Does Your Apportionment Reflect Your Business Activity?

In other words, does your apportionment result in a fair and accurate portion of your federal taxable income being taxed by the applicable state? If not, then opportunities may exist to utilize an "alternative apportionment method."

Some, if not all, states provide an opportunity to request or use an "alternative apportionment method" when the standard apportionment method creates "distortion" or does not properly reflect the amount of business activity in the state.

I'll be honest, the request for alternative apportionment is not an easy one, but when the apportionment factor results in a questionable amount of your taxable income being taxed in a state where you really have very little business activity, an alternative apportionment method may be the solution.

With the states on the perpetual march to lower the threshold of obtaining "nexus" or a taxable presence in a state, the apportionment factor is a way to help ensure that a state does not tax more than its "fair share" of income.

Connecticut's Amended Tax Laws Not Enough for General Electric

It was reported by the press today that General Electric has decided to move its headquarters from Connecticut to Boston. This comes days after the Connecticut General Assembly amended its tax laws with the hopes of alleviating GE's tax concerns regarding Connecticut's law requiring combined reporting starting January 1, 2016.

On December 29, 2015, the Governor signed the 2016-2017 Budget Bill (SB 1601) which made several tax law changes including placing a $2.5 million cap on the amount by which a unitary group's tax liability computed on a combined bases could exceed the group's tax liability computed on a separate basis. The bill also replaced the current three-factor apportionment formula with a single sales factor apportionment formula. Regardless of these changes and the others included in the bill, GE still decided to move its headquarters. This raises the question once again - does state tax law play a major role in a company's location decisions?

Well, according to a Wall Street Journal article, GE had several motives for relocating such as GE's outdated Connecticut suburban campus. According to the article, the campus was not allowing GE to attract the most promising talent that now desires to live and work in urban areas. Notably, according to the article, GE has been getting ready to leave Connecticut for months. This begs the question as to why Connecticut amended their tax laws last month. 

The article also mentions the fact that other states were offering generous tax incentive packages. Consequently, perhaps state tax laws or incentives do play a part in where a company chooses to relocate, but not the only part.

Interesting side fact: Connecticut is ranked #44 on the Tax Foundation's 2016 State Business Tax Climate Index. Massachusetts is ranked #25.

pre-packaged state tax planning is dead, maybe

I hope everyone had a great Thanksgiving holiday week and adventurous Black Friday. Cyber Monday (or week) is upon us - we shall see if any great deals really exist.

As we approach Christmas, we are also approaching the end of another year which causes tax departments and accounting firms to review end of year tax planning options. Specific state tax planning can be done at any time during the year; however, I am curious as to what state tax planning your corporation and clients implemented this year. Was it an idea a consulting firm brought to you? Was it a restructuring idea built on the firm's application to other clients? Was it an idea based off of a court case, a ruling, or simply your company's unique fact pattern (i.e., apportionment, combined v. separate reporting, etc.)?

Legitimate Loopholes

I recently read an article entitled, "Nuances in State Constitutions Can Aid Taxpayers" by Jeff Day at Bloomberg BNA which included comments from Kenneth T. Zemsky, a managing director at Andersen Tax LLC. Mr. Zemsky's comments were taken from a presentation he made at the November 3, 2015 American Institute of Certified Public Accountants (AICPA) conference. If you have a subscription to Bloomberg BNA, I recommend you read it.

One comment that Mr. Zemsky made stood out to me - "legitimate loopholes" exist for many corporate taxpayers, but only customized planning will allow companies to take advantage of them." Custom planning for each client? I think this is something we all know, but Mr. Zemsky is correct. Public accounting firms are well-known for creating planning ideas that they package and utilize at numerous clients over and over. Albeit, the facts may be slightly different, but the idea being implemented is the same. This is not necessarily a bad thing, as the idea may have merit and application. In addition, most clients generally ask if the firm has implemented the idea at other companies. Clients want to know if the idea has been successful and withstood state challenges or audit. However, is this the best way to mitigate tax and risk? 

An article by Charles F. Barnwell, Jr. back in 2009 for Tax Analysts entitled,  "State Tax Planning - What's Left?" is a great article about the history of state tax planning and its current and future opportunities. The article discusses how the 'great' structural planning ideas of the 1990s (i.e., intangible holding companies, sales companies, purchasing companies, etc.) are no longer viable. According to Mr. Barnwell, planning ideas are now based on the 'nuts and bolts' of state taxes such as apportionment factor planning, industry-specific characteristics, and maximizing state offered incentives. Mr. Barnwell says, "the best offense may be a good defense" for companies that have "base-shifting type planning" still in tact." Mr. Barnwell is correct. Since 2009 (when the article was published), we have seen companies unwind previous tax planning to reduce exposure. We have also seen states win litigation against corporations and enact new 'guard rails' to limit state tax planning such as related party add-back provisions, combined reporting and discretionary transfer pricing analysis.

What is a legitimate loophole? If you read the Bloomberg BNA article by Jeff Day, it appears Mr. Zemsky believes legitimate loopholes are found by digging deeper into the state's law and procedures to identify clearly applicable opportunities for clients. This approach definitely makes sense, but how is this different from prepackaged planning? Once consultants identify a strategy or 'legitimate loophole' that works for one client, the next step is to see what other clients could also use the strategy? Thus, turning customized planning into a commodity? In other words, legitimate loopholes do exist. However, once found, they may become 'pre-packaged tax planning.'

Perhaps the question isn't whether the planning is customized or pre-packaged, the question is whether the idea is legitimate tax avoidance or something else (Mr. Zemsky describes this 'something else' as a "scam"). I addressed this question in an article I wrote for Tax Analysts back in 2013 entitled, "What Level of Tax Avoidance is Acceptable?" For details, go here.

This brings me back to the question - what tax planning have you recently implemented? What are you thinking of implementing? What questions are you asking before you take the position? What will the FAS 109 / FIN 48 impact be? Will tax return disclosures be required? Are you prepared for an audit? Will the firm be there to defend the position upon audit? Did the position create more risk than benefit?

For more posts on state tax planning in general and specific ideas, check these posts out.

Louisiana Suspends & Extends Amnesty Program

The Louisiana Department of Revenue announced this week that the state's Amnesty program will be suspended through Monday, November 30 and will resume on Tuesday, December 1. The program will then run until December 31, 2015, which accounts for designated and legal holidays.

During the amnesty period, individual and business taxpayers are offered a fresh start to bring their delinquent tax accounts up to date by clearing unpaid tax bills and filing overdue state tax returns.

Amnesty will be granted for eligible taxes to qualified taxpayers who apply during the amnesty period and who agree to settle their accounts with the state by paying 100 percent of delinquent taxes, 83 percent of the remaining interest and 67 percent of the remaining penalties due. Once approved, the Secretary of Revenue will waive the remaining 17 percent interest and 33 percent penalties.

The goal for the 2015 Tax Amnesty Program is $73 million, net of administrative costs and funds retained by LDR as self-generated revenue.

The 2015 Tax Amnesty Program is the third and final effort permitted by the Louisiana Tax Delinquency Amnesty Act of 2013. After the conclusion of the 2015 amnesty period, there will be no new amnesty program offered by the Department of Revenue until at least 2025.

Go here for more details.

why do states enact bad tax policy?

David Brunori, Deputy Publisher at Tax Analysts, recently wrote an article entitled, "More Than a Surrender When It Comes To Taxing Business." You can see his LinkedIn post with comments here. The article discusses how states let politics, and even taxpayers cause them to enact bad tax policy. 

I am a taxpayer advocate fighting the daily struggle for clarity, but this week I find myself feeling sympathetic to the states and their challenge of collecting revenue (I know, strange right). We operate in a grey and political world with many influences and interpretations. Sometimes taxpayers are right. Sometimes the states are right. The challenge is knowing the difference.

I agree that states (and the federal government) do not make wise fiscal decisions which leads to misuse of funds and the request for more. States have "created their own mess" in regards to tax cuts and other incentives for job creation. My point is, after doing this profession for 20+ years, I think we (as tax professionals) can get used to doing what we do and fighting for taxpayers, and we don't pause to see the perception from the other side. The people we deal with in the DORs are people operating within an extremely challenging bureaucracy (run by politics, bad policies) and face challenges of perhaps bad training, and the lack of resources (people and money). Bottom line, we need to work together to find reasonable and practical solutions. We don't need to talk "at" each other. We need to talk "with" each other.

I am for fair, reasonable and constitutional tax policy. Unfortunately, that isn't what we usually get. We get ambiguity open to interpretation, and law that favors in-state taxpayers.

What do you think causes states to enact bad tax policy?

the unconstitutional tax 'witch hunt'

Based on the recent Wynne case, many corporations, practitioners and states are wondering what other taxes are not 'internally consistent.' The internal consistency test comes from the Complete Auto Transit v. Brady U.S. Supreme Court case. The internal consistency test says that a tax must be structured so that if, hypothetically, each state imposed an identical tax, no multiple taxation would result. 

Questions raised by the U.S. Supreme Court in the majority opinion of the Wynne case along with the dissenting opinions, revolve around determining what is enough to declare a tax unconstitutional. Some say double taxation is not enough, you must have inherent discrimination and double taxation. Others say the tax must be facially discriminatory against interstate commerce. Others simply want to apply a 'common sense' approach. 

Regardless of the approach, the case has increased discussion and awareness of the possibility of other state tax and credit schemes being unconstitutional. Some corporations may choose to proactively review tax and credit schemes to challenge. Some states may voluntarily admit their tax regimes are unconstitutional. Almost feels like a 'witch hunt.' 

As a taxpayer advocate, I agree that states should not have unconstitutional taxes. However, I am concerned that states are under attack and lack the resources to adequately defend themselves.  I want states to be able to obtain the revenue they need in a constitutional fashion, and the basis on which a tax is determined to be unconstitutional is a complex matter. One that generally involves lawyers, the courts and even the U.S. Supreme Court.

As a taxpayer advocate, I fight for taxpayers to obtain clarity to determine what tax positions they should take. That clarity sometimes remains out of reach. Today, I find myself feeling sympathetic to state legislatures and departments of revenue as they struggle to create clarity. We live in a state tax world of 'grey' which leaves everything open to some level of interpretation and scrutiny. Taxpayers feel like they are continually fighting an uphill battle against unfair and unclear rules and regulations. States feel like taxpayers are taking advantage of unclear rules and regulations and lack the resources (people and money) to adequately fight back. Bottom line, we need to work together (states, corporations, tax practitioners) to find solutions that are a 'win-win' for all parties involved.