DO YOU NEED STATE TAX AMNESTY OR VALIDATION?

AMNESTY

The Council on State Taxation (COST) has updated its schedule of 2016 State Tax Amnesty programs. See here.

If you would like more information about amnesty programs versus voluntary disclosure programs, check out some of my previous posts.

VALIDATION

On a separate note, I am always trying to think of unique ways I can help companies and accounting/law firms avoid and resolve controversy. To that end, I have started a new service called RESALT.

RESALT is my second-opinion service where I review research and conclusions made by others (i.e., you, your staff or consultants). This gives you another 'set of eyes' and peace of mind when taking a position or deciding to move forward or not. 

I conduct this service at flat fee per project or per month. I review the facts, research and conclusions already reached. I then conduct additional research to validate or dispute conclusions. I provide you with a written validation, or dispute of the conclusions along with citations to my research for support.

Go here to learn more.

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.

What did you learn at the Georgetown Advanced SALT Conference?

If you attended the Georgetown Advanced State and Local Tax Institute this week, please leave a comment or send me an e-mail at strahle@leveragesalt.com to voice what you learned or what your key takeaways were.

Let's work together to fight the struggle for clarity.

State Tax Transfer Pricing - What's Next?

Recent media reports reflect that transfer pricing in the state tax area is gaining more scrutiny and attention due to international tax developments like OECD BEPS, but also the Multistate Tax Commission's Arms-Length Adjustment Service (ALAS) initiative, previous state litigation and growing interest in tax haven legislation. 

A nice presentation delivered by Michael Bryan, Karl Frieden, Jeff Friedman and Marshall Stranburg at the Federation of Tax Administrators Annual Meeting on June 13, 2016, provides good background information on the basics and importance of transfer pricing while describing the current environment.  

The presentation defines transfer pricing as "the pricing of transactions between related entities for goods, intangible assets, services, and loans." Transfer pricing is "designed to prevent tax avoidance among related entities by requiring pricing equivalent to prices available with an uncontrolled party:

• Transactions must (generally) be at arm’s length
• Non-arm’s length intercompany transactions can impact the clear reflection of income in states where income is reported on a separate or partial combination basis
• Tax evasion or avoidance generally not a pre-requisite for making a transfer pricing adjustment"

According to the presentation, the "key intercompany transactions subject to transfer pricing" are: 

• Transfer and licensing of intangible assets
• Providing and charging for common services
• Financing
• Factoring accounts receivables
• Sale of tangible goods that contain a trademark or other intangible
• Purchase and resale of tangible goods

WHAT'S NEXT?

The presentation ends with a question - "What's Next?" This is the most important question.

What should companies do now? How can companies plan? What path will states take to combat this perceived abuse? Will states piggyback off of BEPS? Will states get involved with the MTC initiative? Will states actually enact and enforce tax haven legislation? Or will states simply adopt worldwide combined reporting? Worldwide combined reporting seems to be a simpler approach. However, as I have noted before, making a simple general rule may not be beneficial to a state if applied to taxpayers across the board.

Consequently, it makes more sense for states to have discretionary authority and make case-by-case adjustments so they can better control the impact on revenue. Therefore, I think states will continue to use a combination of all of the tools that will allow them to retain discretionary authority and control. 

In the words of Dave Brunori, "when proving arm’s-length pricing, the side that can spend the most on good lawyers, accountants, and economists almost always wins." We shall see.

For more information, check out my previous post on the MTC ALAS program.

Should the Federal Government Pre-empt A State's Taxing Power?

I recently read an article by Shirley Sicilian from KPMG where she interviewed Greg Matson, the Executive Director of the Multistate Tax Commission. Good article. Recommended reading.

In the article, Ms. Sicilian asks Mr. Matson what he thinks will 'rock the tax world' in the next few years? Mr. Matson's response included the overturning of Quill, the ripple effect of BEPS on states, and states challenging congressional authority to pre-empt their taxing power.

With all of the court case challenges to Quill and the states trying to impose sales tax collection or reporting requirements on remote sellers, and the proposed federal legislation to reinforce Quill, I have been thinking about the battle between state sovereignty and federalism.

State sovereignty is the concept that states are in complete and exclusive control of all the people and property within their territory. State sovereignty also includes the idea that all states are equal as states.

Sovereignty is the power of a state to do everything necessary to govern itself, such as making, executing, and applying laws; imposing and collecting taxes; making war and peace; and forming treaties or engaging in commerce with foreign nations.

The individual states of the United States do not possess the powers of external sovereignty, such as the right to deport undesirable persons, but each does have certain attributes of internal sovereignty, such as the power to regulate the acquisition and transfer of property within its borders. The sovereignty of a state is determined with reference to the U.S. Constitution, which is the supreme law of the land.

I believe in state sovereignty and as much as I like uniformity and less complexity, I support a state's rights to make their own laws. However, when states overreach and attempt to enact unconstitutional taxes, that is when the federal government or the U.S. Supreme Court has to step in. 

When do you think the Federal government should step in?

Note: For more on federalism and state sovereignty, check out Federalism, State Sovereignty, and the Constitution: Basis and Limits of Congressional Power by Kenneth R. Thomas, Legislative Attorney.