A RECOMMENDATION TO MAKE WORK (life) FUN + 2016 TRENDS

It's Monday, the first 'work day' after the holidays. The first day of the new year. The day we all begin our new year's resolutions. The difficult part of today is that we have to get back into our routines, the pushing and pulling of responsibilities and obligations that we may have escaped from the past couple of weeks. Consequently, we have to build up energy to just do what we were doing, in addition to the piling on of new year's resolutions. Therefore, I encourage you to give yourself a break today. Don't let the pressures of living keep you from living. Make work fun today. 

To help with this, I encourage you to read "Essentialism" by Greg McKeown. I have mentioned this book in the past and believe it will be extremely helpful to your career and personal life (HINT: LESS IS BETTER).

As we embark on 2016, we know that state taxes will continue to change, yet remain a burden for multistate companies. Here are a few tidbits to get you started.

Trends that will create havoc in 2016:

• Tax Reform
• Economic Nexus
• Market-Based Sourcing
• MTC Apportionment Election Court Case Decisions
• Alternative Apportionment
• Combined Reporting
• Transfer Pricing
• OECD BEPS
• Tax Haven Legislation
• Corporate Inversions
• Sales Tax Nexus/Collection Standards for Remote Sellers

Specifically, the Multistate Tax Commission continues to move forward on market-based sourcing regulations and will attempt to create standardization. Transfer pricing will continue to become a bigger issue as the MTC's Arms Length Advisory Service takes shape (see my previous post for more info).

COST (Council on State Taxation) and the Tax Foundation will continue to play a critical role and advocate in the formation of state tax policy and court case decisions. I personally want to thank them for their work over the years and appreciate their continued efforts.

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.

are you going to the NYU SALT Seminar in December?

Anyone heading to the annual NYU School of Professional Studies Institute on State and Local Taxation  seminar in December? Trying to decide.

Here is the link: http://www.sps.nyu.edu/academics/departments/finance-tax-and-law/conferences-events/institute-on-state-and-local-taxation.html

Let me know if you are going. 

Thanks.

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?

are you using ambiguity to your advantage?

If you are following state income tax developments to any degree, then you are aware of the ambiguity in state tax law that is leading to strange outcomes in court cases, new legislation by state legislatures, policies and procedures by departments of revenue, and even positions taken by taxpayers. Recent developments in tax reform, economic nexus, market-based sourcing, Multistate Tax Commission three-factor apportionment election cases, alternative apportionment, combined reporting, transfer pricing, OECD (Organization of Economic Co-Operation and Development) BEPS (Base Erosion and Profit Shifting), and tax haven legislation are creating risks and opportunities for corporate taxpayers.

Ambiguity, in general, creates challenges in the form of complicated laws (changing daily), vague statute of limitations, unreasonable audit positions, and computer generated notices. Ambiguity is allowing states to re-interpret current law so they can obtain different results without actually changing their law. States are also enacting new legislation retroactively to avoid payouts of large tax refunds. 

An example of ambiguity causing controversy is the recent Texas Margin tax case (Hallmark Mktg Co. v. Hegar, Tex., No. 14-1075, 10/9/15). The issue in the case surrounded the Texas regulation that requires “only the net gain” to be included in the apportionment factor (denominator). The state’s position was that the regulation requires both ‘net gain’ and ‘net loss’ to be included in the apportionment factor. Consequently, the state's position is that the regulation is ambiguous. The taxpayer's position is that the regulation only requires net gain. Hence, the taxpayer holds that the regulation is not ambiguous and not open to interpretation. The Texas Court of Appeals held that Texas’ interpretation of regulation was ‘reasonable’ (November 2014). Taxpayers are concerned the ruling “creates uncertainty about whether numerous sections of Texas' franchise tax regulations can be reinterpreted  by the Comptroller under the guise of ambiguity.” The Texas Supreme Court is set to hear oral arguments on December 9, 2015. 

The Texas case is only one example. I could discuss many more and may do so in future blog posts. 

The question we  should be asking is - can current law be interpreted more than one way? The law you are analyzing for your company at this very moment - is it ambiguous or is it clear? Will the state you are dealing with reinterpret the law under audit or litigation? 

Regardless of the answers, ambiguity requires action. Ambiguity requires corporations and taxpayers to be proactive and find solutions and reduce risk. Corporations need tools to determine whether a trend (i.e., court case, ruling, etc.) is a risk or opportunity. Even more than planning, corporations need to be able to determine what position they "should" take. What is reasonable? What is "more likely than not"? Compliance, controversy and provision requirements demand companies to answer these questions. How do you answer these questions? What tools do you use? Who do you talk to? 

We must eliminate ambiguity or use it to our advantage.

STATE OF STATE: COMING TO CHICAGO!

I will be co-presenting a complimentary (free) Bloomberg BNA lunch-n-learn presentation with Diane Tinney in Chicago on November 11, 2015 from 11:30 am to 2:00 pm.  

We will have an interactive discussion about the latest state income tax developments, advances in technology solutions driving change, and how you can make a positive impact on state income tax management in your organization.

If you will be in the Chicago area on November 11th, I would love the opportunity to meet you, and talk about your state income tax experiences as corporate tax executives or accounting/law firm tax professionals. I will be talking about how recent developments continue to create a complex and uncertain environment that makes it difficult to comply, plan, and obtain a fair result. I will also share some recent comments from an auditor that left me dumbfounded and even more determined to fight for fairness.

If you are planning to attend, I would love it if you sent me an e-mail regarding an issue or concern that you would like me to discuss. This would make our meeting even more valuable.

If you are unable to attend, I would still love it if you sent me an e-mail regarding an issue or concern that you have had. If we discuss it during our meeting, I will get back to you with our thoughts and conclusions.

I hope to see you there.

Fight the good-fight.

To register, go here.