CLEANING UP STATE TAX EXPOSURE

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, the state can make the taxpayer file returns for all previous years in which the company had nexus in the state.

7 Questions Companies & State Governments Should Consider

1. If alternative apportionment is wide open and anything goes, why have statutes?

2. Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?

3. Is single-sales factor apportionment 'fair apportionment'? It moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.

4. Are throwback and throwout rules unconstitutional because they look beyond the borders of the state?

5. Should states be able to enact retroactive legislation to protect the state budget from financial loss?

6. Should retroactive legislation be limited to a state's statute of limitations?

7. Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?

Will Your Company Owe More or Less State Tax After the Merger?

Is your company considering restructuring its business? Perhaps creating new legal entities or re-aligning its lines of business into different entities? Changing the ownership structure of the legal entities within the commonly controlled affiliated group? Or maybe it is considering acquiring or merging with a new business (unrelated third-party)?

Regardless of your company's situation, in each of the above mentioned scenarios, your company must perform its due diligence prior to completing any transaction or restructuring. That due diligence should take into consideration the impact the restructuring or transaction will have on the business operations, legal obligations, insurance, finance, and tax, etc.

Additionally, the company can't neglect state and local tax due diligence. If the transaction ends up costing the company a significant amount of state tax dollars now or in the future, you may be asked if these issues were considered or reviewed prior to completing the transaction.

The state and local tax impact can be material and varied. Some of the potential state and local taxes to take into consideration are: income tax, gross receipts taxes, franchise taxes, sales and use taxes, property taxes and transfer taxes.

Usually the biggest concern in regards to the transaction from a state and local tax perspective are:

1. Is there any sales tax on the sale or transfer of assets or change in ownership?

2. Is there any transfer tax on the transfer of assets or change in ownership?

The answers to these questions depends on the state or states involved.

In addition to the above, the impact that the restructuring will have on the business' state tax nexus (taxable presence) position across the country should be reviewed and considered before making any changes.

What do you think are the top issues/topics in state taxation today?

1. State income tax reform/response to federal tax reform (which covers a wide variety of issues - depreciation, foreign income, dividends, charitable contributions, NOLs, Domestic Production Deduction, Sec. 199A, M&E, interest expenses, Sec. 118, related party expenses, deemed repatriation, like-kind exchange repeal, Sec. 179 expense, R&E expenses amortization)
2. Wayfair Supreme Court Case regarding sales tax nexus/collection obligations/possible overturn of Quill/physical presence
3. State taxation of foreign income
4. Market-based sourcing impact (continuing trend)
5. Alternative apportionment (is it all alternative?)
6. Management & utilization of NOLs / 382 NOL issues
7. Combined reporting vs. separate reporting 
8. Single-sales factor apportionment impacts (continuing trend)
9. Whether to utilize Voluntary Disclosure Agreement/Amnesty programs
10. Utilizing and negotiating credits and incentives
11. State income taxation of pass-through entities (new pass-through entity audit rules)
12. Related party expenses / transfer pricing
13. Private letter ruling requests
14. Other?????

Businesses Want to Do Business, NOT Taxes

Businesses are playing a game where the rules keep changing, in the middle of the game. 

Taxes keep changing. A constant battle for businesses to keep up when all businesses want to do is business, not taxes.

Businesses must be able to do business with certainty. State tax laws already lack uniformity and create so many opportunities for businesses to screw up. Now, they keep changing, year to year, day to day.

Over the past few months as state governments have been in session, they have passed numerous pieces of legislation to balance the budget including changes to tax rates, filing methodologies, sourcing rules, etc. along with how or if they will conform to all or parts of federal tax reform.

I have been monitoring state tax legislation and have submitted approximately 30 alerts to clients regarding the changes (and we aren't done yet). More to come. 

Let's work together to make state taxes less important, so businesses can thrive.

Will You Have Pie Leftover?

Scenario #1 - you start with a pie. You give some away. Then you give it all away. Then someone comes along and asks for some. They don't care that you gave it all away already. They want some. You scrape the pie pan and give them some. This continues to happen until it feels like you gave 2 pies away.

Scenario #2 - you start with a pie.  You give some away. Then you give what you think is all of it, but somehow you end up with 2 pieces left. No one comes calling. You have pie leftover.

Both scenarios can happen to a company when filing state income tax returns due to the lack of uniformity among states in filing methodologies, income sourcing, and apportionment methods. This year, states are passing legislation that is not only responding to federal tax reform, but also changing each of these areas for some states. 

Companies should monitor state tax legislation and model out the changes to determine how their income tax liability will shift from state to state. 

The question is - will you have pie leftover or will it feel like you have given 2 pies away when you only had one to begin with?