Middle Market Companies Fight State Tax Surprises

As a CFO, controller or finance executive in a middle market company, you have a wide range of responsibilities to manage.  State and local tax matters can pop up when you least expect it and cause compliance and financial burdens.

Some of those state tax surprises could be (regardless of industry):

1. State tax registration requirements - when should you register?  If you register, will that create tax filing obligations?  When can you withdraw your registration?
2. State income tax apportionment - when can your company allocate income instead of apportion income?
3. Sales taxability of digital goods, licenses, subscriptions, computer hardware, software, cloud computing, etc.
4. Sales tax audits and appeals
5. Choosing sales tax codes for your sales and purchases to correctly utilize your sales tax compliance/decision software with your ERP system
6. Knowing when your company has a filing obligation in a state
7. Filing Voluntary Disclosure Agreements to mitigate prior year tax exposure
8. Determining sales tax consequences of "bundled transactions" or "mixed transactions" (transactions that include taxable items with non-taxable items)
9. Determining sales and use tax consequences for entities that conduct transactions with governmental entities.  When does the exemption apply?  What does the exemption apply to? 
10. If my company is a service provider, is my company paying use tax on purchases?

Several of my clients have had these issues recently.  Do any of the above items sound familiar to you?  

Current State Tax Amnesty Programs

In case you missed what states have amnesty programs going on currently, I thought I would send you a link to COST's (Council on State Taxation) quick summary.

Amnesty can be a great tool for states and taxpayers, but sometimes a voluntary disclosure agreement is a better option.

What is an Amnesty Program?

An amnesty program is generally a time period established by a state to allow taxpayers who are delinquent on their taxes to come forward, and pay those taxes without penalties being imposed. Usually interest is still imposed, but sometimes it may be waived as well. Each state amnesty program is different or unique; meaning, they each contain their own set of rules, guidelines and qualifications. Amnesty programs usually pertain to certain tax periods, specific tax types, and taxpayers who meet certain criteria. In other words, "look before you leap."

Taxpayers who are eligible for an amnesty program, but don’t take advantage of the program, are often faced with harsh penalties if caught after the program has ended.

Voluntary Disclosure Agreements

When amnesty programs are not in effect, most states still have what they call “Voluntary Disclosure Agreement” (VDA) programs which allow taxpayers to come forward on an anonymous basis, limit the number of prior years required to be filed (usually 4), and pay taxes and interest. Under most VDA programs, penalties are waived, but not interest.

Remember, a voluntary disclosure agreement is only able to be utilized if the state has not already contacted the taxpayer (in most cases). If the state contacts the taxpayer first, technically, the state can make the taxpayer file returns for all previous years in which the company had nexus in the state. However, generally, the state does not require returns to be filed for all previous years. The number of years a state will require depends on the facts of each case. In addition, unlike a voluntary disclosure, there is no relief for interest and penalties.

Manufacturers May Elect Single-Sales Factor Apportionment in Tennessee

HB 0534 was signed by the Governor on April 26, 2017 which allows manufacturers in Tennessee to elect to use a single-sales factor apportionment method. The election provides:

For franchise tax and excise tax purposes, a taxpayer whose principal business in Tennessee is manufacturing may elect to apportion net worth and net earnings to Tennessee by multiplying such values by a fraction, the numerator of which is the total receipts of the taxpayer in Tennessee during the tax year and the denominator of which is the total receipts of the taxpayer from any location within or outside of Tennessee during the tax year. A Tennessee taxpayer’s principal business is manufacturing if more than 50 percent of the revenue derived from its activities in Tennessee is from fabricating or processing tangible personal property for resale and consumption off the premises.

The new election is effective for tax years beginning on or after Jan. 1, 2017.

TN Notice #17-11 - Single Sales Factor for Manufacturers

It has been reported that the election is "worth about $113 million for an estimated 518 Tennessee companies."

Louisiana's Gross Receipts Tax Proposal - So Good (NOT)

I just finished reading a post by Nicole Kaeding at The Tax Foundation about how confusing and bad the Louisiana Gross Receipts Tax proposal is. I couldn't agree more.

Why do states continually try to raise revenue by making tax calculations more complex which end up producing unintended consequences or unconstitutional tax regimes?

Many answers are possible, but I digress. Back to Louisiana's gross receipts tax proposal.

I had noticed that Louisiana proposed a gross receipts tax, but hadn't drilled down into the details. When I read Nicole's article, I couldn't believe what I was reading. I particularly love the flow chart she provides which shows the complex tax structure under HB628.

As the corporate income tax becomes less of a revenue source, will more states adopt something similar? I hope not, but as history tells us, states like to play copycat.

Here is a link to another post Nicole wrote which discusses what states currently employ gross receipts taxes and other states considering such a tax. 

FREE WEBINAR TOMORROW: STRATEGIC PLANNING FOR STATE NOLS

I will be co-presenting a FREE Bloomberg BNA webinar tomorrow on state net operating losses. I hope you can make it! Sign up here.

Some of the questions we will attempt to answer are:

• Is strategic planning for state net operating losses possible? 
• Do we care about federal NOLs?
• How are state NOLs determined and how can we plan?
• How does group reporting change everything and how can we plan?
• State IRC. Sec. 382 limitations - do they exist?
• How will federal tax reform impact state NOLs?

We will also cover some crazy state NOL rules.

Please join me.

State Taxes and The Compound Effect: Ticking Time-Bomb or Nest-Egg?

Some things change and some things remain the same.  Unfortunately, a lot of the time, the things we want to change, remain the same (and vice versa).  Hence, what can we do about it?  How can we change something, improve, and get the results we desire?  

I read a book a few years ago that I want to encourage you to read as well.  It is called, "The Compound Effect" by Darren Hardy.  It is a great book about how small actions, small differences in behavior or small changes can make a big difference over time.  

I'm sure most of us are aware of the compound effect when it comes to money, i.e., the earlier you start investing in your 401k, the bigger the "pot" in the future.  Well, the same principle applies to any area of your life that you want to change, whether it is relationships, your fitness level, finances, career, etc.  

Small changes made today and every day (completed with consistency) will produce big results at some point in the future.  Consistency is the key.  Hence, you have to have the perseverance and discipline to stick with the small change you are making on a daily basis so you see the result in the future.  The biggest reason people don't get the results they desire is because they give up too soon.  

How does this apply to state and local taxes?  Well, small errors, or areas of neglect (such as nexus, apportionment, inter-company expenses, etc.) can add up over time.  If no action is taken, an audit, a nexus questionnaire, etc. can arrive at your doorstep and the liability can be much greater than if action had been taken years earlier.  

On the flip-side, if action is taken today (i.e., restructuring, voluntary disclosure agreements, planning, etc.) cash tax savings can be achieved not only for one tax year, but on an annual basis creating additional funds (or "nest-egg") to be used in your business.

The compound effect is a great principle.  Just make sure that it is producing a "positive" effect for you and your business, instead of a "ticking time-bomb."

I leave you with this question from the book, "The Compound Effect:"  

"If you were given a choice between taking $3 million in cash this very instant and a single penny that doubles in value every day for 31 days, which would you choose?"