State Tax Simplicity and Uniformity

I wrote the following in a blog post back in 2009. As I was re-reading it this morning, it dawned on me that several of the items I mentioned still apply in 2016. The more things change, the more they stay the same.

Side Note: PwC just released a nice document entitled, "2015 Year-End State Tax Review and A look Ahead to 2016 and Beyond."

Simplicity and Uniformity

The terms "simplicity" and "uniformity" are not usually discussed in the same breath as state and local tax. With all of the taxing jurisdictions in the United States (when you include all of the states, cities, and counties, etc.), there is very little uniformity, and nothing seems simple.

With that said, I think the states are starting to act in a uniform manner which, in some sense, is creating simplicity. What do I mean?

Well, during the first four months of this year it appears that most, if not all, states are experiencing the following:

1. Budget and financial difficulties of historical proportions

2. All tax revenues are down, including: income tax, sales tax, property tax, etc.

3. Proposing or passing legislation that closes loopholes, raises taxes or creates new taxes, and attempts to encourage in-state economic development.

4. Proposing or passing legislation enacting new minimum fees or taxes.

5. Proposing or enacting legislation to adopt combined reporting, single-sales factor apportionment, market-based sourcing of revenue from service activities instead of the past cost-of-performance rules, adopting economic nexus and "amazon" type nexus, etc.

6. Proposing or enacting "amnesty" programs to encourage delinquent taxpayers to step-forward and pay back-taxes with the benefit of penalties waived (and interest decreased, in some cases).

7. Adopting language that treats all income as "business income," as much as the U.S. Constitution allows.

8. Adopting similar language in regards to what is considered to be a "unitary group."

9. Adopting or proposing legislation that accelerates the payment of tax revenue to the taxing jurisdiction by either increasing the % paid with each quarterly estimated payment, and/or requiring non-resident withholding to be paid quarterly instead of annually.

10. Increasing interest rates and penalties for late payment of taxes.

I am sure there is more, but these are my top ten (for the moment).

CONCLUSION

In summary, the world of state and local tax has always been a world that changes daily or continually, due to court cases and legislative developments.

In 2009, the state and local tax world feels like it is changing at a whirl-wind pace with the only simplicity and uniformity being created is that soon, everything will be taxable, and penalties and interest will be a revenue stream of their own (if they weren't already).

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?

7 YEARS: BUILD IT AND THEY WILL COME

This is a message for those of you desiring to do something different: 

the tools exist, but are you willing to do the work? To do what others are not willing to do. To do what others may think is silly or a waste of time. Are you willing to do something because deep down you feel you must?  

I started writing the LEVERAGE SALT blog on January 10, 2009, seven years ago. It's hard to believe it has been that long.

Back when I started, there were no state tax blogs. In fact, most accounting firms didn't have a blog. I remember searching the Internet and always reading blogs by law firms based on a variety of practice areas, but none of them were based on tax.

In 2009 I was working at a large corporation and was thinking of re-entering the world of public accounting. I thought I needed to increase my visibility and credibility to enable me to re-enter with some leverage, displaying my expertise and insights. Consequently, I spent nights and weekends writing blog posts. I would read state tax developments on a daily basis for my day job, highlight specific items I thought would have broad application or high impact, and then write posts. After a while it became second nature. I had developed a process, a routine that became part of my daily life. Sometimes I would write multiple blog posts on the weekend and schedule them to post throughout the week. 

Today, the blog has over 800 posts on a variety of state tax topics, and I still enjoy having the outlet to communicate my thoughts on state tax developments and perspectives on the profession. 

I could not have imagined that when I started my blog in 2009 that it would also serve as a catalyst to launching my successful solo practice in 2013. Since October 2013, I have been extremely blessed by the relationships I have developed, and clients I have worked with. They have allowed me to pursue and live a dream I had for several years.

'Accountant types' are naturally risk averse, so starting your own firm can seem scary. At first you are simply trying to pay the bills. Then you are trying to save for a rainy day. Then you are trying to save for retirement. And then one day, boom, you find yourself making more money than you originally planned. Surprisingly, from day one, I have made more money working on my own than I did working for other firms (even my first year). Last year (my second full year), I made even more money. I still can't believe it. Please know, I am not saying this to brag, I am sharing this as a word of encouragement to my fellow professionals that may be considering such a move.

I think a few things helped me achieve success so quickly. First, starting my blog back in 2009 helped me build a network of contacts across the U.S. The blog also showcased my strong interest in state tax and my writing capabilities. Consequently, the blog made it easier to obtain clients, resulting in the building of a practice based on research and writing. Third, during my career I have switched jobs many times (working in industry and various accounting firms). I know switching firms can often have a negative connotation, but I truly believe that switching jobs so many times actually helped me develop key characteristics that has led to my success. Characteristics such as being comfortable with new situations that lack clarity and certainty, and having the ability to adapt and improvise to create successful outcomes.

Throughout my 20+ year career, I have always had this desire to be different. To do something different in this profession. The Internet, blogging and social media has definitely enabled me to do so.

What are you thinking about doing? What is driving you? What have you been thinking about doing, but haven't started? I want to encourage you to do it. To start. You may not see the fruits of your labor today. This year or next. It may be several years down the road. but it will come.

I leave you with this quote:

"It is better to fail in originality than to succeed in imitation." - Herman Melville

Also, here are few of my favorite books that may help you succeed:

•  "The Compound Effect" by Darren Hardy
•  "Essentialism" by Greg McKeown
• "Making Ideas Happen" by Scott Belsky
• "The One Thing" by Gary Keller
• "Tribes" by Seth Godin
• "Start with Why" by Simon Sinek,
• "Rework" by Jason Fried & David Heinemeier Hansson
• "The 10X Rule" by Grant Cardone

If you want to learn more about my perspective on blogging, check out my interview with Bloomberg BNA: Expert Insight: Brian Strahle on Blogging, Creativity, and Coping with SALT Celebrity 

A RECOMMENDATION TO MAKE WORK (life) FUN + 2016 TRENDS

It's Monday, the first 'work day' after the holidays. The first day of the new year. The day we all begin our new year's resolutions. The difficult part of today is that we have to get back into our routines, the pushing and pulling of responsibilities and obligations that we may have escaped from the past couple of weeks. Consequently, we have to build up energy to just do what we were doing, in addition to the piling on of new year's resolutions. Therefore, I encourage you to give yourself a break today. Don't let the pressures of living keep you from living. Make work fun today. 

To help with this, I encourage you to read "Essentialism" by Greg McKeown. I have mentioned this book in the past and believe it will be extremely helpful to your career and personal life (HINT: LESS IS BETTER).

As we embark on 2016, we know that state taxes will continue to change, yet remain a burden for multistate companies. Here are a few tidbits to get you started.

Trends that will create havoc in 2016:

• Tax Reform
• Economic Nexus
• Market-Based Sourcing
• MTC Apportionment Election Court Case Decisions
• Alternative Apportionment
• Combined Reporting
• Transfer Pricing
• OECD BEPS
• Tax Haven Legislation
• Corporate Inversions
• Sales Tax Nexus/Collection Standards for Remote Sellers

Specifically, the Multistate Tax Commission continues to move forward on market-based sourcing regulations and will attempt to create standardization. Transfer pricing will continue to become a bigger issue as the MTC's Arms Length Advisory Service takes shape (see my previous post for more info).

COST (Council on State Taxation) and the Tax Foundation will continue to play a critical role and advocate in the formation of state tax policy and court case decisions. I personally want to thank them for their work over the years and appreciate their continued efforts.

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.

are you going to the NYU SALT Seminar in December?

Anyone heading to the annual NYU School of Professional Studies Institute on State and Local Taxation  seminar in December? Trying to decide.

Here is the link: http://www.sps.nyu.edu/academics/departments/finance-tax-and-law/conferences-events/institute-on-state-and-local-taxation.html

Let me know if you are going. 

Thanks.