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.

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.

7 Questions Companies & State Governments Should Consider

1. If alternative apportionment is wide open and anything goes, why have statutes?

2. Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?

3. Is single-sales factor apportionment 'fair apportionment'? It moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.

4. Are throwback and throwout rules unconstitutional because they look beyond the borders of the state?

5. Should states be able to enact retroactive legislation to protect the state budget from financial loss?

6. Should retroactive legislation be limited to a state's statute of limitations?

7. Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?

State Taxation: 'Food For Thought'

My recent posts have contained some of my notes and questions I recorded from attending the Paul J. Hartman State and Local Tax Forum last week. This is my last post which lists 20 takeaways or 'food for thought.'

1. The Organisation for Economic Co-operation and Development (OECD) does not identify tax havens, so why are the states?
2. Discretionary Authority is no warning. It doesn't allow taxpayers to know what a state will do (i.e., using alternative apportionment or combined reporting to force a taxpayer to deviate from the standard apportionment formula; or modifying a costs-of-performance statute to get a market-based sourcing result).
3. International taxation is starting to use state tax concepts such as combined reporting and apportionment.
4. "Are 'bright-line' tests knee-jerk reactions?" - quote from one of the speakers
5. "Tax Haven legislation should be trashed. Tax haven legislation picks winners and losers." - quote from one of the speakers
6. The only way to fight retroactive legislation is to monitor it and lobby against it before it is enacted.
7. Should states be able to enact retroactive legislation to protect the state budget from financial loss?
8. Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?
9. Retroactive legislation should not be able to increase revenue.
10. Ask yourself, if a 'technical correction' is creating new law or changing the interpretation of the law from the original interpretation that has been followed by taxpayers for years. If the answer is yes, do something.
11. Should retroactive legislation be limited to a state's statute of limitations?
12. Prior legislatures can't bind future legislatures.
13. New legislatures can't determine, or know, the intent of prior legislatures. Shouldn't be able to unbind or unwind prior legislation.
14. "Retroactive legislation is telling you what the law was." - quote from one of the speakers
15. Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?
16. Is single-sales factor apportionment 'fair apportionment'? Moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.
17. "Throwback and throwout rules are unconstitutional because they look beyond the borders of the state." - quote from one of the speakers
18. If alternative apportionment is wide open and anything goes, why have statutes?
19. "To gain true insight, read the entire case - don't just read the blurb. See what it says and what it doesn't say." - quote from one of the speakers. Get creative. See the case, the issue from a different perspective. Ask "why not."
20. Does common sense apply? If so, is your definition of 'common sense' the same as mine?

Obviously, I obtained all of the thoughts above from the Forum. Some are quotes from speakers, some are ideas paraphrased from a speaker's discussion, and others are personal reflections. 

The 'Most Significant State Tax Policy Issues'

David Brunori will be in Las Vegas this week speaking at the Council On State Taxation annual meeting (Friday morning) with Doug Lindholm, Helen Hecht, and Richard Pomp. They are leading a debate/discussion on the most significant issues in state tax policy. I can't be there, but thought I would give my two cents. 

I think some of the most significant state tax policy issues are:

• the imposition of sales tax collection obligations on remote retailers;
• expanding the sales tax base to services;
• whether states should ramp-up transfer pricing training/positions or join the MTC ALAS program;
• whether states should adopt tax haven legislation which allows them to cherry-pick the taxation of foreign income or simply adopt mandatory worldwide combined reporting;
• whether states should continue to enact unconstitutional legislation forcing taxpayers to go to court;
• whether states should continue to enact retroactive legislation;
• whether states should continue to enact legislation that benefits in-state taxpayers vs. out-of-state taxpayers (i.e., market-based sourcing, single-sales factor apportionment, credits and incentives).

What do you think are the most significant issues in state tax policy?

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.