OR ND

NV

NH

OH

RI

VT

NJ

TX

UT

SD

NE

MS

TN

KY

IN

WI

DC

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Click-through nexus

AK

HI

MA

ME

RI

VT NH

NY CT

PA NJ

MD DE

VA WV

NC

SC

GA

FL

IL OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO

UT

WY

MT

WA

OR ID

NV

CA DC

States that have enacted click-through legislation

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Pennsylvania ruling says current law is broad enough to include click-through nexus

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Affiliate nexus

AK

HI

MA

ME

RI

VT NH

NY CT

PA NJ

MD DE

VA WV

NC

SC

GA

FL

IL OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO

UT

WY

MT

WA

OR ID

NV

CA DC

States that have enacted affiliate nexus legislation

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*Note this map only tracks formally enacted state legislation (since 2009) and does not address states where pre-existing ‘affiliate nexus’ language may already exist (e.g., MN, NJ).

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Notice and reporting requirements

AK

HI

MA

ME

RI

VT NH

NY CT

PA NJ

MD DE

VA WV

NC

SC

GA

FL

IL OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO

UT

WY

MT

WA

OR ID

NV

CA DC

States that have enacted notice and reporting legislation

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Economic nexus – sales and use tax

7

AK

HI

MA

ME

RI

VT NH

NY CT

PA

NJ

MD DE

VA WV

NC

SC

GA

FL

IL OH

IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO

UT

WY

MT

WA

OR

ID

NV

CA

DC

Economic nexus enacted prior to 2016

Economic nexus proposals in 2016

Economic nexus enacted in 2016

No economic nexus threshold

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States Are Tired of Waiting

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I know you're out there. I can feel you now. I know that you're afraid... afraid of us. You're afraid of change. I don't know the future. I didn't come here to tell you how this is going to end. I came here to tell how it's going to begin. Neo

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Three Strikes Against the Remote Seller – Strike #1 Direct Marketing Association v. Brohl, 135 U.S. Supreme Court 1124 (3/3/2015) Justice Kennedy – “The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.” “There is a powerful case to be made that a retailer doing extensive business within a state has a sufficient ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or internet.” “. . . it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”

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Three Strikes Against the Remote Seller – Strike #2 Direct Marketing Association v. Brohl, U.S. Court of Appeals, Tenth Circuit, Dkt. 12-1175 (2/22/2016) Notice and reporting requirements for out-of-state retailers •  Colorado statute requires non-collecting retailers to: (1) report transactions

to state tax authorities, and (2) notify customers of their obligation to self-report and pay use tax.

•  District Court held, on summary judgment, that statute violates the dormant Commerce Clause because it discriminates against and unduly burdens interstate commerce.

•  Three judge panel of the US Court of Appeals, 10th Circuit reversed the district court’s summary judgment ruling and found the notice and reporting requirements did not violate the Commerce Clause.

•  DMA is seeking full 10th Circuit Court review. (Citing Justice Scalia comments during oral arguments: “This is certainly a . . . very important case because I have no doubt if we come out agreeing with you, every one of the states is going to pass a law like this.”)

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Three Strikes Against the Remote Seller – Strike #3 NCSL draft model language (1/20/2016) •  The National Conference of State Legislatures released model language for

expanding sales/use tax collection requirements through state lawmaking. •  Three components for states to consider:

•  Revise “doing business” definition. •  Require marketplace providers to collect tax for marketplace sellers. •  Use tax reporting.

•  Among the more significant expansions, “doing business” could include: 1.  Engaging, directly or indirectly, in direct response marketing targeted

at this state. 2.  Entering into one or more agreements with persons that have nexus

under the Commerce Clause with this state. 3.  Total sales to purchasers in the state exceed a state-established dollar

threshold.

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NCSL proposed model language

The NCLS model language includes the following: [‘Doing business in this state’] includes, but shall not be limited to, the following acts or methods of transacting business on a regular or systematic basis: (1) Maintaining within this state, directly or indirectly or by an affiliate, an office, distribution facility, salesroom, warehouse, storage place, or other similar place of business, including the employment of a resident of this state who works from a home office in this state. (2) Engaging in, either directly or indirectly through a Marketplace Provider, Referrer, or other third party, direct response marketing targeted at this state. (3) Entering into one or more agreements under which a person or persons that have nexus under the Commerce Clause with this state directly or indirectly refer potential purchasers of products to the seller for a commission or other consideration, whether by an Internet-based link or an Internet web site or otherwise.

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NCSL proposed model language

Section # National Conference of State Legislators Proposed Model Language

1 Quill reference/Direct challenge language

2(A)(1) Maintaining place of business directly or indirectly, employee working from home in state

2(A)(2)

Direct response marketing

2(A)(3)

Click-through

2(B) Any part of sale process in state

(2)(C)

Product offered by marketplace provider with substantial nexus

2(D) Sales threshold (economic nexus), Sales threshold Streamlined Sales and Use Tax Agreement

2(E) Related to person that has nexus in state and engages in defined activities (attributional nexus)

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NCSL proposed model language

Section # National Conference of State Legislators Proposed Model Language

2(F) Marketplace provider or referrer nexus

3(A) Marketplace provider defined

3(B) Marketplace seller defined

3(C) Marketplace provider collection requirement and exceptions

3(D) Relief for marketplace seller providing incorrect information

4(A) Referrer definition

4(B) Referrer permit registration > $10,000 fees in PY

4(C) Annual report filing and notice to retailer > $10,000 fees in PY

4(D) Referrer sales tax collection imposition

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And so it begins

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Alabama

Alabama adopts economic nexus regulation •  Economic nexus regulation targets out-of-state retailers with

substantial sales in the state. •  Effective January 1, 2016, out-of-state sellers will establish economic

nexus if making retail sales of greater than $250,000 of tangible personal property and conducting certain additional activities in the state.

•  The regulation is in direct challenge with the physical presence requirements outlined in Quill.

Reg. 810-6-2-.90.03, adopted 9/17/2015; see also Notice, Alabama Department of Revenue (11/17/2015)

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Louisiana

Louisiana expands the definition of dealer subject to sales/use tax •  Expands definition of a dealer subject to sales and use tax to include any

person who: 1)  sells the same or similar line of products as a Louisiana retailer under

the same or substantially similar business name, using the same or similar intangible property;

2)  solicits business through an agent or representative with Louisiana nexus;

3)  holds a substantial ownership interest (greater than 5%) in a Louisiana retailer with a Louisiana sales location; or

4)  is owned in substantial part (greater than 5%) by a Louisiana retailer with a Louisiana sales location.

•  Applicable to tax periods beginning on and after April 1, 2016. Act 22 (H.B. 30), Laws 2016, First Extraordinary Session (3/14/2016)

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South Dakota

South Dakota law may provide Quill test case •  Nexus is based on economic activity rather than physical presence. •  Sales threshold is $100,000 revenue/year or 200+ sales

transactions. •  Provision for “speedy” judgments. No audit “or other tax collection

procedure” required to bring a declaratory judgment in circuit court. South Dakota S.B. 106, enacted 3/22/2016

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Vermont H.B. 873

•  Expansion of doing business definition. •  Engages in ‘regular, systematic, or seasonal solicitation of sales.’ •  Makes sales from outside Vermont to destinations within Vermont of

‘at least $100,000, or totaling at least 200 individual sales transactions during any 12-month period preceding the monthly period with respect to which that person's liability for tax under this chapter is determined.’

•  Reporting requirements •  Notice to all Vermont purchasers with purchases over $500 in the

prior year. •  Vendors with sales over $50,000 in prior year file annual statement

with state reporting purchasers and purchase amounts for Vermont sales.

Vermont H.B. 873, introduced 3/22/16. Passed House 3/24/16

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Other Current Legislative Session Proposals State Bill Number Introduction Date

Connecticut S.B. 448 3/10/2016 Minnesota H.B. 2769

S.B. 2374 H.B. 3124 S.B. 3093

3/8/2016 3/8/2016 3/14/2016 3/22/2016

Nebraska L. 1087 1/20/2016 Oklahoma H.B. 2531

H.B. 2925 S.B. 1251 S.B. 1301

2/1/2016 2/1/2016 2/1/2016 2/1/2016

Rhode Island H.B. 7230 H.B. 7375

1/20/2016 1/28/2016

Vermont H.B. 873 3/17/2016

*The bills listed above are not all-inclusive and represent only bills with NCSL model legislative language or other special nexus expansion language from the 2016 legislative sessions only. Bills introduced in 2015 and carried to the 2016 session are not listed.

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Multistate Tax Commission Proposal

Draft model sales and use tax notice and reporting statute •  Includes Policy Checklist based on Colorado's retailer notification statute •  At a meeting on 1/31/2011, the subcommittee discussed separating the sales

and use tax notice requirement threshold from the reporting requirement threshold in the MTC's Colorado-style "Amazon" model statute.

•  On a 2/21/2012 teleconference call, the subcommittee approved the model notice and reporting statute and sent it back for the Executive Committee's consideration.

•  On 5/12/2012, the executive committee decided to halt work on the notice and reporting model statute while the Colorado Department of Revenue appeals a federal judge's ruling that the state's 2010 law is unconstitutional.

•  The draft sales and use tax notice and reporting model statute based on the Colorado law is being held at the MTC Executive Committee level pending an outcome to the litigation.

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Multistate Tax Commission Proposal (cont.)

Draft click-through and affiliate sales and use tax nexus model statute The Multistate Tax Commission is on track to adopt a click-through and affiliate sales and use tax nexus model statute for those states pursuing their own plans to increase use tax collection absent a federal law authorizing states to require collection by remote sellers. •  During the annual meetings July 28-30, 2015, the MTC voted to approve the

draft model statute and forward it to a public hearing. The hearing was held September 15, 2015, with no comments received.

•  The draft model consists of two main provisions. Section (a) defines the person on whom a tax payment or collection burden is imposed (‘retailer engaged in business’) and contains a list of activities that would bring a person within the definition of ‘retailer engaged in business.’ Section (b) is the ‘click-through’ nexus provision generally modeled on what other states have enacted.

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Streamlined Sales Tax

•  23 Full Member States

•  1 Associate Member State

•  Approach is voluntary

•  Mandatory filing by remote sellers requires federal legislation

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Streamlined Sales Tax

Member States AR MN OK WV GA NE RI WI IA NJ SD WY IN NV TN (Assoc) KS NC UT KY ND VT MI OH WA

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Federal Legislation

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Federal Legislation

A variety of indirect tax legislation has been introduced at the federal level: •  Permanent Internet Tax Freedom Act •  Wireless Tax Fairness Act of 2015 •  The Wireless Telecommunications Tax and Fee Collection Fairness Act of

2015 •  Digital Goods and Services Tax Fairness Act •  Permanent federal tax deduction for state and local sales taxes •  The Online Sales Simplification Act of 2015 •  Marketplace Fairness Act of 2015 •  Remote Transactions Parity Act of 2015 (RTPA)

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Federal Legislation

Permanent Internet Tax Freedom Act On February 24, 2016, President Obama signed the Trade Facilitation and Trade Enforcement Act of 2015 (HR 644), which includes (1) a permanent moratorium on Internet access taxes and on multiple and discriminatory taxes on electronic commerce, and (2) an extension of the grandfather clause permitting some states to continue taxing Internet access until June 30, 2020. The legislation was approved by the Senate on February 11, 2016 and the House on December 11, 2015. Section 922 of HR 644, signed on 2/24/2016

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Federal Legislation

Wireless Tax Fairness Act of 2015 On December 17, 2015, the Wireless Tax Fairness Act of 2015 was introduced in the House. The legislation, which is sponsored by Rep. Zoe Lofgren of California, would prohibit state or local jurisdictions from imposing any new taxes on mobile services, mobile service providers, or mobile service property for five years. However, the bill allows all current taxes to remain in place. The bill has bipartisan support with 49 co-sponsors and has been referred to the House Judiciary Committee. HR 4287, introduced 12/17/2015

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Federal Legislation

The Wireless Telecommunications Tax and Fee Collection Fairness Act of 2015 On February 25, 2015, Representative F. James Sensenbrenner Jr. of Wisconsin introduced H.R. 1087, the Wireless Telecommunications Tax and Fee Collection Fairness Act of 2015. The bill is designed to ensure that methods of collecting taxes and fees by private citizens on behalf of state and local jurisdictions are fair and effective and do not discriminate against interstate commerce for wireless telecommunications services. The bill is now in the US House Committee on the Judiciary. A similar bill was introduced in July 2014.

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Federal Legislation

Digital Goods and Services Tax Fairness Act On March 24, 2015, S 851 was introduced by Senator John Thune. A companion bill, HR 1643, was introduced in the House two days later. The legislation, known as the Digital Goods and Services Tax Fairness Act, is designed ‘to promote neutrality, simplicity, and fairness in the taxation of digital goods and digital services.’ The proposed legislation would prevent states from imposing multiple or discriminatory taxes on the sale or use of a digital good or a digital service. On April 8, 2015, the Multistate Tax Commission issued a letter expressing concern regarding the legislation. The letter states, ‘this bill does not protect states against sales-shifting to avoid tax altogether and its other provisions are flawed, potentially creating significant problems for states and their tax administrators.’ Please note HR 1643 passed the U.S. House Judiciary Committee on June 17, 2015. Slide 31

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Federal Legislation

Permanent federal deduction for state and local sales taxes On April 16, 2015, the House approved HR 622, which would permanently extend the provision allowing individuals to elect to deduct state and local sales taxes in lieu of deducting state and local income taxes. The bill, which was introduced January 30, 2015, would apply for taxable years beginning after December 31, 2014. A companion bill, S. 126, was introduced by U.S. Senate Finance Committee member Dean Heller, R-Nev., on January 8, 2015.

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Federal Legislation

Marketplace Fairness Act of 2015 On March 10, 2015, a bipartisan group of senators introduced the Marketplace Fairness Act of 2015, providing that full member states of the Streamlined Sales and Use Tax Agreement and non-member states that meet certain minimum simplification requirements may require remote sales tax collection. The bill, S. 698, is substantially similar to S. 743, which passed the Senate in the last Congress. The one notable amendment is an added provision defining when a state may begin to collect sales and use taxes from remote sales under the Act. The bill provides that a state may not begin to exercise the remote seller collection authority: •  before the date following one year after the date of enactment; and •  during the period beginning October 1 and ending on December 31 of the

first calendar year beginning after the date of enactment.

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Proposed Alternative to MFA: Origin Sourcing

The proposal: Adopt a federal law requiring origin sourcing for state taxation of interstate remote sales The details: •  Remote sales would be sourced to the jurisdiction where the remote

seller’s business is located •  Establish some baseline protections against manipulation—for

example, define “origin” to prevent companies from setting up shell operations

•  Review how states have implemented origin sourcing for intrastate sales for guidance

•  Prohibit states from imposing a use tax on items on which sales tax was collected at origin

•  Consider need for federal court review

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Proposed Alternative to MFA: Origin Sourcing Pros and Cons (Prior Proposal)

Proponents Argue: •  Origin sourcing represents the

same standard employed for over- the- counter sales

•  Minimizes remote seller compliance obligations (both collections and audits)

•  Eliminates the need for software

•  States would not be required to adjust state statutes on taxability, rates, etc.

Opponents Argue: •  Shifts the tax imposition away

from a consumption-based tax •  Consumers pay taxes to states

where they have no presence •  “Race to the bottom” as e

commerce businesses would locate in non-tax states

•  Foreign commerce would go un-taxed

•  Does not address the inherent disadvantage of local businesses competition

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Federal Legislation

Remote Transactions Parity Act of 2015 (RTPA) On June 15, 2015, Rep. Jason Chaffetz of Utah, introduced the Remote Transactions Parity Act of 2015 as an alternative to the Marketplace Fairness Act. The legislation would authorize each member state of the Streamlined Sales and Use Tax Agreement (SSUTA) to require remote sellers to collect and remit sales and use tax. Non-SSUTA states may require remote sellers to collect and remit sales and use tax if they comply with certain simplification requirements, including destination-based sourcing and providing a single entity within the state responsible for all state and local tax administration.

Unlike the Marketplace Fairness Act, the RTPA would allow for a small remote seller phase-in. In the first year, remote sellers with gross annual receipts exceeding $10 million and remote sellers utilizing an electronic marketplace for making sales to the public would be required to collect and remit sales taxes. In year two, the receipts threshold would be reduced to $5 million, and in the third year, the receipts threshold will be reduced to $1 million -- however, in all years sellers utilizing an electronic marketplace will be required to collect notwithstanding annual receipts. In the fourth and subsequent years, there will be no federal exemption for small remote sellers.

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Federal Legislation

Remote Transactions Parity Act of 2015 (RTPA) (cont.) Comparison to the MFA: •  Sourcing: Both the MFA and RTPA require destination-based sourcing. •  Lawsuit Protection: The RTPA provides protection from class action refund

suits for overcollection and qui tam suits for undercollection, whereas the MFA does not.

•  Audit Protection: The MFA provides that each state may conduct an audit of a business only once per year. In contrast, the RTPA bars state audits and demand letters for remote sellers with under $5 million in gross receipts, except in situations of fraud and for certified software providers.

•  Small seller exemption: The MFA would provide a $1 million exemption. The RPTA would provide a three-year phased out exemption, starting with $10 million in year one, $5 million in year two, $1 million in year three, and then eliminating the exemption in year four.

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Proposed Alternative to MFA/RTPA: Origin Sourcing

Goodlatte told C-SPAN's "The Communicators" that he didn't really care that Senate leadership promised to take up the Marketplace Fairness Act: "We will not be taking up the Senate bill." He also brushed aside a question about a similar measure from Rep. Jason Chaffetz, but said he was still working on his own proposal that would set tax obligations on a seller's location, not a buyer's. "We would like to work with anyone who's concerned about making sure that we don't set a precedent for allowing states to reach out and regulate businesses outside of their jurisdiction, and that's what we feel the Senate bill does," Goodlatte said. And Goodlatte, who has never seemed particularly interested in the online sales tax issue, gave no timeline on when he thought those differences might be bridged. "When we have the right solution, that will be the right time to move it, and I don't think the political environment will play a major role in that," he said.

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Proposed Alternative to MFA/RTPA: Origin Sourcing

U.S. House Judiciary Chair Bob Goodlatte (R-VA) released a summary of his revised proposal for compelling sales tax collection by remote sellers as follows:

•  A single statewide destination tax rate would be used by participating states. •  Taxability would be based on a seller’s “origin-base,” defined as the location

where a remote seller has the most employees.

•  States would be required to participate in a clearinghouse in order to receive tax collections from remote sales.

•  Only the origin-base state may audit remote sellers. •  Provisions for remote sellers in states that do not impose a sales tax include:

•  A seller would be allowed to collect sales tax at the destination rate using the base where the seller has its highest gross receipts, otherwise it must report sales (name, address, and amount) to the clearinghouse; and

•  If a state participates in the clearinghouse, purchasers in that state would not be subject to sales tax.

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Proposed Alternative to MFA/RTPA: Origin Sourcing

U.S. House Judiciary Chair Bob Goodlatte’s summary continued: •  Any state not participating in the clearinghouse would subject purchasers in

that state to tax using the origin state’s rate and base, and the origin state would be permitted to keep the revenue.

•  New “uniform compliant purchaser certificate[s]” would apply for resale and direct pay permits and entity- and use-based exemptions would be established (authorization for use based on the destination state’s process).

•  States would retain the ability to impose use tax on their own residents, provided a credit would be available for taxes paid.

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Federal Legislation: Marketplace Fairness Act MFA-related trends, ideas and happenings •  On January 20, 2016, the National Conference of State Legislatures sent a letter to state legislative

leaders in all 50 states urging them to address remote sales tax collection and providing model legislative language to do so.

•  At the National Governor’s Association annual State of the States event on January 7, 2016, a spokesperson for the organization indicated that if Congress does not act on the taxation of remote sales, the states will act on their own.

•  Although supporters of e-fairness legislation worked in both the House and the Senate, the ITFA was again extended without being paired with some kind of online sales tax fairness bill. Permanent moratorium eventually enacted.

•  On December 13, 2015, the Executive Committee of the Council of State Governments adopted a resolution asking Congress to pass legislation which would allow states to enforce their existing sales and use tax laws, regardless of the method of transaction.

•  Alabama state officials are anxiously awaiting a lawsuit challenging their state’s new economic nexus laws in hopes of overturning the physical presence requirement in Quill and adopting the MFA, officials said in a December 2, 2015 webcast.

•  At a November 20, 2015 meeting, members of the National Conference of State Legislatures (NCSL) Task Force on State and Local Taxation discussed the alternative options states could take absent any action from Congress on either the MFA or the RTPA. The NCSL's president, Utah Sen. Curt Bramble, suggested that states craft legislation in January that is potentially designed to challenge Quill.

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Federal Legislation: Marketplace Fairness Act

MFA-related trends, ideas, and happenings (cont.)

•  Speaking at an American University Law Review's symposium on November 13, 2015, US Senator Heidi Heitkamp opined that the US Supreme Court is likely to address the sales tax issues related to remote sellers and to overturn Quill before Congress can resolve them.

•  At the Midwestern States Association of Tax Administrators annual conference on August 24, 2015, state tax leaders praised the RTPA and criticized contrasting draft legislation, the Online Sales Simplification Act of 2015, by US House Judiciary Committee Chair Bob Goodlatte.

•  On August 2, 2015, the NCSL Task Force on State and Local Taxation approved a resolution supporting the passage of (1) remote sales tax collection legislation, (2) a permanent or extended moratorium on the taxation of internet access (3) the federal Digital Goods and Services Tax Fairness Act of 2015, and (4) the federal Remote Transactions Parity Act of 2015

•  US Rep. Jason Chaffetz is actively seeking ways to bypass the House Judiciary Committee in order to advance his bill, the Remote Transactions Parity Act of 2015 (RTPA). The chair of the committee is Bob Goodlatte, who has expressed his opposition to the RTPA.

•  During the spring meeting on May 12, 2015 in Burlington, Vermont, the Streamlined Sales Tax Governing Board explored options for collecting online sales taxes that include the Online Sales Simplification Act, the Remote Transactions Parity Act, and federal litigation to overturn Quill.

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Overview of New Revenue Standard

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Overview of New Revenue Standard Executive summary •  Converged standard on revenue

recognition issued by FASB and IASB in May 2014

•  Applicable to all entities and industries

•  Principles-based standard replaces nearly all existing industry specific guidance

•  Could significantly change how many companies recognize revenue (and certain costs)

•  Transition Resource Group and AICPA industry task forces raising implementation issues

Achieve a single, comprehensive revenue recognition model

Core principle is that revenue recognition depicts transfer of control to customer in an amount that reflects consideration to which entity expects to be entitled

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Overview of New Revenue Standard Who is affected

Scope set to improve consistency and comparability within industries, across industries, and across capital markets

Scope of the standard Applicable to all entities and industries with only certain transactions excluded

Specifically excluded •  Lease contracts •  Insurance contracts •  Financial instruments •  Guarantees (other than product

warranties) •  Certain nonmonetary exchanges •  Contracts with other than

customers (e.g., collaborations)

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Overview of New Revenue Standard When is it effective *One year deferral of the effective date approved by both the FASB and IASB

Public Non-public

Effective Date Annual periods beginning after December 15, 2017 (2018 calendar year); including interim periods within

Annual periods beginning after December 15, 2018 (2019 calendar year)

Early adoption permitted?

Only after original standard effective date - “annual periods beginning after December 15, 2016” (2017 calendar year)

Yes, but no earlier than effective date for public companies (December 15, 2016).

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Overview of New Revenue Standard Core Principle

•  Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

•  To achieve this core principle, an entity must: -  Identify the contract with customer, -  Identify performance obligations in contract, -  Determine transaction price, -  Allocate transaction price to performance obligation(s) in contract, -  Recognize revenue when (or as) the entity satisfies a performance

obligation.

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Examples that could impact a Communications Company

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Example Customer Premises Equipment (e.g., modems)

•  Under current GAAP, CPE fees are recognized over the service period, and the cost of the CPE is capitalized and depreciated over the estimated useful life.

•  Under new GAAP, may need to recognize revenue and related cost of modem when delivered. Revenue recognized based on standalone selling price (SSP), and cost recognized based on cost of equipment. Revenue may need to be recognized for billed CPEs, or unbilled CPEs, to extent separately stated in contract.

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Example Installation Services (e.g., wiring) •  Under current GAAP, recognize revenue upfront upon completion of

installation, to the extent of direct selling costs incurred. •  Under new GAAP, recognize revenue and related cost of distinct

installation services when completed. Amount of revenue recognized is based on SSP (not necessarily amount billed) regardless of whether the fee is waived or discounted. Cost recognized is based on cost of installation.

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Example Activation Fees •  Under current GAAP, recognize revenue upfront upon activation/re-

activation, to the extent of direct selling costs incurred. •  Under new GAAP, may need to recognize activation fees over the

contract term or customer relationship period. •  Activation fees are generally not separate performance obligations,

but are considered up front payments for the handset and future telecommunications services.

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Example Sales Promotions - Cash Consideration •  Under current GAAP, certain sales promotions are considered cash or

in-substance cash. Promotions include Visa prepaid cards, which are recognized as a marketing (operating) expense, and gift cards, which are recognized as a reduction of revenue.

•  Under new GAAP, promotions considered cash consideration may be recorded as a reduction of revenue and spread over the period that the promotion is issued.

•  Discounts, rebates, refunds, credits, incentives, performance bonus, and price concessions are recorded as reductions as long as they are probably (GAAP) or highly probable (IFRS) of not being subject to a significant reversal.

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Example Sales Promotions – Non-Cash Consideration •  Under current GAAP, certain sales promotions are considered non-

cash consideration, such as free product giveaways including tablets. Free product giveaways are recognized as a marketing (operating) expense.

•  Under new GAAP, non-cash sales promotions such as free product giveaways may be treated as a separate performance obligation with revenue recognized when the product is delivered.

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Example Capitalization of Contract Costs •  Under current GAAP, costs to obtain a customer contract are

expensed as incurred. •  Under new GAAP, may be required to capitalize incremental costs to

acquire contracts and amortize them over the expected relationship period, which includes expected renewal periods.

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State Tax implications of new revenue standard Income Taxes State tax conformity - typically, states will follow federal, and will not likely decouple and book/tax differences will flow through the M statements; however, if there are any law changes at the federal level (e.g., IRC changes), there could be a difference. For example, if a state conforms to the IRC as of January 1, 2000, and then Congress amends the IRC in 2015 to address a revenue recognition issue, then the state may not conform to the federal.

Apportionment - typically, the apportionment values are based on book amounts. As the revenue recognition changes are applied, the amount of sales recognized could change, which could have an impact on apportionment.

Sales Taxes Audit issues - The revenue recognition principles will impact bundled transactions. What is recognized as revenue may not reflect the amount on the invoice. Since the amount on the invoice is normally the tax base, the amount of tax collected may not match the revenue recognized. For example take a phone that costs $300 and monthly service for $40 per month for 24 months. If bundled, the phone is actually sold for $50, and tax would be collected on $50; however, the new GAAP standard would assign a higher amount to the phone to closer approximate the performance obligation. Here, that amount would be closer to $290, which is comprised of attributing $10 of the $40 to the cost of the phone ($10 x 24 months plus $50). The customer is charged tax on the $50 phone, and on each invoice for service based on $40. But the revenue recognized is different. Tax systems must be programmed to reconcile. Tax Base different from Invoice - In some states like California, the tax is based on the full value of the phone, regardless of the bundled price, and there is no tax on the service (sales tax laws vary). This can create another disconnect.

Excise Taxes - certain states like Delaware and Hawaii have excise taxes on the seller rather than a sales tax on the customer. Under current GAAP, company has option to record sales and excise taxes on its books at gross or net. Under new GAAP, the excise tax is recorded at gross (while for normal sales tax (i.e., agent of the state), the sales tax collected would be at net.

Use Taxes - when making a purchase, the tax is normally on the invoice price. If the expense recorded under the new GAAP is different from the invoice, there will be a similar audit issue as described in 1) above.

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PwC

Overview of Proposed Section 385 Regulations

SALT Monthly Update May 5, 2016

PwC

Proposed Section 385 regulations Purpose

•  On April 4, 2016, Treasury and the IRS released proposed regulations under Section 385 (the Proposed Regulations) to address whether a purported debt instrument is treated as stock or debt, or as in part stock or in part debt, for US federal income tax purposes.

•  The preamble to the Proposed Regulations states: “While these proposed regulations are motivated in part by the enhanced incentives for related parties to engage in transactions that result in excessive indebtedness in the cross-border context, federal income tax liability can also be reduced or eliminated with excessive indebtedness between domestic related parties. Thus, the proposed regulations apply to purported indebtedness issued to certain related parties, without regard to whether the parties are domestic or foreign.”

SALT Monthly Update May 5, 2016

PwC

Proposed Section 385 regulations Expanded groups

•  The Proposed Regulations are generally limited to purported debt instruments between members of an “expanded group.” -  The term "expanded group" is defined in Prop. Reg. § 1.385-1 by

reference to the term “affiliated group” in section 1504(a), with certain modifications. An expanded group includes: ◦  foreign and tax-exempt corporations (e.g., S corporations). ◦  corporations held indirectly (e.g., through partnerships). ◦  corporations connected by ownership of 80% vote or value,

rather than vote and value •  The Proposed Regulations also adopt the broad Section 304(c)(3)

attribution rules for purposes of determining indirect ownership.

SALT Monthly Update May 5, 2016

PwC

Proposed Section 385 regulations General principles

Treatment of certain instruments as partly debt and partly stock •  Prop. Reg. § 1.385-1(d)(1) provides that the IRS may treat expanded

group debt as part debt and part stock if the IRS's analysis supports a reasonable expectation that, as of the issuance of the debt instrument, only a portion of the principal amount will be repaid. -  The elimination of the "all-or-nothing" characterization of a

purported debt instrument applies to instruments issued on or after the date the regulations are finalized. Such bifurcation will only occur, however, if the instrument has met the documentation and information requirements discussed below (set forth in Prop. Reg. § 1.385-2) and the substance of the instrument is regard

SALT Monthly Update May 5, 2016

End

This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US federal, state or local tax penalties.

This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP and its Client and is intended solely for the use and benefit of that Client and not for reliance by any other person.

© 2016 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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