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.

Transparency and Letter Rulings

I found this Tax Analysts article by Cara Griffith, Amy Hamilton, and Jennifer Carr, that discusses the need for transparency and the value of publishing letter rulings to help all taxpayers. The article discusses the pros and cons of doing so, and the constraints that state departments of revenue face in fulfilling the desired objective of providing as much guidance as possible.

Even though the article is a few years old, I think it is beneficial reading because all taxpayers are looking for more certainty and less risk regarding the tax positions they take.

We need to work together to fight the struggle for clarity.

14 STATE TAX DEVELOPMENTS YOU MAY HAVE MISSED

I have been extremely busy with work and managing a move from Virginia to Nashville, TN. We bought a fixer-upper on 16 acres near Nashville and are set to close on the sale of our house in Virginia in June. We will be physically and permanently in the Nashville area in June. Can't wait. Because of the multitude of tasks involved in moving, I haven't had the time to blog as much. I hope you understand. 

Note: if you are located in the Nashville area, please contact me or connect with me on LinkedIn. If you are ever in the area for work or attend the Paul J. Hartman State and Local Tax Forum in October, let me know.

I have however, posted several things in the LEVERAGE SALT LinkedIn group that you may find interesting, if you haven't seen them.

1. State Rundown 4/21: Scraping the Bottom of the Revenue Barrel

2. 90 Reasons We Need State Corporate Tax Reform? - Interesting.

3. State Rundown 5/6: Energy Boom Goes Bust

4. Iowa Tax Reform Options: Building a Tax System for the 21st Century

5. Oregon Initiative Petition 28: The Threat to Oregon’s Tax Climate

6. Graduated Income Tax Amendment Stalls In Illinois House

7. 2016 State Tax Amnesty Programs (According to COST)

8. COST Issues Comments on Georgia's Waiver of Interest Provision

9. TEI Issues Policy Statement on Statutes of Limitation for State and Local Taxes

10. TEI Holds Liaison Meeting with the Illinois Department of Revenue

11. New Jersey Can Strike Blow Against Tax Havens

12. If Everyone Is a Tax Haven, No One Is

13. Unclaimed Property Litigation Update – Spring 2016

14. Pennsylvania Illustrated: A Visual Guide to Taxes & The Economy

I hope you find something useful from the links provided. If you do, please drop me a line and let me know. Also, send me a topic or question you would like me to cover in a future blog post.

I started the LEVERAGE SALT LinkedIn group to encourage interaction. To be honest, there really isn't much interaction on LinkedIn. It appears to be more of a bullhorn than true conversation. I know we are extremely busy and don't have time to wander the halls of LinkedIn. But I challenge you to start a conversation. Let's really talk. 

'AS IF' the Seller Had A Physical Presence

The Governor of South Dakota signed SB 106 on March 22, 2016. The law requires any seller selling tangible personal property, products transferred electronically, or services for delivery into South Dakota, who does not have a physical presence in the state to remit sales tax 'as if the seller had a physical presence' in the state. For this new requirement to apply, the seller must meet one of two criteria in the previous calendar year or the current calendar year:

1. The seller's gross revenue from sales into South Dakota exceeds $100,000; or
2. The seller has 200 or more separate transactions in South Dakota;

The law applies to sales made on or after May 1, 2016.

BEWARE

If you disagree with South Dakota's new law, you can voluntary comply and request a refund. However, the law explicitly provides that no claim will be granted on the basis that the taxpayer lacked a physical presence in the state.

IMMINENT HARM

In the new law, South Dakota states that the inability to effectively collect sales or use tax from remote sellers is "seriously eroding the sales tax base," "causing revenue losses" and "imminent harm" through the "loss of critical funding for state and local services."

South Dakota asserts that their revenue loss is more problematic because the state has no income tax.

WANT U.S. SUPREME COURT TO RECONSIDER QUILL

South Dakota also states in its new law that the U.S. Supreme Court has an urgent need to reconsider Quill and the physical presence requirement. The law provides that the legislature recognizes that the enactment of this law places remote sellers in a complicated position because existing constitutional doctrine calls this law into question. In other words, South Dakota is enacting an unconstitutional law to create a case to litigate with the hopes of overturning Quill.

The law states that the Legislature intends to clarify that the obligations created by this law would be stayed by the courts until the constitutionality of the law is clearly established by a binding judgment.

WARNING: ENFORCEMENT OF PROVISIONS CURRENTLY BARRED

As the state tax group at McDermott Will & Emery reported in their INSIDE SALT blog, two declaratory judgment suits have been filed which now bars the enforcement of the provisions until the litigation is resolved. The plaintiffs are trade associations representing catalog marketers and e-commerce retailers.

The bottom line is that remote retailers can breathe easy for a moment and do not have to comply with this new law while we wait for the courts to decide. For more details, read the INSIDE SALT post.

How are you protecting your company from state taxes?

As I was reading Deloitte's, "The New Normal in State Taxation," I was thinking, this is great information, but what are companies doing with this information? How are they responding? Are they doing anything differently? Are companies becoming more aggressive in light of the fact that states are aggressively expanding the definition of what is taxable and when you are taxable? Or are companies becoming more conservative, more risk averse? 

Companies are in a difficult position. All of the legal arguments are great, but practically speaking, where do opportunities exist to reduce state and local taxes or conduct your business in a tax-efficient manner? How will you find them? How do you know if other companies are taking similar positions or taking more aggressive positions?  Will those positions withstand the scrutiny of an audit or succeed upon appeal?

Companies seek outside counsel via accounting and law firms, and some times even call the state for guidance. Some companies lobby to obtain favorable legislation or get it changed because proposed legislation will have unintended consequences. 

What is your company doing to make sure it isn't overpaying its state and local taxes?

How is your company reducing risk?