This is a Public Service announcement. Revealing a secret from the state and local tax underground. A secret that makes it difficult for companies to do business. To stay in compliance. To avoid compounding tax liabilities and interest and penalties.
What is this secret?
Wait for it . . . . . . . .
State taxes are a "moving target."
A "moving target" is defined as:
something that moves while someone is trying to hit it
something that is always changing
Some state tax rules don't change. Some state tax rules change at a certain time or in a certain tax year based on federal or state legislation. Some state tax rules change every year. Some state tax rules change suddenly based on a court case or ruling. Some state tax rules change without you knowing it based on a state's internal policy decision or change in interpretation of a statute or regulation.
So how does a company plan?
Conduct year-end planning?
Conduct beginning of the year planning?
Plan for acquisitions, mergers, divestitures?
Companies must stay on top of income tax laws on a tax year by tax year basis. Meaning, income tax laws are generally static for a specific tax year, but can change from year to year. Thus, tax pros should not follow "SALY" (same as last year) when preparing returns. This can lead to "IAP" (interest and penalties). With that said, there are situations when court case decisions or rulings happen that may have retroactive impact and create amended return / refund opportunities or may simply alter prospective returns.
In regards to sales tax, there are static rules but the interpretation of some of those static rules can change and are definitely not the same in every state. Sales tax rules and tax rates can change at different times of the year due to court cases, rulings and state legislation. Unlike income tax, sales tax periods are generally monthly, quarterly or annual
It's the lack of uniformity among state tax laws that creates risks and opportunities.
Some state income tax laws that may differ from state to state are:
Economic Nexus (creating a taxable presence)
Sales sourcing of sales of tangible property and services
Requiring throwback of sales
Allowing or requiring combined reporting
Allowing a pass-through entity (PTE) to make a PTE tax election (i.e., $10,000 SALT-CAP work around)
If PL 86-272 protection applies
Conformity to federal international tax considerations (i.e., GILTI, FDII, deemed dividends, ECI, etc.)
Treatment of bonus depreciation
Treatment of disregarded entities (i.e., single-member LLCs or Q-Subs)
Some sales tax laws that may differ from state to state are related to the following:
Sourcing of sales of services (including multiple points of use)
Sourcing of sales to/from non-US countries
Sales of software, SaaS, and other computer services
Sales of information services or data processing
Sales of services
Sales by construction contractors
Treatment of sellers in drop shipment transactions
Allowable or acceptable forms of exemption certificates
Treatment of leases (lessors and lessees)
Width and breadth of manufacturing exemption
Occasional sale or casual sale exemption when selling assets or business
Treatment of repairs and maintenance (labor and parts)
Treatment of research and development activities
Sales to governmental and non-profit entities
I could keep going, but I think you get the point.
So what is a company supposed to do?
Depending on what stage your business is (i.e., start-up, emerging, growth, mature), I recommend you inquire of your tax professional about the state tax impacts of your business. You may only have one or a few states to deal with right now. Some of you may have 20 or more states to consider. The key is to get on top of it now. To know what you don't know so you can make informed decisions. To stop problems from growing out of control and implement proper procedures and tax decisions. Be proactive. Don't let blind spots create a compound effect of problems.
Conduct year-end state tax planning, early, often and always.
QUOTES
"In all affairs, it's a healthy thing now and then to hang a question mark on the things you have long taken for granted." - Bertrand Russell
"Bureacracy is the art of making the possible impossible." - Javier Pascual Salcedo
"Knowledge is the beginning of practice; doing is the completion of knowing." - Wang Yangming