STATE TAX LETTER RULINGS, OBTAINING CLARITY PART 1: THE PROCESS IN TENNESSEE

In our quest for clarity in the maze of continual multistate tax challenges and developments, we search our tax research databases, we contact colleagues, and yet, sometimes, we still don't know what to do. One option is to get a "letter ruling" or "private letter ruling." 

I want to provide you with information on each state's letter ruling process. Then we will explore 'how' to write a letter ruling.

Note: "When" to write a letter ruling is a judgment call based on the facts surrounding your case, and the specific state's process and other rulings the state has issued. 

I plan on writing about each state's letter ruling process in future blog posts. Today, I am focusing on Tennessee's letter ruling process since I recently moved to Tennessee. 

According to Tennessee law, a letter ruling is an interpretation and application of the tax law as it relates to a specific set of facts furnished to the Department by the taxpayer. Assuming the facts are correctly represented by the taxpayer requesting the letter ruling, the Department is bound to follow its decision with respect to that taxpayer. The taxpayer’s identity must be disclosed to the Department in its letter ruling request.

Revenue rulings are statements regarding the substantive application of law and statements of procedure that affect the rights and duties of taxpayers and other members of the public. Revenue rulings are advisory in nature and are not legally binding on the Department. The taxpayer’s identity is not required for a nonbinding revenue ruling.

When exceptional circumstances require immediate consideration of an issue, a taxpayer can request an expedited letter ruling or revenue ruling by expressly making such request in writing and submitting an expedited ruling fee of $10,000 with the request. When an expedited ruling is requested, the Commissioner of Revenue will either issue a ruling within sixty days from the date of the request or deny the request and return the fee to the requesting party within seven days from the date of the request.

Fees

The fee for the issuance of a letter ruling or revenue ruling is $500.
The fee for the issuance of an expedited ruling is $10,000.

To request a ruling, the taxpayer (or the taxpayer’s representative) should send a letter to the Commissioner of Revenue, 500 Deaderick Street, Nashville, TN 37242.

The letter should include the following:

• The taxpayer’s (or representative’s) contact information, including mailing address and telephone number;
• A check for the applicable fee;
• A fully completed Power of Attorney, if required (see below);
• The taxpayer’s question or questions;
• A description of all relevant facts;
• A copy of any pertinent sample invoices, contracts or the like (which may be provided in redacted form); and
• If appropriate, pictures of the equipment, products, or other items that are the subject of the ruling request.
• The letter may also include the taxpayer’s analysis of the law; however, this is not required.

Power of Attorney

The Department places extremely high importance on maintaining taxpayer confidentiality. In many cases, the taxpayer requesting a letter ruling wishes for the Department to communicate with its outside representative, such as a CPA or attorney. In such instances, the taxpayer must sign a Power of Attorney, which is available on the Department's website.

The Power of Attorney must list all outside representatives with whom the Department is permitted to communicate about the letter ruling request. A Power of Attorney is not required if the only people with whom the Department will communicate are the individual taxpayer, or the owners and employees of the taxpayer company.

The Process: From Request to Issued Ruling

Each ruling request is assigned to a Department attorney when received. The attorney will contact the taxpayer (or representative) to request any additional necessary information and to clarify any questions the attorney may have. The attorney works closely with the Department's General Counsel to research and prepare a preliminary draft of the ruling. When completed, the preliminary draft is sent to various divisions within the Department for review. The attorney may further revise the draft ruling, based upon comments received from the reviewers. Once the review and revision process is complete, the final version of the ruling is sent to the Commissioner's office. At least one Deputy Commissioner reviews the ruling before it is given to the Commissioner. In appropriate cases, the Commissioner will meet with the Deputy Commissioners and the Department's legal staff to discuss the ruling. After thorough consideration, the Commissioner will issue the ruling to the taxpayer.

Rulings on the Department of Revenue's Website

It is the policy of the Department that all letter rulings and revenue rulings that are instructive to other taxpayers, and that are not detrimental to the State’s Economic Development efforts, will be made available to the general public on the Department's Web site. All rulings will be redacted to remove identifying taxpayer information before being made public. The taxpayer will have the opportunity to review and comment on the proposed redacted version before it is made public. The Department will consider requests that rulings not be published based on a taxpayer's belief that confidentially cannot be accomplished in a redacted version of the ruling. Any request for non-publication, even in redacted form, should be made in the ruling request and must include a detailed explanation as to why the ruling should not be made public.

Duplicative Ruling Requests

If a tax ruling has been previously issued on a specific topic, the Department is not likely to issue another ruling on the same topic unless the taxpayer can show that its facts are materially different from the facts that serve as the basis for the issued ruling, or that there has been a substantive change in the law. If a taxpayer submits a ruling request that is duplicative of previously issued guidance, the Department will likely respond by informal letter and provide a copy of the applicable previously issued tax ruling, in addition to returning the taxpayer's ruling fee.

Revocation of a ruling

Rulings may be revoked or modified by the Commissioner at any time. The revocation or modification of a letter ruling will be effective retroactively unless the following conditions are met, in which case the revocation will be prospective only:

• The taxpayer must not have misstated or omitted material facts involved in the transaction;
• Facts that develop later must not be materially different from the facts upon which the ruling was based;
• The applicable law must not have been changed or amended;
• The ruling must have been issued originally with respect to a prospective or proposed transaction; and
• The taxpayer directly involved must have acted in good faith in relying upon the ruling and a retroactive revocation of the ruling must inure to his detriment.

Statutory Authority Tenn. Code Ann. Section 67-1-109 gives the Commissioner the power to issue revenue and letter rulings at his discretion.

the fixer and preventer

At my house, I often refer to myself as "the Fixer."  Why?  Well, I live in a house full of girls (my wife, two daughters and a shitzu).  As most men encounter, they often have a "honey do list" that accumulates over time.  However, on a weekly basis there seems to be things that constantly need attention, maintenance or "fixing."  Examples may include:  cell phones not working properly, computers not working properly, IPads, toys, etc.

Every family needs a "fixer" (whether it is male or female).  Someone who can fix almost anything because unfortunately, everything in this world seems to be made to break down at some point.  Everything needs constant maintenance or "fixing."

In the state and local tax world, this seems to be the case as well.  Every day represents a new court case, new legislation, new business decisions, new fact patterns, and lovely audits and notices, etc.  Constant change is inevitable.  Constant change can lead to problems and issues that require maintenance or "fixing."  Hence, every company needs a state and local tax "fixer."  Someone who can provide leverage when it is required.  Someone who lightens the burden, and is a strong advocate when needed.  Someone who can identify the right-size, most cost-effective and practical solution.  

The key to being a good "fixer" is also being a good "preventer."   The more problems you can prevent, the less problems you will have to fix.  Hence, a good fixer will be as proactive as possible instead of just reacting to the constant "nagging" or "fire drills" that pop up.

Do you have a "fixer" at home? 

Do you have a state and local tax "fixer" and "preventer" for your business?

"Good Enough For Government Work"

My dad was not just a "handyman," but was "the" handyman.  He could work on anything, fix anything and he had every tool known to mankind.  He had a huge workshop with 10 million screwdrivers, hammers, wrenches, saws, etc. (no exaggeration, I counted).

When I was a kid, it seemed like every Saturday he would be working on a project, and I would be pulled in to assist.  

I don't know about your experience, but every project we worked on wasn't easy.  What started out as an easy project often turned into a problem.  Something wouldn't loosen or something wouldn't tighten, something was too big, something was too small, the right tool wasn't acting like the right tool, and so on and so on.  As one problem would get solved, another one would appear like magic.  

In any case, at some point at the end of the project, after all of the problems were resolved (usually using some type of creativity), my dad would often say, "good enough for government work."  Now, I must clarify that my dad did not mean any offense to government work or government workers.  However, when my dad made this statement he was saying that the project was complete, albeit not perfectly, but it was done to a level that was atleast satisfactory or would do the job.  Today, every time I work on a home improvement project, that phrase comes into my head.  I can hear my dad's voice.  

In regards to state and local taxes, it sometimes feels as though each project (compliance, controversy, planning, etc.) runs into problem after problem.  What you think should be simple and straight forward turns into a complex and difficult maze to navigate.  When you get to the end of the project, you often feel like settling or in other words, saying "good enough for government work."  

Based on my experience, I highly recommend you don't take that approach.  Don't settle for satisfactory, but dig in, back-up, take a breath and look at your project from a different angle.  At the end of the project, when you are exhausted, a little extra effort could reap valuable benefits for you and your company or client.

SALT and STRUCTURE: Keep it Simple Sxxxxx?

Does your company or client operate its business within a simple organizational or entity structure?  Does it operate all of its business activities through one entity or several entities?  

Whether or not your company or client should operate its business through one entity or several entities depends on several factors, such as:

1. Does the company have more than one business line, product or service?
2. Does the company manufacture products and provide services as well?
3. Is the company profitable in general?  Are certain business lines profitable and others are losing money?
4. Does the company sell wholesale and retail? 
5. Does the company sell its products and/or services over the Internet?
6. Does the company have operations in foreign countries?
7. Does the company have valuable trademarks, patents, copyrights, or other intangibles?
8. Does the company want to decentralize or centralize certain functions such as, accounting, legal, tax, purchasing, etc.? 
9. Should the company have separate entities for legal reasons?  Liability reasons?
10. Does the company want to streamline its supply-chain, obtain economies of scale?

The list could go on and on.  Each case is different, but the goal should be the same - create and utilize a legal and organizational structure that helps the company achieve its business, legal and financial objectives.

Tax purposes or ramifications, whether it is federal tax, international tax, and of course, state and local tax, should attempt to be in alignment with the company's business, legal and financial objectives.  

Therefore, when it comes for a company to decide as to if they should keep a relatively simple structure or create multiple entities, the "keep it simple stupid" mantra may or may not come into play.  The key is to complete the cost/benefit analysis of doing so.  This means weighing the business, legal and financial objectives.  It also means evaluating the tax ramifications.

Note: if you are a long-time subscriber to the LEVERAGE SALT blog, this post may seem familiar. Yes, I originally wrote this post a couple of years ago, but it still applies today. I am in the middle of a big move from Virginia to Tennessee, so please bear with me as I still attempt to provide you with meaningful content. Sometimes a reminder is just as good as something new. Another way to put it is, we don't always need new laws if we would simply enforce our current laws.

DEFINE THE FIGHT - DON'T LOSE AN AUDIT BEFORE IT STARTS

Note: I wrote this post a couple of years ago, but thought I would revive it.

I was watching mixed-martial arts (UFC fighting) and as the announcers were describing the game plan or approach to the fight one of the fighters was taking, the announcer said the fighter was focused on "defining the fight." Meaning, he had developed a strategy and trained accordingly before the fight even started. He had studied his opponent to know his strengths and weaknesses. He had also studied himself and recognized his own strengths and weaknesses.

This is how we should approach multistate tax audits and (in my opinion) life in general. We should develop a strategy and prepare for an audit before it even starts. Preparation helps to eliminate surprises. It also helps you know what to do when things start going wrong. Thus, we must work proactively to 'define the fight.'

In that context, I thought I would provide some general guidelines or ways to 'define the fight' when faced with a multistate income tax or sales and use tax audit:

1. Become acquainted with the auditor's supervisor and the manager of the audit office.
2. Don't waste time negotiating with the auditor unless you know he has the authority to make a decision. However, don't go over the auditor's head unless absolutely necessary.
3. Question why you were selected for audit. Find out how long the audit will take.
4. Prepare an audit plan
5. Establish ground rules
   1. Timeline
   2. Available resources
   3. Time to prepare documents
   4. Scheduling of in-office visits
   5. Procedures for requesting records
   6. Contact person for auditor (one person)
   7. Status reports by auditor (don't want surprises)
6. Review statute of limitations
   1. Extending statute of limitations - applies to refunds as well?
   2. Restricted waivers - statute of limitations open to only particular issues
   3. Conditional waiver - waive only if assessment prepared by certain date
   4. Extend statute of limitations only 6 months from date scheduled to come to office
   5. Negotiate limitation on scope of audit in exchange for signing waiver
   6. Don't sign if auditor has wasted time (cancelled appointments, etc.)
7. Narrow down auditor's request to highest level possible
8. Review sampling technique proposed by auditor
   1. Make sure it is representative
   2. Statistical sampling?
   3. Block sampling?
   4. Ask auditor to include accounts with possible tax overpayments (may lower estimated error rate by increasing the size of the sample)
9. Request auditor to submit document requests in writing
10. Examine prior audit files
11. Examine current tax related files
12. Minimize audit adjustments before they happen
13. Educate company employees
14. Compile basic info
15. Perform reverse audit to identify refunds or credits
16. Ask auditor to identify overpayments
17. Tax paid in error
    1. Ask for credit within audit or submit refund request
    2. Vendor / Vendee liability state?
18. Review auditor's preliminary work papers
19. Exit conference
    1. Know whether the auditor has the power to negotiate
    2. Request waiver of penalties and interest
    3. If we pay today, will interest stop accruing?
    4. Pay tax on agreed issues to stop interest
    5. Give auditor a check with as little interest as possible
    6. Get copy of revised / final work papers
    7. Re-examine with auditor or supervisor if misunderstandings occur
    8. request electronic copy of auditor's work papers/assessment so we can reorganize with reason why exempt 
    9. Mark all as "disagree" (until resolution reached)
20. Protest (in writing and/or request a hearing)

These are only GENERAL guidelines I have developed throughout my career. They are NOT hard and fast rules. Each case is different and as a result, some guidelines may not make sense. Consequently, please seek the advice of an experienced state tax advisor before implementing any of the ideas provided.

For the most part, I have had great experiences with auditors and built strong working relationships. However, sometimes you are forced to go to appeals to resolve issues and obtain a fair result when the facts or law are being misinterpreted or misapplied. 

Hopefully these guidelines will help you when you or your clients receive the dreaded "you've been chosen for audit" letter.

ADAPT. IMPROVISE. OVERCOME.

When you woke up this morning, did you feel the way you wanted to feel? Did your breakfast and "morning time" (with family, getting ready for school and work, etc.) go smoothly? Was your morning commute a breeze, smooth, no delays, no wrecks, no construction? How about when you got to the office - did you have a 100 e-mails from the night before? Client voice-mail messages demanding their work done yesterday?

I could go on and on, but you get the point. Life does not usually happen as we plan - either on a daily basis or when big life-altering decisions or situations happen in our life. These moments require us to adapt, improvise and overcome. This motto is generally referenced in relation to the U.S. military, but has obvious applicability to every day life. Every day we are forced to become flexible to achieve success, to meet goals, to keep our house in order, to pay the bills, to get the family to all of its functions and extracurricular activities on time. It is a constant and never-ending battle. Thus, we have to constantly adapt, improvise and overcome.

The same can be said when it comes to multistate taxes. Working in the state tax field is a constant barrage of daily change. Every state's laws are different, every client's situation is unique and court cases / rulings are continually changing the interpretation and application of vague tax laws. Every question requires research to be conducted to obtain a conclusion with substantiated certainty. Businesses receive tax notices and assessments that require perseverance and a 'never give up' attitude at times to keep digging (researching) to develop arguments and a strong defense to assessments that appear unreasonable. State tax professionals must adapt, improvise and overcome.

How have you adapted, improvised and overcome in your life or in the state tax field?

What best practices or advice would you give other state tax professionals?