is the law changing or simply the interpretation of the law?

Interpretation of the law determines whether there is any retroactive changes to the law being made.

If retroactively changing the law, it may be unconstitutional.

If the interpretation is simply incorrect, then no change in the law is being suggested, the interpretation is only being corrected (changed).

However, then the interpretation could be considered to being changed retroactively.

Does it matter if the law is changed or the interpretation is changed?

The answer likely depends on who is making the change.

The issues:

• What is the law?

• What is the correct interpretation of the law?

• What is the basis of that interpretation?

• Will the courts agree?

State tax laws are challenged because either the state has made an assessment and believes additional tax is due based on the state's interpretation of the law.

But what if the law is vague or ambiguous, open to interpretation?

What if the company has a different interpretation of the law?

Who wins?

Deference. What is it?

Judicial deference is the idea that under some circumstances, a court should defer to a state agency's interpretation of a statute or regulation rather than the court imposing its own interpretation.

Recently the U.S. Supreme court ruled in Loper Bright Enterprises v. Raimondo which overturned the Chevron doctrine. The Chevron doctrine gave deference to the state agency's interpretation.

From a state perspective, several states did not follow the Chevron doctrine. Some states even have anti-deference statutes.

Georgia codified antideference in 2021 specifically for tax matters providing that all quesitons of law to be decided by a court or the Georgia Tax Tribunal are to be made "without any deference to any determination or interpretation, writen or unwritten, that may have been made on the matter."

Tennessee amended its statutes effective April 2022 providing that when interpreting a state statute or rule, a court should not give deference to a state agency's interpretation and should interpret the statute "de novo."

CONCLUSION

Interpretation matters.

Public knowledge of the state's interpretation is necessary if we are to have any level of certainty and compliance.

Public knowledge of the state's interpretation allows companies to make determinations as to whether they agree with that interpretation and either accept it or challenge it.

Retroactively changing the law or the interpretation of the law can have adverse effects on not only the taxpayer involved, but the taxpayer community at large.

Ambiguity in a law creates confusion, different interpretations, risk, opportunity and ultimately, most likely, litigation.

Stay sharp. Be safe.

Don't let state taxes play the villain in your business story

Our lives are like a book. A story. A journey. Each day is a new page, a new paragraph, a new sentence, a new word. There are chapters to our lives. There is a preface, a foreword, an introduction. There are many plot lines, unexpected twists and turns. Sometimes we are the hero, sometimes we are the villian. Sometimes we know exactly what to write and other times, we just stare at the blank page. Too many options, not enough options. Do we rewrite the story? Do we turn the page? Is it time to start a new chapter or do we keep going down the same road. When good times happen, we want it to last forever. When bad things happen, we can't wait to turn the page or move into the next chapter. Sometimes we cause change and sometimes change is forced upon us. We grow, we age, we hopefully learn. We adapt, we improvise and hopefully overcome. We learn what we like, what we don't like. Our personal and professional lives intertwined. Working to focus, to achieve, to realize goals and dreams while balancing time with families and friends. Obsession leads to great things, when obsession is focused on the right things without sacrificing the most important things (which aren't things).

I'm not quite sure why I started with that intro, but hopefully it means something to you.

As business owners, business and/or tax professionals, our work takes up a lot of our time, our lives. Thus, business is personal and should be taken seriously. It is how we support ourselves and our families. It is a big part of our story. They often say that what you do is not who you are. That what you do doesn't define you. I don't think that's necessarily true. It is often difficult to separate what you do from who you are. We all take on the identity of what we do or atleast for some part of the day. Or maybe we take on an alter ego. Regardless, we have our bios that tell people some of who we are, but not the whole picture.

Right about now, you are probably asking, "how does any of this relate to state taxes?" Well, as I have done in many of my blog posts over the last decade, I will attempt to bring this back to state taxes.

Companies have a story. They have a lifecycle. They start out with an idea, a vision, a dream, a goal. Then they get capital and make investments. They pick a location, buy or build a facility, hire people, start selling, start shipping, in one state, in multiple states. Then they grow - hire more, build more, sell more. Maybe they create new legal entities, new ownership structures. Maybe they start selling different products and services. Maybe they build new facilities and hire more employees in multiple states. Maybe the entities sell to each other. Maybe the entities start selling to customers in foreign countries. Maybe they create foreign entities that sell into the U.S. Maybe they acquire another entity or they are acquired by another entity. Maybe the owners simply sell their ownership interest and move on to begin another venture.

All of the above changes, stages, activities create different state and local tax issues, risks and opportunities. Some companies plan ahead before making a decision or taking action, but often the action happens before the state tax impact is taken into consideration. This results in potential tax exposure or liabilities that arise and can grow if they are not discovered or investigated. Sometimes planning ahead could have eliminated any exposure and perhaps even created tax savings or refund opportunites. Some state tax issues related to the above are:

• knowing when to file returns in a state (i.e., having a taxable presence or nexus)

• knowing when to collect sales tax on the company's sales (sales taxability study)

• identifying tax credits and incentives related to building/investing in a specific state, county or city

• identifying any sales tax exemptions related to the company's purchases

• knowing how each type of legal entity is taxed from a state income tax perspective

• knowing the state tax impact of integrating new companies, merging companies or selling interests in a partnership or S corporation

Each stage of a company's business tells a story. Is filled with various facts, plots and challenges. State taxes play a key role and impact every chapter, every page, and perhaps every sentence. State taxes can be the hero or the villain.

Being proactive is always better than being reactive or playing the "wait and see game."

state taxes aren't that complicated (someone said)

I had a birthday recently and also did some traveling. Went to our firm's Altanta and Alpharetta offices. I had some great one-on-one meetings and did a little state and local tax (SALT) Q&A lunch-n-learn just talking about several current SALT issues and some common issues that always pop-up each year as companies operate, grow, change, etc. In addition to my meetings and trip, I also had some interesting calls with fellow SALT colleagues. Based on my week, I'd like to share some observations and opinions regarding the SALT profession.

One - as we discussed SALT issues during the lunch-n-learn, a few points became obvious. Most of the issues we discussed dealt with 'risk management' or areas in which companies either just missed the mark or purposely played the 'wait and see game.'

State and local tax laws or the interpretation of those laws are constantly being challenged or changed. That constant change in combination with the lack of conformity among the states creates opportunities for companies to do things incorrectly (whether by mistake or on-purpose). This puts a state tax consultant in the 'not so fun position' of telling companies bad news (i.e., large historical liabilities, etc.). However, this bad news is often told in conjunction with a solution to remedy the situation and alleviate the pain. It is still painful, but hopefully not as painful as if the company just waited for the state to catch them.

Another thought that became obvious as we discussed various state tax issues, how you analyze a company's situation, state tax law, rulings, etc. and ultimately reach a conclusion or guidance to give a company is that a state tax professional needs the ability to look at company's facts and state tax legal authority from multiple angles.

You have to be able to go to the 50,000 foot view and then be able to dig in the haystack. You have to be able to turn the facts and law upside down, sideways and then turn it right side up again. You can't just look at the picture as it is and then say 'yes or no.' If you simply rely on a 'chart' from a tax research software tool, then you will likely end up with the wrong answer or an answer that doesn't address the whole picture or a variation of the picture. A chart can be the starting point, but should never be the finish line.

Someone told me this week that state taxes aren't that difficult, but then later said they handled some very complex issues that made them scratch their head. - well, which is it? Is state tax simple or is it complex?

I've always said that state taxes are deceptively simple and endlessly complicated. Some questions are 'bread and butter.' Some questions are complicated. Actually, most questions seem to be living in the grey and require knowledge, judgement and advocacy. Responses require providing companies with options, levels of assurance and risks.

Regardless of the issue and a company's ultimate decision regarding a state tax position, documentation is key.

A company should ensure they have documented the facts, assumptions, state tax legal authority at the time of making the decision, and the conclusions reached. This is especially needed when the answer is not 'should' or 'more likely than not.'

State taxes require consultants to be technically sound and have the ability to communicate that knowledge and expertise in a practical manner so companies can make decisions and take action - "actionable intelligence."

Companies don't need 20 page memos that describe every facet of the law when those 'facets' don't apply to the situation at hand. Companies need their guidance to be thorough and brief (to the point). Clear. Concise. Supportable. Reasonable. As long as the facts and assumptions are correct; and all applicable legal authority has been reviewed and addressed, then the written guidance that contains those things should be sufficient.

Knowing - where to look, how to look, when you have looked in all the right places, how to organize the analysis, how to communicate the analysis with the right levels of assurance, how to present options and risks to a company - takes experience, judgement and skill that is developed over time.

I guess me 'getting older' isn't such a bad thing when I think of it this way. My 'older age' just means I'm more experienced and hopefully more skillful then when I was 'younger.'

Here's to you getting older, wiser and more skillful.

Stay safe out there.

the BIGGEST STATE TAX ISSUE companies face today

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."

"darkness is death"

Time change. Daylight savings time. Fall back. Spring ahead. However you describe it, most (if not all of us) changed our clocks recently. We either gained an hour or lost an hour (depending on how you look at it), but one thing I do know - I've lost daylight. So I'm not sure how this is "daylight savings" time. I don't like to complain, but I just do. So I'll just say that I really like sunlight and dislike darkness. As they said in a cartoon movie I can't remember the title of right now - "Darkness is Death."

Regardless of how you feel about changing your clocks or sunlight or darkness, one thing is certain, times continue to change. The way business is conducted continues to change. New technologies are created (whether that's good or bad; or will be used for good or bad is yet to be seen). And last but not least, state tax legislation continues to change; and court cases and rulings continue to be made which ultimately create certainty and uncertainty. Wait, what? What did you just say?

Yes, new legislation, court cases and rulings create just as much uncertainty as they do certainty.

Well, that's great.

Just as each company's facts and circumstances differ, state tax laws seem to have a life of their own when the answer isn't "black and white" (which is most of the time); or when each state's laws are different. This creates a world of grey (or some may say, "darkness"). This "darkness" is why I say every state tax question is a research question. (A research question that needs to be solved by a human (not A.I., AI or artificial intelligence, just saying)).

Darkness is debilitating. It's hard to drive in the dark without headlights. It's hard to walk in the dark without a flashlight. Darkness creates fear and uncertainty. Darkness creates unknown risks. Thus, light is needed to move forward with some level of assurance and confidence.

Darkness can also create unknown opportunities. You can't see them. This requires faith. A compass. A navigator. A roadmap.

"Darkness" in the state tax world surrounds several areas and questions companies continually ask:

• what states do I need to file tax returns in?

• is what I'm selling subject to sales tax?

• which entity in my affiliated group of companies is required to file the tax return?

• if I sell my interest in this partnership, to what states do I source the gain and have to pay tax?

• I'm selling services all across the United States. How do I source those sales to each state in the apportionment factor of my income tax returns?

• do I really have to get exemption certificates from my customers?

• do I have to register with a state for sales tax purposes to provide a vendor with that state's resale exemption certificate or can I use a multijurisdictional certificate?

• am I required to file combined income tax returns or does every entity file separately?

• should I make this election or that election?

• do I qualify for these tax credits?

• do I have to collect sales tax on my total gross receipts or can I deduct costs reimbursements or costs that I flow-through and pay to someone else?

• how do I know if we really meet the requirements to be protected from a state's income tax by P.L. 86-272?

• I didn't even know that state had a gross receipts tax.

• what is a franchise tax and why is the tax base so high?

• am I really selling SaaS and does the state tax it?

• should I make a state's pass-through entity tax election? How do i quantify or model the impact? Will it be beneficial for all partners and shareholders?

• should I file a Voluntary Disclosure Agreement (VDA) or simply start filing returns?

• should I request a Private Letter Ruling (PLR)?

• should I challenge (protest) this audit assessment or simply pay it and move on?

• when can I stop filing returns in a state?

• how do I dissolve or withdraw from a state?

• is registering with a state's Secretary of State's Office the same thing as registering with a state's Department of Revenue (taxation)?

• what sales tax compliance software should I use? Should I outsource the return prep to a third-party?

I could keep going, but I think you get the point. The darkness is everywhere.

Finding the light in the state tax world is not easy.

Unlike darkness in life where you can just flip the light switch and see, darkness in the state tax world takes research and analysis and judgment based on experience. And even then, the answer may not be clear (still dark or grey).

Consequently, I think the "light" is finding the right-fit state tax consultant that you trust and like working with. Someone with not only the technical knowledge and experience, but the ability to look at an issue from 2 feet and 50,000 feet. To be technical and practical. To look at the risk and provide judgment. To reduce risk. To recommend positions with the proper level of assurance. Knowledge. Judgment. Advocacy. That is the light in the proverbial darkness. The compass. The roadmap. The flashlight. The headlight.

I hope you find the light you need to move your company and clients forward.

If you are a state tax consultant, I hope you "shine brightly."

QUOTES

"The art and science of asking questions is the source of all knowledge." - Thomas Berger

"The prize goes to the person who sees the future the quickest." - William Stiritz

"We are drowning in information and starved for knowledge." - John Naisbitt

knowing what questions to ask and how to move forward

Over 20 years ago I was introduced to Tony Robbins and his books. This week I started reading "Awaken The Giant Within" again. I actually started with the chapter entitled, "Questions Are The Answer." The idea or thought is that questions have the power to focus our attention and direct our path. Ask the wrong questions and you will go down the wrong path. Questions cause us to think about certain things (positive or negative) depending on the question. Questions not only cause us to drill down on a person, place, thing, etc. but questions also cause us to "delete" (as Tony says in the book) or not think about certain things or think about things in a certain way.

Tony says:

• "the difference between people is the difference in the questions they ask consistently."

• "Questions determine everything you do in life, from your abilities to your relationships to your income."

Quotes Tony put in the book:

• "Always the beautiful answer who asks a more beautiful question." - E.E. Cummings

• "Some men see things as they are, and say, 'Why?' I dream of things that never were, and say, 'Why not?'" - George Bernard Shaw

QUESTIONS AND ANSWERS IN STATE TAX

After reading that chapter, and I got immersed in work this week, I often thought about the questions and answers I get in my work.

State tax consultants are faced with unique fact patterns and grey tax law which causes us to have to ask the right questions to get the right answer or conclusions. If you never ask the right question you may not uncover a significant fact that could change the conclusion. If you don't know where to look (research) you may never find the regulation, statute, court case or ruling that would alter the position your client or company was going to take.

Positions that a company makes are not just words on paper, they are real dollars. This is important and not just business. It's personal.

The positions a company takes (or doesn't take) have a financial impact on a company. The positions can determine whether a company has the funds to make investments or even keep operating. So understanding and identifying the facts that matter and the legal authority to stand on is not only part of the job, it is the job.

• Ask the Right Questions = Get the Right Answers

• Knowing what to ask, what facts are important, where to look, how to search, filtering through the trees to find the path or the one tree to climb - that's what I call experience and judgment.

• Never giving up, looking at every angle, gaining new perspectives, thinking outside the box - that's what I call advocacy.

I call all of the above "leverage."

This week I've been working on several projects with unique fact patterns and grey tax law (as I'm sure you have as well). Each one causing me to do all of the above. But what do you do when do all of the above and you still have questions?

That's when you have to reach conclusions with certain levels of assurance AND still provide your clients with recommended courses of action. Those recommended action steps should seek to reduce risk and uncertainty and/or take positions that have a level of assurance that supports taking the position.

Some potential courses of action may be:

• taking the position and filing amended returns (refund claims)

• requesting a Private Letter Ruling (PLR)

• filing a Voluntary Disclosure Agreement (VDA)

• documenting the file with a technical memorandum and taking the position

These complex positions and decisions can arise out of the basic areas of state taxation such as:

• whether a company has nexus (a taxable presence) in a state.

• determining whether a state imposes sales tax on what a company is selling.

• how to source a company's sales by state for both income tax and sales tax purposes.

• determining if a specific election to file a return in a certain way should be made.

• And many more......

I've been in the tax profession for 28 years and all of the complexity and never-ending change has been part of the intrigue AND pain. It can be positive and negative. The answers you give clients can be positive and negative.

• Risk management is not the fun part of the job.

• Getting clients refunds = fun.

• Telling a client they need to file historical tax returns and pay a lot of money = not fun.

• Winning an audit protest and saving the client thousands of dollars = fun.

• Telling a company to pay historical tax and interest (even if you reduce the number of tax years and eliminate penalties) = not fun.

So there are fun and not so fun parts of the job. There are easy and difficult conversations to be had. Thus, knowing what questions to ask AND then knowing how to move forward after you get the answers - that is the key. That is the "LEVERAGE."