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.

why sales tax software (& AI) is not the solution

THE PROBLEM

As I say in the title, sales tax software is not the solution. What I mean is that software cannot be a 'load and leave it' solution. It cannot be used blindly without proper oversight and implementation.

Otherwise the old saying, "garbage in/garbage out" becomes all too true.

You can't assume that your point of sale system or your ERP systems are properly communicating with your tax decision software. If the systems don't understand each other, or the company is not getting proper advice from the tax decision software company or other outside consultants, errors can happen. Sales tax can be collected for states that the company isn't registered in. Sales tax can even be collected for states in which the company is registered in, but the tax doesn't get remitted because the other system doesn't report it or expect it (capture it).

If these errors go on for months or even years, the liability can be significant in several states creating a mess to clean-up. The clean-up can involve filing Voluntary Disclosure Agreements (VDAs), filing amended returns, and even going back to customers to issue refunds, and/or the paying of tax, interest and penalties out of your own pocket.

I see too many clients with sales tax problems caused by software issues, registration issues, account login issues, etc.

During due diligence, whether we are assisting the buyer or the seller, I see too many companies that have played the 'wait and see' game or were simply unaware of their sales tax obligations due to either the complexity of what they were selling and making bad assumptions, or getting bad advice, or bad software implementation.

Emerging companies and middle market companies generally don't have enough in-house staff to properly complete their sales tax compliance, let alone ensure their software systems are communicating properly. Even if they do, they may incur employee turnover that makes it difficult to keep a handle on what is going on. If the company is relying on the software company to provide that assurance, unfortunately, that trust is often misplaced as the software company is selling the software (a tool) and is not providing specific tax advice to help the company apply the tool to the company's unique facts.

IT'S JUST A TOOL

For the last several years, we have seen the creation of many new software tools for sales tax compliance and other areas of tax. Some of them are great, some not so great. However, we've also experienced that feeling of being overwhelmed by all of the software tools available that you get to the point of -

• this is all well and good, but who really understands it?

• who really implements it?

• how do I know when I need it?

• and the most important - if I need it, how do I implement it well?

All of this talk about how great AI (artificial intelligence) is and how great it can be, is ........(to be determined). However, regardless of the tool you use (and AI is a tool), you can never 'load it and leave it.'

If you expect a tool (software or AI) to be as simple as pushing a button and magic happens that you can rely on, then prepare for 'garbage' to eventually appear.

Over the past year, certain lawyers got in trouble for using AI in cases, relying on false legal support, which they call "hallucinations." That can happen in any industry or profession.

CAN'T DELEGATE DECISION MAKING

Regardless of the tool, we have to remember these are tools. We can't delegate our responsibility. We can't delegate oversight. We can't delegate decision making.

It's like doing tax research and relying on some database or chart to tell me the answer by just doing a simple search. That is not analysis. That is not looking at all of the facts, and other court cases, rulings, etc. It is looking at things in a 'vacuum.' A vacuum can only pick up what is in front of it, it doesn't see the entire room, you do (or at least you better). The vacuum has to be moved to find the other dirt in the room.

CONCLUSION

Software and AI are not the solution. You are.

who or what is 'rocking the boat'?

Usually 'rocking the boat' is perceived to be a bad thing, but 'rocking the boat' can be a good thing. Let me explain.

If you are riding in a boat heading into a storm and the boat starts rocking, that is usually a bad thing or scary. The boat is rocking to due to some external force or environmental change.

If someone on your boat gets up and starts jumping around without any explanation and you can't stop them or talk with them, that is usually a bad thing.

But if the the captain of the boat purposely turns the boat, changes direction and heads into the storm, then the rockiness of the boat is a good thing. It means the boat is going in the right direction. A strategic, purposeful direction. The rockiness is part of the process of reaching the chosen destination.

If someone on the boat gets up and voices a concern with the current direction of the boat, and makes a valid point why the boat should change course, the rockiness of the boat is a good thing. A necessary thing.

I'm sure we could keep going with this analogy or you could make up better analogies, but you get the point. Change, upheaval, incurring resistance or turbulance is sometimes a necessary or required part of the process of achievement or improvement.

HOW DOES THIS APPLY TO STATE TAXES?

2024 just began. January already gone. State governments have started or will be starting their legislative sessions. Proposals are flying all around. This is in addition to the state tax law changes that were enacted last year that became effective in 2023 or as of January 1, 2024. On top of the state legislative proposals, we also have federal legislation that is moving through the House and Senate that will have ripple effects on the states regarding research and development expenses and other items (appears to have a high probability of passing). The SALT CAP (i.e., state tax deduction limit of $10,000) is proposed to double to $20,000 (based on commentary, this legislation has a low probability of passing). As with all federal tax legislation, some states automatically conform, and some states don't conform until they specifically say they do.

All of these changes can 'rock the boat' of your business.

These are external changes that you don't have control over. You may be able to influence them (or some people may be able to), but for most companies, their 'boats' get rocked and they have to learn how to change course to find calmer waters.

Some state tax issues or items that are currently being challenged or expected to become bigger issues in 2024 that could 'rock your boat':

1. More states to adopt state income tax exconomic nexus thresholds

2. The protections of P.L. 86-272 continue to be challenged and worked around.

3. Gross receipts taxes (Ohio, Washington, Tennessee, Oregon, Nevada) continue to change their rules.

4. Sourcing sales of services or intangibles for income tax apportionment purposes continues to be more confusing with market-based sourcing - do you source to your customer or your customer's customer?

5. How do you source the gain on the sale of your partnership interest?

6. Should my company really make pass-through entity tax (PTET) elections in all states where we can?

7. Do I really owe the California LLC fee or minimum tax based on my ownership in a California LLC?

8. Am I required to file a state income tax combined return?

9. Should I make state income tax elective consolidated return elections?

10. Will the Washington capital gains tax survive challenges and should I pay it?

11. Does everyone have economic nexus for income tax purposes if the state has no 'factor presence' threshold?

12. Can a telecommuting employee that does 'back office' functions create nexus but a telecommuting employee that solicits sales be protected by P.L 86-272?

13. Is SaaS considered tangible personal property or a service for state income tax apportionment purposes?

14. Does P.L. 86-272 apply to sales of SaaS?

15. How can a company realistically source sales of SaaS when the users are in multiple states and the buyer doesn't provide the data?

16. Are state 'throwback' rules constitutional?

17. Should market-based sourcing really create economic nexus?

I could keep going, but I will stop.

CONCLUSION

External forces will always 'rock a company's boat.' However, even if the boat isn't currently rocking, a taxpayer or a tax consultant may need to stand up in the boat to advise or ask the captain of the boat to change directions. The goal is to adapt to the wind or to change the direction of the boat so the company can move towards calmer waters or avoid the storm altogether.

Unfortunately, the constant change in federal and state tax legislation and court cases and rulings, makes it difficult for the waters to stay calm very long.

The best strategy for a company to thrive in this type of environment is to monitor changes, make informed decisions and most of all - be proactive. Don't wait until your in the middle of the storm.

You can always navigate out of the storm, but the damage to the boat will differ based on how quickly you change course.

Here's to smooth sailing.

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