Substance v. Form (reasonable v. punitive)

The challenge.

We know what we did.

We know how any reasonable person would perceive what we did.

We know what we meant to do.

It should be understood that this is the conclusion and answer.

However, the technicality. The application of the law. A deadline. A procedure. A form. A description. An inadvertant explanation on a website or in sales and marketing material.

Despite the substance of a transaction, the form of the transaction may (or will likely) determine the outcome or conclusion reached by an auditor, adiministrative appeals or a court.

In the state and local tax world, we deal with these types of connundrums all the time. Either the facts aren't great or the law isn't great (when applied to the facts).

If you can't change the facts and you can't change the law, then it is up to building arguments and support for the conclusion you seek.

Big corporations and consulting firms may approach these types of issues one way.

Middle market and smaller businesses (and consulting firms) are often forced to approach these situations a different way. Lacking the dollars and/or the resources, companies are often forced to fight adversity with a skeleton crew and dig deep as quick as possible and as far as possible without breaking the bank or sometimes, pushing a legitimate position.

When a reasonable conclusion can't be reached and a conclusion seems overly punitive because "we have to follow the technicality" of the rules, that stings.

That's when we lean on appeals, a taxpayer advocate office, or some other discretionary tool (without going to court). This sometimes works and sometimes it doesn't.

I wish all businesses (who are trying to follow the rules) could get reasonable results, but that isn't always the case.

Sometimes the late filing of a document (by just a couple of days) can be costly (even when it shouldn't be).

Exceptions to rules should be made, sometimes.

It's like going to a store or restaurant or other place of business and asking for assistance when you know that you "technically" didn't follow the rules or maybe don't deserve it.

The employee at the desk can either be a stickler for the rules, or use their discretion to use "common sense" (or go the extra mile) and help the customer (providing excellent customer service) achieve a fair and reasonable result.

State Tax Notices: A Game?

State tax notices, got to love them.

I don't know about you, but I am seeing a lot more state tax notices being received by companies. Not only are they first time notices, but they are repeat notices, month after month. This is even after the taxpayer/company has responded to the first notice.

It often feels like the state taxing authority never looked at the response sent by the company.

Actually, I recently called a state taxing authority because a company received a repeat notice, and the state said they were probably six months behind on processing incoming responses/mail, etc. Therefore, the company would continue to receive a repeat notice every month until the company's initial response was processed.

Disregarding repeat notices for the moment, even the first notice a company receives gives the perception that the state taxing authority did not even look at the documents that were attached to the originally filed return. The attachments often explain or provide the information that the notice is now requesting. This causes companies and taxpayers to devote additional time and resources to explain something again and again.

Can't taxing authorities get better? Is it just a computer system gone awry? Lack of resources?

What can taxpayers do to eliminate notices and repeat notices?

I understand it isn't always the taxing authority's fault, some taxpayers don't provide adequate information. But for those that do, the notices keep coming.

Sometimes it just feels like a game. A game in which the taxing authorities just want a company or taxpayer to give up and pay the additional tax, interest and/or penalties being imposed.

Time for State Taxes to Be REWRITTEN

Sometimes we get so caught up in the litigation and proposed legislation that we don't stop to ask whether we should even be going in this direction. Perhaps we are getting the wrong answers because we are asking the wrong questions. It's time for state taxes to be rewritten. For politics to get out of the way. 

I read an article this week, written by Michael J. Bologna and edited by Ryan Tuck for Bloomberg BNA regarding state tax policy (entitled, "Kill Corporate Income Tax, Seek Low Rates"; requires a subscription to BBNA to access). The focus of the article were comments made at the August 10th National Conference of State Legislatures program in Chicago by William Fox, a professor of economics at the University of Tennessee, and Therese J. McGuire, a professor of strategy at the Kellogg School of Management at Northwestern University.

Overall, I agree with their comments about what a fair tax system should look like, and how the current state tax regimes are complex, unfair and inefficient. The current taxing schemes cause compliance burdens for taxpayers, administration burdens for state governments, and inconsistent revenue.

If the ideal tax structure contains low rates, broad bases and simplicity, then why do states keep making their tax systems more complex? 

States continually run into budget problems and resource constraints, yet the tax systems are not adjusted to make it possible for revenue departments to operate efficiently and effectively.

Politics makes it almost impossible for tax structures to change to fit modern economies. For example, when will all services become subject to sales tax by all states? How will states tax digital and remote sales without enacting unconstitutional taxes?

If corporate income taxes only account for approximately 8% of all state taxes collected, then why is so much effort and litigation expended by both taxpayers and governments?

States keep enacting state tax schemes that favor in-state taxpayers such as single sales factor apportionment, market-based souring, unitary combined reporting and digital sales tax laws, when the simple solution is to widen the tax base and lower the rates. This may actually cause more companies to move into a state. It would more than likely decrease the compliance burden and potential for audit controversies.

Will and should more states consider replacing their corporate income tax with a gross receipts tax similar to the Ohio Commercial Activities Tax or the Washington Business and Occupation Tax? 

Like a person that creates his own problems and then spends his life complaining about them, that's what state taxes have become. We can't expect a different result if we keep doing the same thing. It's time to get off the merry-go-round.

the fixer and preventer

At my house, I often refer to myself as "the Fixer."  Why?  Well, I live in a house full of girls (my wife, two daughters and a shitzu).  As most men encounter, they often have a "honey do list" that accumulates over time.  However, on a weekly basis there seems to be things that constantly need attention, maintenance or "fixing."  Examples may include:  cell phones not working properly, computers not working properly, IPads, toys, etc.

Every family needs a "fixer" (whether it is male or female).  Someone who can fix almost anything because unfortunately, everything in this world seems to be made to break down at some point.  Everything needs constant maintenance or "fixing."

In the state and local tax world, this seems to be the case as well.  Every day represents a new court case, new legislation, new business decisions, new fact patterns, and lovely audits and notices, etc.  Constant change is inevitable.  Constant change can lead to problems and issues that require maintenance or "fixing."  Hence, every company needs a state and local tax "fixer."  Someone who can provide leverage when it is required.  Someone who lightens the burden, and is a strong advocate when needed.  Someone who can identify the right-size, most cost-effective and practical solution.  

The key to being a good "fixer" is also being a good "preventer."   The more problems you can prevent, the less problems you will have to fix.  Hence, a good fixer will be as proactive as possible instead of just reacting to the constant "nagging" or "fire drills" that pop up.

Do you have a "fixer" at home? 

Do you have a state and local tax "fixer" and "preventer" for your business?

what level of tax avoidance is permissible?

The following is an excerpt from my December 2, 2013 article in Tax Analysts State Tax Notes:

Here’s a multiple choice: the difference between tax avoidance and tax evasion is (a) whatever the IRS says, (b) a smart lawyer, (c) 10 years in prison, (d) all of the above. — Avery Tolar (Gene Hackman) in The Firm

According to the courts, tax avoidance is legal, but tax evasion is not. However, tax avoidance without business purpose or economic substance may be treated as a sham and disallowed. The history of state tax planning and two recent conflicting state decisions raise a question: What level of tax avoidance is acceptable?

Senate Finance Committee member Chuck Grassley, R-Iowa, once said that at the heart of every abusive tax shelter is a tax lawyer or accountant. That may be true, but what about legal tax planning and avoidance? Who, or what, is at the heart of tax avoidance? The answer to that may depend on the experience of the individual responding — whether he has worked for the government or has represented taxpayers against the government. Hence, we all decide whether tax avoidance should be allowed based on our own biases. For example, I have always worked as a taxpayer representative or advocate. Thus, I naturally lean toward the taxpayer’s point of view.

From the taxpayer’s side, I have experienced tax authorities abuse power, neglect the law, and use vague laws to raise revenue. States have imposed unconstitutional state taxes and pleaded bankruptcy when found guilty. On the other side, I have experienced taxpayers and advisers who analyze laws to the finite detail to wiggle around corners and yet stay within the boundaries of the law. As a result, both government and taxpayers can take advantage of the law, but who is right? What is acceptable? What came first — aggressive tax planning or overreaching and vague tax laws?

WE ARE WHAT WE ALLOW

"We are what we allow" - if you watch Grey's Anatomy, then you may know I got this quote from last week's show. When Dr. Grey made the comment, I was like 'yes,' we are what we allow. If we allow others to treat us small, then we will be small. If we allow others to define who we are and what we do, then we will become that version of ourselves.

We have a choice. We have a daily decision. Are we going to be what we want to be? Or will we allow others to decide who we will be and how they treat us?

In regards to working in the state tax profession, whether you work in a corporate tax department, the Big 4 or a small regional firm, people in your department or partners will try to define who you are. They will treat you a certain way. You need to decide if you are okay with how they are treating you. Are you who you want to be? Is how they are treating you interfering with who you want to become? Just say no. Stop it today. Decide for yourself.

In regards to state taxation, corporations can get ran over by auditors, by unconstitutional laws, by unreasonable compliance deadlines and notices. Will you sit by and let it go on? Or will you stand up? Will you fight? Will you take action? Will your company defend itself? Will your company lobby for better policy? Will you take your audit issues to appeals? 

We are what we allow.

Peace.