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."

when state tax laws change, tax pros & taxpayers respond like my cats

Like several parts of the country, this week we got abnormally cold temperatures and about 6 to 7 inches of snow in Nashville. We live on a hill on 16 acres. We don't normally get this much snow and definitely not this cold (zero or negative temps). Oh, did I mention we live on a hill.

So, when this level of 'winter' occurs, we basically don't go anywhere and just wait for it to melt. I do a little shoveling where I can. Actually, I did shovel my road on my hill so I could attempt to get out if I wanted to. Most people would have just played the waiting game. Not me. (Let's attempt to hurt my back for the sake of a clean road.)

My family calls this week - "snow week." A time where work pauses and my wife gets to play games, do art, and fun stuff with our daughters. In other words, a time where everyone is trapped at home.

While I continue to work from home as if nothing has happened.

THE CATS

We have three outdoor cats that we gathered up and put in our heated garage to protect them from the extreme cold. When I go in the garage every morning, one cat is content and just wants to be left alone, one cat is a little confused, but then immediately starts to eat and seems relaxed, and the last cat follows me around, wanting petted non-stop, looking like he wants to jump on my head (he's the anxious one). He keeps acting like he wants out of the garage. Our garage doors are glass. He will sit at our garage doors and just look outside and whine.

Sidenote - when he is outside and winter comes (starts to get colder), he will often come to our windows or doors and look in - like he wants to be inside. In other words, you can't make him happy. He always wants the opposite of what he has (sound familiar?). He thinks he wants out of the garage so he can play in the snow and cold, but he would immediately want back in.

Why do I share all of this in a newsletter about state taxes?

Well, I think life has a lot of great analogies for state taxes (or it's just because that's my profession).

JANUARY IS "SNOW MONTH" FOR THE TAX PROFESSION

We are in the middle of January and it is the calm before the storm for most tax practitioners. In the state and local tax (SALT) profession, there really isn't any off-season. It's busy season year-round. With that said, we do experience "higher call-volumes" during tax 'busy season.'

In addition to tax 'busy season' getting ready to kick-off, state government legislative season or sessions will be starting soon. Governors and others are already making their proposals or ideas known. Every year, states change their tax laws via these sessions. These changes can be unique to the state or they can be related to conforming or not conforming with federal tax legislation. These changes are in addition to the daily non-legislative changes that occur due to new interpretations of current law, court decisions, private letter rulings, audit adjustments related to grey areas of tax law that taxpayers did not expect to be interpreted in a certain way.

Some state tax policy organizations that are great resources for monitoring law changes or being involved in impacting policy changes are:

• The Tax Foundation

• Council on State Taxation (COST)

• Multistate Tax Commission (MTC)

• National Conference of State Legislatures

• Federation of Tax Administrators

The Tax Foundation published an article about State Tax Changes taking effect January 1, 2024.

COST has a lot of great resources that only members can obtain, but they also provide some great FREE resources such as their Policy Position Statements, Amicus Briefs, other studies and reports, etc.

The MTC has a number of uniformity working groups that you can participate in or attend that can be enlightening.

WHEN STATE TAX LAWS CHANGE, TAX PROS AND TAXPAYERS RESPOND LIKE MY CATS

Just like my cats, tax pros and taxpayers respond differently to tax law changes and this time of year.

Some tax pros and taxpayers will greet tax law changes like its no big deal, not realizing the impact or the reason why they should care.

Some tax pros and taxpayers will understand what is going on and be cautious and take a 'wait and see' approach, calmly waiting for guidance so they can make informed decisions and move on.

Some tax pros and taxpayers will be anxious, will want guidance immediately, even if the tax law change has just been proposed and not enacted. They will pace and want to know what to do (even if the law change never happens).

Regardless of what cat you feel most like, this is an annual, recurring event where state tax law changes can feel like an 'avalanche' of snow.

An effective state tax pro, daily monitors state tax law changes in addition to the annual state legislative sessions.

A state tax pro looks for risks and opportunities to taxpayers.

A state tax pro provides technical and cost-effective practical guidance. Identifying the grey areas. Explaining the issues and options. Providing navigation. A compass. A roadmap. Direction.

In the context of thinking of state tax law changes as snow, a state tax pro provides a 'shovel' or 'snow plow.'

CONCLUSION

Regardless of how you feel about state tax law changes or snow, winter comes every year. I hope you don't get trapped at home for too long when winter comes. I also hope you find your shovel or snow plow to move forward when the avalanche of state tax law changes occur.

Here's to spring.

conduct state tax "year-end" planning early, often & always

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

are court case decisions worthless?

I attended the Paul J. Hartman State and Local Tax Forum this week. It was the 30th anniversary of the Forum. I’ve attended the conference over the years multiple times. Good conference. Knowledgeable, esteemed and respected speakers (lawyers). These lawyers handle some of the top state and local tax cases and litigation around the country. They also seem to be the same lawyers that speak at ALL of the conferences, so you’ve probably heard of them or met them.

As I was sitting in one of the sessions, the panel of speakers was going back and forth talking about court cases. One of the attorneys was explaining a specific case that the tax practitioner community was looking to as having broad applicability and authority to not only the state and taxpayer involved in the case, but every taxpayer and every state. He explained the facts and issues in the case and did confirm the ruling’s final decision and applicability, etc. However, he also said he disagreed with the ruling and mentioned the dissenting opinion. He thought the reasoning in the case was incorrect and thus, the conclusion was wrong and should be challenged.

Other speakers (attorneys) on the panel mentioned how the case was precedential and should be considered authoritative and reliable for taxpayers. The first attorney still disagreed with the conclusion and seemed to infer that taxpayers should not follow the court case.

That’s when it hit me, a strange epiphany - should taxpayers follow court case rulings?

Can taxpayers follow court case rulings? Yes, the facts matter. Yes, the states involved matter. But if a taxpayer’s facts line up with the facts in a ruling, shouldn’t the taxpayer be able to follow the case’s decision? Or should every taxpayer have to determine on their own, or make another judgement call regarding whether the case was decided correctly?

When does a taxpayer get a clear roadmap?

When does a taxpayer get certainty when the path always seems to be grey?

Taxpayers and state tax practitioners deal with vague statutes and regulations. State notices, publications, letter rulings, and court case decisions are supposed to provide clarity (which they generally do), but if taxpayers can’t follow court case decisions, then what good is a court case decision?

I know, I know, court case decisions are often appealed and I am not talking about those. I’m talking about court case decisions that are final (no appeal) and appear to be settled (until the next challenge). Can taxpayers rely on those decisions?

I also know that states often change their statutes or regulations after a court case if the state disagrees with the ruling or wants to limit its applicability (let’s not even talk about retroactive legislation - which I’ve done in the past).

Every question in the state tax profession is a research question due to the number of jurisdictions, the lack of uniformity and unique client fact patterns. The search to find answers and provide certainty is a daily challenge. If taxpayers and tax practitioners can’t rely on court case decisions, then what can we rely on?

It Feels Like Life Has Been Cancelled = Opportunity to Change?

Good morning. It’s been almost 2 years since I wrote on this blog. Now that we are all working from home, I thought it would be good to start-up again. Perhaps therapeutic for myself and hopefully for you. Yes, I will write about state taxes, but I want to mostly talk about the new challenges we face and our fight to move forward.

Before I do, I just want to say, I hope you are doing well and are safe. I hope you aren’t reading the news 24/7 and getting stressed and depressed. I had been doing that all week this week and I can’t do it anymore. It is demotivating and paralyzing. Can’t keep that up. I normally don’t watch the news because all they do is sensationalize and spread fear on a normal, daily basis. Now that they have this virus to talk about, it’s like non-stop negativity and politics. I normally don’ trust the media or politicians and when they are the only ones talking, it’s hard to read between the lines and find the truth.

Okay. Let’s talk.

It feels like life has been cancelled. Like waking up from a bad nightmare or movie. BUT, in the wake of this crazy time, this is when life becomes real. When we find out what really matters. When we are forced to pause, to stop our regular routine and change. Change is difficult, even when it is optional. However, sometimes we will only change if we are forced to change.

Trust me, I would rather this 'thing' not be the cause of change, but we can't change that. However, as we are confined to our homes with our families, we should try to be as positive as possible (which is difficult with the news and media constant barrage). In any case, we should try to be more innovative during this time. Think of all the things you do - why have you been doing them that way? Why is that your routine? Have you ever tried doing things differently? How could you do things differently?

Despite uncertainty, life is too short to live in fear. Let's live by faith and strength. Let's do what we can. Let's respond, not react.

Peace. Be Blessed.

INTERVIEW #8 - REBECCA PAULSEN

As I mention on my site, I have been interviewing state tax professionals across the country and posting them on this blog to help each of us build connections and get to know each other better.

To be interviewed, all you have to do is answer the 14 questions (found here) and send them to strahle@leveragesalt.com to be published on the blog.

I have received feedback from professionals that answering the questions is a great exercise. Looking back is a good way to help you move forward.

To read prior interviews, go here.

Today's guest is Rebecca Paulsen, Vice President | Senior State Tax Director at U.S. Bank in Minneapolis. 

1. Birthplace: Johannesburg, South Africa

2. Education: Bachelor's degree in accounting, Saint Mary’s College; Master’s degree in taxation, University of Notre Dame

3. Career: 10 years in public accounting; 19 years in corporate tax in financial services companies; owned my own accounting firm for a couple years early on

4. Best Career Move: joining the US Bank Corporate Tax Department

5. Career Goals: to shape public policy in the SALT arena – if I can work myself out of a job by making state tax simple and reasonable for both taxpayers and collectors, then I will have succeeded.  I am a realist, though, so I will be happy if I can make it a little better in my sphere of influence. 

6. Best advice ever received: was on the golf course:  “you are not good enough to be that p___ed off.”  Best work advice – from President Ronald Reagan (not in person) “Surround yourself with the best people you can find, delegate authority, and don’t interfere as long as the policy you’ve decided upon is being carried out.” I try to do this every day.

7. Most difficult situation faced on the job: being told about a rumor, and simultaneously being told not to refute it.

8. Career tip for students: Listen more than you talk.  Respect your elders – experience is more valuable than book smarts.  Spend a lot less than you earn.

9. Role models: Aside from my parents, two female attorneys, with whom I still work – one in Missouri, and one in DC.  I won’t name them, because they will probably see this, and will not want to be outed.  They are who I wanted to be when I grew up – before life came along and changed my plans.  They are smart, articulate, organized, generous, principled, and fiercely loyal.  I love them dearly.

10. Family: A husband, three teenagers, two cats, and apparently, a skunk that lives in my barn.

11. Pastimes: Watching my kids play hockey, competing in random tests of physical endurance (I have run a marathon, competed in a triathlon, and finished several “mud runs”), refereeing soccer games (U12 – U19), reading, cooking, brewing beer, and trying mightily to grow edible things in my garden.

12. Most memorable book: Atlas Shrugged.  Just read it.

13. Favorite restaurant: Hell’s Kitchen – in Minneapolis.  Get the Juevos Rancheros.  With bacon.

14. Ideal vacation: I honeymooned in Samoa and Tonga – if I ever get the chance to go back to Tonga, I might only get a one way ticket.  

I hope you enjoyed meeting Rebecca.

Thank you Rebecca for sharing.