Delaware Enacts Single-Sales Factor Apportionment

The Governor of Delaware signed "The Delaware Competes Act" (HB 235) into law on January 27, 2016 (press release). 

The summary of the Act states that "the principal change in the Act is to remove disincentives for companies to create Delaware jobs and invest in Delaware property that currently exists in how income is apportioned to Delaware for purposes of the corporate income tax." The Act attempts to accomplish this goal by changing Delaware's apportionment formula from a three-factor formula (property, payroll, sales) to a single-sales factor formula.

Phase-In for Most

The change to the single-sales factor apportionment will be phased-in by first doubling the weight on the sales factor in tax year 2017, and then gradually relying exclusively on the sales factor beginning in 2020 (i.e., triple-weighted sales factor in 2018, six-times-weighted sales factor in 2019, single-sales factor in 2020). Corporations organized under the laws of foreign countries that do business in the United States may not dilute their property and payroll factors by including property and payroll that is located outside of the United States in the denominator of these fractions.

Starting in 2017

Despite the phase-in for most corporations, starting in 2017, telecommunications corporations and corporations with their worldwide headquarters located in Delaware that make capital investment in those facilities may use either single sales factors or equally weighted, three-factor apportionment.

Other Changes

The Act also simplifies business tax compliance for smaller businesses by reducing tax payment and filing burdens. For example, the Act doubles the thresholds at which businesses have to make monthly gross receipts tax and withholding filings, enabling hundreds of Delaware businesses to file quarterly instead. The Act also provides that filing thresholds and tax calculations will be indexed for inflation, which locks-in the simplification and efficiency gains for future taxpayers.

The Act attempts to simplify compliance for smaller business. Currently, all corporations must pay 50% of their estimated tax liability for the first quarter of their taxable year, followed by payments of 20%, 20% and 10% in each of their second through fourth quarters. The Act allows smaller businesses with receipts of less than $20 million to make use of a simpler, evenly-weighted (25% per quarter) schedule. Further, the Act updates the calculation for the penalty for underpayment of estimated tax, which has not changed in more than 30 years.

Is Your Auditor M.I.A.?

Where is the auditor? I haven't heard from him or her in a while.

Should I call them? Or should I just wait it out, and see if they contact me again?

Have you ever asked yourself those questions?

Some taxpayers have an audit begin where the auditors come to their place of business, ask questions, review records, and then leave. When the auditors leave, they say they will let the taxpayer know if additional information is needed or if they have any questions.

Then, months go by without any contact from the auditor.

But wait, three weeks before the statute of limitations is about to expire on one of the tax years within the audit period, the state contacts the taxpayer and asks the taxpayer to sign a waiver of the statute of limitations, usually a year extension (you should attempt to negotiate a smaller extension; some states have a minimum of 6 months).

After the extension is signed, the taxpayer may receive another information request or list of questions from the auditor, with a short timeline or due date for the taxpayer to respond. After the taxpayer responds, another 6 months go by without any contact from the auditor.

Then, once again, one month before the statute of limitations is about to expire, the taxpayer receives a preliminary audit assessment. This time the state won't extend the statute, and the taxpayer has less than a month to dispute the audit assessment's findings before a final assessment is received.

QUESTIONS
If your auditor goes M.I.A. in the middle of an audit, what should you do?

Should you just play the "wait and see game"? Or should you contact the auditor sooner to find out what the status is?

If you contact the auditor sooner, you may or may not receive a response earlier? It really could go either way.

The same is true if you don't contact the auditor. You could get "lucky" and the statute of limitations could expire without receiving an assessment. On the other hand, you could receive an audit assessment with a short amount of time to respond.

What do you think? Have you experienced this?

2016 State Tax Amnesty Programs

The Council on State Taxation (COST) has released a chart reflecting state tax amnesty programs scheduled to occur in 2016. Here's the link.

If you are curious as to what states had amnesty programs in 2015, go here. 

Is amnesty the way forward? Does your company have past liabilities that need paid without paying penalties or interest? Should your company participate in a state's amnesty program or utilize the state's Voluntary Disclosure Program?

These questions plague companies when faced with identified compliance exposure and failures for multiple tax years. Some states offer one-time, short time-frame amnesty periods allowing companies to come forward, file prior year tax returns, and pay tax with the promise of future compliance. Depending on the specifics of the state's amnesty program, penalties and/or interest may be abated.

Key to remember: if your company has exposure and does not come forward, then the state may assess more significant penalties and interest when it finds your company later.

If you would like to read more about amnesty, check out my previous posts here.

Specifically, you may like: Amnesty and Voluntary Disclosure Agreements: What, When, Why?

Does Your Apportionment Reflect Your Business Activity?

In other words, does your apportionment result in a fair and accurate portion of your federal taxable income being taxed by the applicable state? If not, then opportunities may exist to utilize an "alternative apportionment method."

Some, if not all, states provide an opportunity to request or use an "alternative apportionment method" when the standard apportionment method creates "distortion" or does not properly reflect the amount of business activity in the state.

I'll be honest, the request for alternative apportionment is not an easy one, but when the apportionment factor results in a questionable amount of your taxable income being taxed in a state where you really have very little business activity, an alternative apportionment method may be the solution.

With the states on the perpetual march to lower the threshold of obtaining "nexus" or a taxable presence in a state, the apportionment factor is a way to help ensure that a state does not tax more than its "fair share" of income.

Connecticut's Amended Tax Laws Not Enough for General Electric

It was reported by the press today that General Electric has decided to move its headquarters from Connecticut to Boston. This comes days after the Connecticut General Assembly amended its tax laws with the hopes of alleviating GE's tax concerns regarding Connecticut's law requiring combined reporting starting January 1, 2016.

On December 29, 2015, the Governor signed the 2016-2017 Budget Bill (SB 1601) which made several tax law changes including placing a $2.5 million cap on the amount by which a unitary group's tax liability computed on a combined bases could exceed the group's tax liability computed on a separate basis. The bill also replaced the current three-factor apportionment formula with a single sales factor apportionment formula. Regardless of these changes and the others included in the bill, GE still decided to move its headquarters. This raises the question once again - does state tax law play a major role in a company's location decisions?

Well, according to a Wall Street Journal article, GE had several motives for relocating such as GE's outdated Connecticut suburban campus. According to the article, the campus was not allowing GE to attract the most promising talent that now desires to live and work in urban areas. Notably, according to the article, GE has been getting ready to leave Connecticut for months. This begs the question as to why Connecticut amended their tax laws last month. 

The article also mentions the fact that other states were offering generous tax incentive packages. Consequently, perhaps state tax laws or incentives do play a part in where a company chooses to relocate, but not the only part.

Interesting side fact: Connecticut is ranked #44 on the Tax Foundation's 2016 State Business Tax Climate Index. Massachusetts is ranked #25.

pre-packaged state tax planning is dead, maybe

I hope everyone had a great Thanksgiving holiday week and adventurous Black Friday. Cyber Monday (or week) is upon us - we shall see if any great deals really exist.

As we approach Christmas, we are also approaching the end of another year which causes tax departments and accounting firms to review end of year tax planning options. Specific state tax planning can be done at any time during the year; however, I am curious as to what state tax planning your corporation and clients implemented this year. Was it an idea a consulting firm brought to you? Was it a restructuring idea built on the firm's application to other clients? Was it an idea based off of a court case, a ruling, or simply your company's unique fact pattern (i.e., apportionment, combined v. separate reporting, etc.)?

Legitimate Loopholes

I recently read an article entitled, "Nuances in State Constitutions Can Aid Taxpayers" by Jeff Day at Bloomberg BNA which included comments from Kenneth T. Zemsky, a managing director at Andersen Tax LLC. Mr. Zemsky's comments were taken from a presentation he made at the November 3, 2015 American Institute of Certified Public Accountants (AICPA) conference. If you have a subscription to Bloomberg BNA, I recommend you read it.

One comment that Mr. Zemsky made stood out to me - "legitimate loopholes" exist for many corporate taxpayers, but only customized planning will allow companies to take advantage of them." Custom planning for each client? I think this is something we all know, but Mr. Zemsky is correct. Public accounting firms are well-known for creating planning ideas that they package and utilize at numerous clients over and over. Albeit, the facts may be slightly different, but the idea being implemented is the same. This is not necessarily a bad thing, as the idea may have merit and application. In addition, most clients generally ask if the firm has implemented the idea at other companies. Clients want to know if the idea has been successful and withstood state challenges or audit. However, is this the best way to mitigate tax and risk? 

An article by Charles F. Barnwell, Jr. back in 2009 for Tax Analysts entitled,  "State Tax Planning - What's Left?" is a great article about the history of state tax planning and its current and future opportunities. The article discusses how the 'great' structural planning ideas of the 1990s (i.e., intangible holding companies, sales companies, purchasing companies, etc.) are no longer viable. According to Mr. Barnwell, planning ideas are now based on the 'nuts and bolts' of state taxes such as apportionment factor planning, industry-specific characteristics, and maximizing state offered incentives. Mr. Barnwell says, "the best offense may be a good defense" for companies that have "base-shifting type planning" still in tact." Mr. Barnwell is correct. Since 2009 (when the article was published), we have seen companies unwind previous tax planning to reduce exposure. We have also seen states win litigation against corporations and enact new 'guard rails' to limit state tax planning such as related party add-back provisions, combined reporting and discretionary transfer pricing analysis.

What is a legitimate loophole? If you read the Bloomberg BNA article by Jeff Day, it appears Mr. Zemsky believes legitimate loopholes are found by digging deeper into the state's law and procedures to identify clearly applicable opportunities for clients. This approach definitely makes sense, but how is this different from prepackaged planning? Once consultants identify a strategy or 'legitimate loophole' that works for one client, the next step is to see what other clients could also use the strategy? Thus, turning customized planning into a commodity? In other words, legitimate loopholes do exist. However, once found, they may become 'pre-packaged tax planning.'

Perhaps the question isn't whether the planning is customized or pre-packaged, the question is whether the idea is legitimate tax avoidance or something else (Mr. Zemsky describes this 'something else' as a "scam"). I addressed this question in an article I wrote for Tax Analysts back in 2013 entitled, "What Level of Tax Avoidance is Acceptable?" For details, go here.

This brings me back to the question - what tax planning have you recently implemented? What are you thinking of implementing? What questions are you asking before you take the position? What will the FAS 109 / FIN 48 impact be? Will tax return disclosures be required? Are you prepared for an audit? Will the firm be there to defend the position upon audit? Did the position create more risk than benefit?

For more posts on state tax planning in general and specific ideas, check these posts out.