Time for State Taxes to Be REWRITTEN

Sometimes we get so caught up in the litigation and proposed legislation that we don't stop to ask whether we should even be going in this direction. Perhaps we are getting the wrong answers because we are asking the wrong questions. It's time for state taxes to be rewritten. For politics to get out of the way. 

I read an article this week, written by Michael J. Bologna and edited by Ryan Tuck for Bloomberg BNA regarding state tax policy (entitled, "Kill Corporate Income Tax, Seek Low Rates"; requires a subscription to BBNA to access). The focus of the article were comments made at the August 10th National Conference of State Legislatures program in Chicago by William Fox, a professor of economics at the University of Tennessee, and Therese J. McGuire, a professor of strategy at the Kellogg School of Management at Northwestern University.

Overall, I agree with their comments about what a fair tax system should look like, and how the current state tax regimes are complex, unfair and inefficient. The current taxing schemes cause compliance burdens for taxpayers, administration burdens for state governments, and inconsistent revenue.

If the ideal tax structure contains low rates, broad bases and simplicity, then why do states keep making their tax systems more complex? 

States continually run into budget problems and resource constraints, yet the tax systems are not adjusted to make it possible for revenue departments to operate efficiently and effectively.

Politics makes it almost impossible for tax structures to change to fit modern economies. For example, when will all services become subject to sales tax by all states? How will states tax digital and remote sales without enacting unconstitutional taxes?

If corporate income taxes only account for approximately 8% of all state taxes collected, then why is so much effort and litigation expended by both taxpayers and governments?

States keep enacting state tax schemes that favor in-state taxpayers such as single sales factor apportionment, market-based souring, unitary combined reporting and digital sales tax laws, when the simple solution is to widen the tax base and lower the rates. This may actually cause more companies to move into a state. It would more than likely decrease the compliance burden and potential for audit controversies.

Will and should more states consider replacing their corporate income tax with a gross receipts tax similar to the Ohio Commercial Activities Tax or the Washington Business and Occupation Tax? 

Like a person that creates his own problems and then spends his life complaining about them, that's what state taxes have become. We can't expect a different result if we keep doing the same thing. It's time to get off the merry-go-round.

What did you learn at the Georgetown Advanced SALT Conference?

If you attended the Georgetown Advanced State and Local Tax Institute this week, please leave a comment or send me an e-mail at strahle@leveragesalt.com to voice what you learned or what your key takeaways were.

Let's work together to fight the struggle for clarity.

Should the Federal Government Pre-empt A State's Taxing Power?

I recently read an article by Shirley Sicilian from KPMG where she interviewed Greg Matson, the Executive Director of the Multistate Tax Commission. Good article. Recommended reading.

In the article, Ms. Sicilian asks Mr. Matson what he thinks will 'rock the tax world' in the next few years? Mr. Matson's response included the overturning of Quill, the ripple effect of BEPS on states, and states challenging congressional authority to pre-empt their taxing power.

With all of the court case challenges to Quill and the states trying to impose sales tax collection or reporting requirements on remote sellers, and the proposed federal legislation to reinforce Quill, I have been thinking about the battle between state sovereignty and federalism.

State sovereignty is the concept that states are in complete and exclusive control of all the people and property within their territory. State sovereignty also includes the idea that all states are equal as states.

Sovereignty is the power of a state to do everything necessary to govern itself, such as making, executing, and applying laws; imposing and collecting taxes; making war and peace; and forming treaties or engaging in commerce with foreign nations.

The individual states of the United States do not possess the powers of external sovereignty, such as the right to deport undesirable persons, but each does have certain attributes of internal sovereignty, such as the power to regulate the acquisition and transfer of property within its borders. The sovereignty of a state is determined with reference to the U.S. Constitution, which is the supreme law of the land.

I believe in state sovereignty and as much as I like uniformity and less complexity, I support a state's rights to make their own laws. However, when states overreach and attempt to enact unconstitutional taxes, that is when the federal government or the U.S. Supreme Court has to step in. 

When do you think the Federal government should step in?

Note: For more on federalism and state sovereignty, check out Federalism, State Sovereignty, and the Constitution: Basis and Limits of Congressional Power by Kenneth R. Thomas, Legislative Attorney.

NO REGULATION WITHOUT REPRESENTATION

The folks over at McDermott Will & Emery and the 'Inside SALT' blog made me aware of the "No Regulation Without Representation Act of 2016" (H.R. 5893). The bill was introduced by Congressman Jim Sensenbrenner (R-Wis.).   

The bill would require a person to have a physical presence in a state before the state can impose a sales or use tax collection or reporting requirement, an assessment, or treat the person as doing business (having 'nexus') in the state.

In essence, this bill is a glimmer of hope for remote sellers against the onslaught of state nexus expansion laws that have been enacted over the past few years, and the current litigation in South Dakota and Alabama where states are attempting to impose collection obligations on businesses without a physical presence.

The bill defines physical presence to include:

1. owning or holding a leasehold interest in, or maintaining real property such as a retail store, warehouse, distribution center, manufacturing operation or assembly facility;
2. leasing or owning tangible personal property (other than computer software) of more than de minimus value in the state;
3. having one or more employees, agents or independent contractors present in the state who engage in specific solicitations toward obtaining product or service orders from customers in that state, on behalf of the person;
4. having one or more employees or independent contractors present in the state who provide on-site design, installation, or repair services on behalf of the remote seller; 
5. maintaining an office in the state at which it regularly employs three or more employees for any purpose.

According to the bill, 'physical presence' does NOT include:

1. referral agreements with in-state persons who receive commissions for referring customers to the seller;
2. having a presence in the state for less than 15 days in a taxable year;
3. product delivery in-state by a third-party;
4. Internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.

If the Act gains traction and is actually enacted, it would apply to calendar quarters beginning on or after January 1, 2017.

It is too early to tell if this bill will actually go anywhere, but it is nice to see a bill like this get introduced.

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.

"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.