Transfer Pricing in Unexpected Places – State and Local Income Tax

Transfer pricing is commonly viewed as an international issue, but certain state tax authorities are beginning to scrutinize domestic related-party transactions. These transactions include supply chains for materials or finished goods, services, equipment leasing, licensing software and intellectual property (royalties) or loans among domestic related parties.

States that require separate reporting rather than formulary apportionment reporting are impacted by the arm’s length nature of related-party transactions. Many states are looking at transfer pricing as a state income tax consideration in order to prevent the erosion or their tax base due to intercompany transactions. This includes Alabama, Arkansas, Delaware, Florida, Georgia, Indiana, Iowa, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee and Virginia. The status of these separate reporting states is subject to change, however, and should be monitored regularly.

The Multistate Tax Commission (MTC) State Intercompany Transactions Advisory Service (SITAS) committee supports states trying to address base erosion from transfer pricing through the cooperative development of state-level transfer pricing examination capabilities. Of note, the MTC SITAS committee has issued the SITAS Committee Participation Commitment and Exchange of Information Agreement, which facilitates the exchange of tax returns and other relevant information among participating states to increase transparency in auditing transfer pricing issues.

In recent years, North Carolina and New Jersey provided voluntary transfer pricing resolution programs (application periods are now closed), indicating the attention level certain states are giving to transfer pricing issues. Additionally, states with limited resources to pursue transfer pricing audits are entering into contingent fee arrangements with independent service providers to assist with auditing transfer pricing issues.

Sales and Use Tax

Intercompany leasing of equipment, provision of certain services, or the use of self-developed software or software as a service (SaaS) among domestic related parties can create a sales and use tax liability and reporting obligation. This usually depends on factors such as the consumption location, title transfer location and if the item is eligible for an exemption. As such, businesses that use or share equipment, services or software across different states should be evaluating the potential risk and planning opportunities from these complex areas of sales and use tax.

For businesses that operate across multiple states, including separate reporting states, Weaver has specialists in the areas of state and local tax, sales and use tax, and transfer pricing that can help you identify risks and opportunities for your business. Contact us to learn more.