The first question a kid asks before starting to play a game that it has never played before is - what are the rules?
Seems like a simple question and one that should be easily answered.
Over the holidays, my family played games. We didn't have to ask about the rules for games we had played several times before, because the rules hadn't changed. For some of the games we hadn't played in a while, we needed to read the instructions to refresh our memory of the rules, but again, the rules hadn't changed. For games we had never played before, we had to ask - what are the rules? But once we learned them, we could play the game and even WIN the game.
Let me ask you this?
Do you know the state tax rules? Income tax rules? Sales tax rules?
Are the rules different depending on the state?
Once you know the rules for that state, do they ever change?
If you stop doing business in a state and then re-enter the state to do business in a later year, will the rules still be the same? Will you simply need a refresh or will you have to learn all new rules?
State taxes is like playing a game where the rules keep changing during the game. The rules don't stay the same year after year, and they may not even be clear when you start the game.
BIGGEST ISSUE
At this time of year, many firms will release reports on the top issues of 2023 and/or what they think the top issues of 2024 will be. However, I think the BIGGEST ISSUE is the lack of clarity and ability to rely on state tax statutes, regulations, court decisions and rulings. In other words, the BIGGEST ISSUE is simply the ability to know how much tax to pay, and how to avoid interest and penalties.
The 'greyness' or lack of clarity and certainty create confusion (and yes, opportunity), but in a world where companies simply need to walk before they run (i.e., comply), knowing the baseline can be the most important line.
Not only are there many 'grey issues' when it comes to multistate income tax and sales tax, there are many issues where there is simply 'discretionary authority.' Again this can be positive, but when a company needs to make decisions and take positions on tax returns, it can be frustrating. The lack of clarity and certainty creates risk and unintended consequences.
BRIGHT LINE TESTS
Bright line tests or straight forward thresholds for nexus, taxability, etc. are great in most cases. However, then the argument becomes about the bright line and how it is arbritary or should be changed. Bright line tests quickly create winners and losers.
Greyness or discretionary authority provides opportunities for each player to determine on their own if they are a winner or loser (atleast until the referee throws a flag).
PRIVATE LETTER RULINGS
When in doubt, file a private letter ruling. Get certainty. Correct??
Well, it's not that simple. An effective private letter ruling can provide certainty and help a company avoid additional tax, interest and penalties. An ineffective private letter ruling can be a waste of time. What do I mean?
Many taxpayers choose NOT to do a private letter ruling because of the following concerns:
Taxpayers must disclose their identify before obtaining an answer from the state.
Facts may not be accurate, or disputed later, making the answer invalid.
Ruling may be revoked at any time.
Timing of the proposed and prospective transaction with obtaining an answer from the state.
Rulings are binding unless the facts are not accurate.
Unsure as to how deep of an analysis of the law the corporation is required to provide.
The length of time to obtain a ruling.
Consequently, there is even uncertainty in the process of attempting to obtain certainty.
AMENDED RETURNS
Sometimes the best way to gain certainty is to simply pay the additional tax (or tax that you disagree with) and then file a refund claim (amended return) to challenge the state's position.
I don't love this option since the taxpayer has to pay the tax first, but it does eliminate risk and makes the state declare their position. However, if the state's position is contrary to the taxpayer's, then the taxpayer won't love this option. But this option does avoid interest and penalties.
TAKING THE POSITION QUIETLY
Some taxpayers may choose to simply do their own research, document their position, identify the appropriate levels of assurance and then take the position on the tax return and wait. Wait to see if the state ever comes calling (audits or sends a notice). If the state does send a notice or audits the taxpayer, then the taxpayer will have to challenge the state and make its case. If the taxpayer loses, then they may have to pay additional tax, interest and penalties. So this option can cost more.
CONCLUSION
Uncertainty is not going anywhere. The rules keep changing and will continue to change. Therefore, each company or taxpayer must make informed decisions, exercise good judgment, receive wise counsel and document their positions. Then they must decide and take appropriate action based on all of the facts and applicable authority. That appropriate action may be different in each situation, but the key is for taxpayers to do the analysis and make the best decision they can so they "know how much tax to pay and avoid interest and penalties."