who or what is 'rocking the boat'?

Usually 'rocking the boat' is perceived to be a bad thing, but 'rocking the boat' can be a good thing. Let me explain.

If you are riding in a boat heading into a storm and the boat starts rocking, that is usually a bad thing or scary. The boat is rocking to due to some external force or environmental change.

If someone on your boat gets up and starts jumping around without any explanation and you can't stop them or talk with them, that is usually a bad thing.

But if the the captain of the boat purposely turns the boat, changes direction and heads into the storm, then the rockiness of the boat is a good thing. It means the boat is going in the right direction. A strategic, purposeful direction. The rockiness is part of the process of reaching the chosen destination.

If someone on the boat gets up and voices a concern with the current direction of the boat, and makes a valid point why the boat should change course, the rockiness of the boat is a good thing. A necessary thing.

I'm sure we could keep going with this analogy or you could make up better analogies, but you get the point. Change, upheaval, incurring resistance or turbulance is sometimes a necessary or required part of the process of achievement or improvement.

HOW DOES THIS APPLY TO STATE TAXES?

2024 just began. January already gone. State governments have started or will be starting their legislative sessions. Proposals are flying all around. This is in addition to the state tax law changes that were enacted last year that became effective in 2023 or as of January 1, 2024. On top of the state legislative proposals, we also have federal legislation that is moving through the House and Senate that will have ripple effects on the states regarding research and development expenses and other items (appears to have a high probability of passing). The SALT CAP (i.e., state tax deduction limit of $10,000) is proposed to double to $20,000 (based on commentary, this legislation has a low probability of passing). As with all federal tax legislation, some states automatically conform, and some states don't conform until they specifically say they do.

All of these changes can 'rock the boat' of your business.

These are external changes that you don't have control over. You may be able to influence them (or some people may be able to), but for most companies, their 'boats' get rocked and they have to learn how to change course to find calmer waters.

Some state tax issues or items that are currently being challenged or expected to become bigger issues in 2024 that could 'rock your boat':

1. More states to adopt state income tax exconomic nexus thresholds

2. The protections of P.L. 86-272 continue to be challenged and worked around.

3. Gross receipts taxes (Ohio, Washington, Tennessee, Oregon, Nevada) continue to change their rules.

4. Sourcing sales of services or intangibles for income tax apportionment purposes continues to be more confusing with market-based sourcing - do you source to your customer or your customer's customer?

5. How do you source the gain on the sale of your partnership interest?

6. Should my company really make pass-through entity tax (PTET) elections in all states where we can?

7. Do I really owe the California LLC fee or minimum tax based on my ownership in a California LLC?

8. Am I required to file a state income tax combined return?

9. Should I make state income tax elective consolidated return elections?

10. Will the Washington capital gains tax survive challenges and should I pay it?

11. Does everyone have economic nexus for income tax purposes if the state has no 'factor presence' threshold?

12. Can a telecommuting employee that does 'back office' functions create nexus but a telecommuting employee that solicits sales be protected by P.L 86-272?

13. Is SaaS considered tangible personal property or a service for state income tax apportionment purposes?

14. Does P.L. 86-272 apply to sales of SaaS?

15. How can a company realistically source sales of SaaS when the users are in multiple states and the buyer doesn't provide the data?

16. Are state 'throwback' rules constitutional?

17. Should market-based sourcing really create economic nexus?

I could keep going, but I will stop.

CONCLUSION

External forces will always 'rock a company's boat.' However, even if the boat isn't currently rocking, a taxpayer or a tax consultant may need to stand up in the boat to advise or ask the captain of the boat to change directions. The goal is to adapt to the wind or to change the direction of the boat so the company can move towards calmer waters or avoid the storm altogether.

Unfortunately, the constant change in federal and state tax legislation and court cases and rulings, makes it difficult for the waters to stay calm very long.

The best strategy for a company to thrive in this type of environment is to monitor changes, make informed decisions and most of all - be proactive. Don't wait until your in the middle of the storm.

You can always navigate out of the storm, but the damage to the boat will differ based on how quickly you change course.

Here's to smooth sailing.

when state tax laws change, tax pros & taxpayers respond like my cats

Like several parts of the country, this week we got abnormally cold temperatures and about 6 to 7 inches of snow in Nashville. We live on a hill on 16 acres. We don't normally get this much snow and definitely not this cold (zero or negative temps). Oh, did I mention we live on a hill.

So, when this level of 'winter' occurs, we basically don't go anywhere and just wait for it to melt. I do a little shoveling where I can. Actually, I did shovel my road on my hill so I could attempt to get out if I wanted to. Most people would have just played the waiting game. Not me. (Let's attempt to hurt my back for the sake of a clean road.)

My family calls this week - "snow week." A time where work pauses and my wife gets to play games, do art, and fun stuff with our daughters. In other words, a time where everyone is trapped at home.

While I continue to work from home as if nothing has happened.

THE CATS

We have three outdoor cats that we gathered up and put in our heated garage to protect them from the extreme cold. When I go in the garage every morning, one cat is content and just wants to be left alone, one cat is a little confused, but then immediately starts to eat and seems relaxed, and the last cat follows me around, wanting petted non-stop, looking like he wants to jump on my head (he's the anxious one). He keeps acting like he wants out of the garage. Our garage doors are glass. He will sit at our garage doors and just look outside and whine.

Sidenote - when he is outside and winter comes (starts to get colder), he will often come to our windows or doors and look in - like he wants to be inside. In other words, you can't make him happy. He always wants the opposite of what he has (sound familiar?). He thinks he wants out of the garage so he can play in the snow and cold, but he would immediately want back in.

Why do I share all of this in a newsletter about state taxes?

Well, I think life has a lot of great analogies for state taxes (or it's just because that's my profession).

JANUARY IS "SNOW MONTH" FOR THE TAX PROFESSION

We are in the middle of January and it is the calm before the storm for most tax practitioners. In the state and local tax (SALT) profession, there really isn't any off-season. It's busy season year-round. With that said, we do experience "higher call-volumes" during tax 'busy season.'

In addition to tax 'busy season' getting ready to kick-off, state government legislative season or sessions will be starting soon. Governors and others are already making their proposals or ideas known. Every year, states change their tax laws via these sessions. These changes can be unique to the state or they can be related to conforming or not conforming with federal tax legislation. These changes are in addition to the daily non-legislative changes that occur due to new interpretations of current law, court decisions, private letter rulings, audit adjustments related to grey areas of tax law that taxpayers did not expect to be interpreted in a certain way.

Some state tax policy organizations that are great resources for monitoring law changes or being involved in impacting policy changes are:

• The Tax Foundation

• Council on State Taxation (COST)

• Multistate Tax Commission (MTC)

• National Conference of State Legislatures

• Federation of Tax Administrators

The Tax Foundation published an article about State Tax Changes taking effect January 1, 2024.

COST has a lot of great resources that only members can obtain, but they also provide some great FREE resources such as their Policy Position Statements, Amicus Briefs, other studies and reports, etc.

The MTC has a number of uniformity working groups that you can participate in or attend that can be enlightening.

WHEN STATE TAX LAWS CHANGE, TAX PROS AND TAXPAYERS RESPOND LIKE MY CATS

Just like my cats, tax pros and taxpayers respond differently to tax law changes and this time of year.

Some tax pros and taxpayers will greet tax law changes like its no big deal, not realizing the impact or the reason why they should care.

Some tax pros and taxpayers will understand what is going on and be cautious and take a 'wait and see' approach, calmly waiting for guidance so they can make informed decisions and move on.

Some tax pros and taxpayers will be anxious, will want guidance immediately, even if the tax law change has just been proposed and not enacted. They will pace and want to know what to do (even if the law change never happens).

Regardless of what cat you feel most like, this is an annual, recurring event where state tax law changes can feel like an 'avalanche' of snow.

An effective state tax pro, daily monitors state tax law changes in addition to the annual state legislative sessions.

A state tax pro looks for risks and opportunities to taxpayers.

A state tax pro provides technical and cost-effective practical guidance. Identifying the grey areas. Explaining the issues and options. Providing navigation. A compass. A roadmap. Direction.

In the context of thinking of state tax law changes as snow, a state tax pro provides a 'shovel' or 'snow plow.'

CONCLUSION

Regardless of how you feel about state tax law changes or snow, winter comes every year. I hope you don't get trapped at home for too long when winter comes. I also hope you find your shovel or snow plow to move forward when the avalanche of state tax law changes occur.

Here's to spring.

the BIGGEST STATE TAX ISSUE companies face today

The first question a kid asks before starting to play a game that it has never played before is - what are the rules?

Seems like a simple question and one that should be easily answered.

Over the holidays, my family played games. We didn't have to ask about the rules for games we had played several times before, because the rules hadn't changed. For some of the games we hadn't played in a while, we needed to read the instructions to refresh our memory of the rules, but again, the rules hadn't changed. For games we had never played before, we had to ask - what are the rules? But once we learned them, we could play the game and even WIN the game.

Let me ask you this?

Do you know the state tax rules? Income tax rules? Sales tax rules?

Are the rules different depending on the state?

Once you know the rules for that state, do they ever change?

If you stop doing business in a state and then re-enter the state to do business in a later year, will the rules still be the same? Will you simply need a refresh or will you have to learn all new rules?

State taxes is like playing a game where the rules keep changing during the game. The rules don't stay the same year after year, and they may not even be clear when you start the game.

BIGGEST ISSUE

At this time of year, many firms will release reports on the top issues of 2023 and/or what they think the top issues of 2024 will be. However, I think the BIGGEST ISSUE is the lack of clarity and ability to rely on state tax statutes, regulations, court decisions and rulings. In other words, the BIGGEST ISSUE is simply the ability to know how much tax to pay, and how to avoid interest and penalties.

The 'greyness' or lack of clarity and certainty create confusion (and yes, opportunity), but in a world where companies simply need to walk before they run (i.e., comply), knowing the baseline can be the most important line.

Not only are there many 'grey issues' when it comes to multistate income tax and sales tax, there are many issues where there is simply 'discretionary authority.' Again this can be positive, but when a company needs to make decisions and take positions on tax returns, it can be frustrating. The lack of clarity and certainty creates risk and unintended consequences.

BRIGHT LINE TESTS

Bright line tests or straight forward thresholds for nexus, taxability, etc. are great in most cases. However, then the argument becomes about the bright line and how it is arbritary or should be changed. Bright line tests quickly create winners and losers.

Greyness or discretionary authority provides opportunities for each player to determine on their own if they are a winner or loser (atleast until the referee throws a flag).

PRIVATE LETTER RULINGS

When in doubt, file a private letter ruling. Get certainty. Correct??

Well, it's not that simple. An effective private letter ruling can provide certainty and help a company avoid additional tax, interest and penalties. An ineffective private letter ruling can be a waste of time. What do I mean?

Many taxpayers choose NOT to do a private letter ruling because of the following concerns:

• Taxpayers must disclose their identify before obtaining an answer from the state.

• Facts may not be accurate, or disputed later, making the answer invalid.

• Ruling may be revoked at any time.

• Timing of the proposed and prospective transaction with obtaining an answer from the state.

• Rulings are binding unless the facts are not accurate.

• Unsure as to how deep of an analysis of the law the corporation is required to provide.

• The length of time to obtain a ruling.

• Consequently, there is even uncertainty in the process of attempting to obtain certainty.

AMENDED RETURNS

Sometimes the best way to gain certainty is to simply pay the additional tax (or tax that you disagree with) and then file a refund claim (amended return) to challenge the state's position.

I don't love this option since the taxpayer has to pay the tax first, but it does eliminate risk and makes the state declare their position. However, if the state's position is contrary to the taxpayer's, then the taxpayer won't love this option. But this option does avoid interest and penalties.

TAKING THE POSITION QUIETLY

Some taxpayers may choose to simply do their own research, document their position, identify the appropriate levels of assurance and then take the position on the tax return and wait. Wait to see if the state ever comes calling (audits or sends a notice). If the state does send a notice or audits the taxpayer, then the taxpayer will have to challenge the state and make its case. If the taxpayer loses, then they may have to pay additional tax, interest and penalties. So this option can cost more.

CONCLUSION

Uncertainty is not going anywhere. The rules keep changing and will continue to change. Therefore, each company or taxpayer must make informed decisions, exercise good judgment, receive wise counsel and document their positions. Then they must decide and take appropriate action based on all of the facts and applicable authority. That appropriate action may be different in each situation, but the key is for taxpayers to do the analysis and make the best decision they can so they "know how much tax to pay and avoid interest and penalties."

conduct state tax "year-end" planning early, often & always

This is a Public Service announcement. Revealing a secret from the state and local tax underground. A secret that makes it difficult for companies to do business. To stay in compliance. To avoid compounding tax liabilities and interest and penalties.

What is this secret?

Wait for it . . . . . . . .

State taxes are a "moving target."

A "moving target" is defined as:

• something that moves while someone is trying to hit it

• something that is always changing

Some state tax rules don't change. Some state tax rules change at a certain time or in a certain tax year based on federal or state legislation. Some state tax rules change every year. Some state tax rules change suddenly based on a court case or ruling. Some state tax rules change without you knowing it based on a state's internal policy decision or change in interpretation of a statute or regulation.

• So how does a company plan?

• Conduct year-end planning?

• Conduct beginning of the year planning?

• Plan for acquisitions, mergers, divestitures?

Companies must stay on top of income tax laws on a tax year by tax year basis. Meaning, income tax laws are generally static for a specific tax year, but can change from year to year. Thus, tax pros should not follow "SALY" (same as last year) when preparing returns. This can lead to "IAP" (interest and penalties). With that said, there are situations when court case decisions or rulings happen that may have retroactive impact and create amended return / refund opportunities or may simply alter prospective returns.

In regards to sales tax, there are static rules but the interpretation of some of those static rules can change and are definitely not the same in every state. Sales tax rules and tax rates can change at different times of the year due to court cases, rulings and state legislation. Unlike income tax, sales tax periods are generally monthly, quarterly or annual

It's the lack of uniformity among state tax laws that creates risks and opportunities.

Some state income tax laws that may differ from state to state are:

• Economic Nexus (creating a taxable presence)

• Sales sourcing of sales of tangible property and services

• Requiring throwback of sales

• Allowing or requiring combined reporting

• Allowing a pass-through entity (PTE) to make a PTE tax election (i.e., $10,000 SALT-CAP work around)

• If PL 86-272 protection applies

• Conformity to federal international tax considerations (i.e., GILTI, FDII, deemed dividends, ECI, etc.)

• Treatment of bonus depreciation

• Treatment of disregarded entities (i.e., single-member LLCs or Q-Subs)

Some sales tax laws that may differ from state to state are related to the following:

• Sourcing of sales of services (including multiple points of use)

• Sourcing of sales to/from non-US countries

• Sales of software, SaaS, and other computer services

• Sales of information services or data processing

• Sales of services

• Sales by construction contractors

• Treatment of sellers in drop shipment transactions

• Allowable or acceptable forms of exemption certificates

• Treatment of leases (lessors and lessees)

• Width and breadth of manufacturing exemption

• Occasional sale or casual sale exemption when selling assets or business

• Treatment of repairs and maintenance (labor and parts)

• Treatment of research and development activities

• Sales to governmental and non-profit entities

I could keep going, but I think you get the point.

So what is a company supposed to do?

Depending on what stage your business is (i.e., start-up, emerging, growth, mature), I recommend you inquire of your tax professional about the state tax impacts of your business. You may only have one or a few states to deal with right now. Some of you may have 20 or more states to consider. The key is to get on top of it now. To know what you don't know so you can make informed decisions. To stop problems from growing out of control and implement proper procedures and tax decisions. Be proactive. Don't let blind spots create a compound effect of problems.

Conduct year-end state tax planning, early, often and always.

QUOTES

• "In all affairs, it's a healthy thing now and then to hang a question mark on the things you have long taken for granted." - Bertrand Russell

• "Bureacracy is the art of making the possible impossible." - Javier Pascual Salcedo

• "Knowledge is the beginning of practice; doing is the completion of knowing." - Wang Yangming

"darkness is death"

Time change. Daylight savings time. Fall back. Spring ahead. However you describe it, most (if not all of us) changed our clocks recently. We either gained an hour or lost an hour (depending on how you look at it), but one thing I do know - I've lost daylight. So I'm not sure how this is "daylight savings" time. I don't like to complain, but I just do. So I'll just say that I really like sunlight and dislike darkness. As they said in a cartoon movie I can't remember the title of right now - "Darkness is Death."

Regardless of how you feel about changing your clocks or sunlight or darkness, one thing is certain, times continue to change. The way business is conducted continues to change. New technologies are created (whether that's good or bad; or will be used for good or bad is yet to be seen). And last but not least, state tax legislation continues to change; and court cases and rulings continue to be made which ultimately create certainty and uncertainty. Wait, what? What did you just say?

Yes, new legislation, court cases and rulings create just as much uncertainty as they do certainty.

Well, that's great.

Just as each company's facts and circumstances differ, state tax laws seem to have a life of their own when the answer isn't "black and white" (which is most of the time); or when each state's laws are different. This creates a world of grey (or some may say, "darkness"). This "darkness" is why I say every state tax question is a research question. (A research question that needs to be solved by a human (not A.I., AI or artificial intelligence, just saying)).

Darkness is debilitating. It's hard to drive in the dark without headlights. It's hard to walk in the dark without a flashlight. Darkness creates fear and uncertainty. Darkness creates unknown risks. Thus, light is needed to move forward with some level of assurance and confidence.

Darkness can also create unknown opportunities. You can't see them. This requires faith. A compass. A navigator. A roadmap.

"Darkness" in the state tax world surrounds several areas and questions companies continually ask:

• what states do I need to file tax returns in?

• is what I'm selling subject to sales tax?

• which entity in my affiliated group of companies is required to file the tax return?

• if I sell my interest in this partnership, to what states do I source the gain and have to pay tax?

• I'm selling services all across the United States. How do I source those sales to each state in the apportionment factor of my income tax returns?

• do I really have to get exemption certificates from my customers?

• do I have to register with a state for sales tax purposes to provide a vendor with that state's resale exemption certificate or can I use a multijurisdictional certificate?

• am I required to file combined income tax returns or does every entity file separately?

• should I make this election or that election?

• do I qualify for these tax credits?

• do I have to collect sales tax on my total gross receipts or can I deduct costs reimbursements or costs that I flow-through and pay to someone else?

• how do I know if we really meet the requirements to be protected from a state's income tax by P.L. 86-272?

• I didn't even know that state had a gross receipts tax.

• what is a franchise tax and why is the tax base so high?

• am I really selling SaaS and does the state tax it?

• should I make a state's pass-through entity tax election? How do i quantify or model the impact? Will it be beneficial for all partners and shareholders?

• should I file a Voluntary Disclosure Agreement (VDA) or simply start filing returns?

• should I request a Private Letter Ruling (PLR)?

• should I challenge (protest) this audit assessment or simply pay it and move on?

• when can I stop filing returns in a state?

• how do I dissolve or withdraw from a state?

• is registering with a state's Secretary of State's Office the same thing as registering with a state's Department of Revenue (taxation)?

• what sales tax compliance software should I use? Should I outsource the return prep to a third-party?

I could keep going, but I think you get the point. The darkness is everywhere.

Finding the light in the state tax world is not easy.

Unlike darkness in life where you can just flip the light switch and see, darkness in the state tax world takes research and analysis and judgment based on experience. And even then, the answer may not be clear (still dark or grey).

Consequently, I think the "light" is finding the right-fit state tax consultant that you trust and like working with. Someone with not only the technical knowledge and experience, but the ability to look at an issue from 2 feet and 50,000 feet. To be technical and practical. To look at the risk and provide judgment. To reduce risk. To recommend positions with the proper level of assurance. Knowledge. Judgment. Advocacy. That is the light in the proverbial darkness. The compass. The roadmap. The flashlight. The headlight.

I hope you find the light you need to move your company and clients forward.

If you are a state tax consultant, I hope you "shine brightly."

QUOTES

"The art and science of asking questions is the source of all knowledge." - Thomas Berger

"The prize goes to the person who sees the future the quickest." - William Stiritz

"We are drowning in information and starved for knowledge." - John Naisbitt

knowing what questions to ask and how to move forward

Over 20 years ago I was introduced to Tony Robbins and his books. This week I started reading "Awaken The Giant Within" again. I actually started with the chapter entitled, "Questions Are The Answer." The idea or thought is that questions have the power to focus our attention and direct our path. Ask the wrong questions and you will go down the wrong path. Questions cause us to think about certain things (positive or negative) depending on the question. Questions not only cause us to drill down on a person, place, thing, etc. but questions also cause us to "delete" (as Tony says in the book) or not think about certain things or think about things in a certain way.

Tony says:

• "the difference between people is the difference in the questions they ask consistently."

• "Questions determine everything you do in life, from your abilities to your relationships to your income."

Quotes Tony put in the book:

• "Always the beautiful answer who asks a more beautiful question." - E.E. Cummings

• "Some men see things as they are, and say, 'Why?' I dream of things that never were, and say, 'Why not?'" - George Bernard Shaw

QUESTIONS AND ANSWERS IN STATE TAX

After reading that chapter, and I got immersed in work this week, I often thought about the questions and answers I get in my work.

State tax consultants are faced with unique fact patterns and grey tax law which causes us to have to ask the right questions to get the right answer or conclusions. If you never ask the right question you may not uncover a significant fact that could change the conclusion. If you don't know where to look (research) you may never find the regulation, statute, court case or ruling that would alter the position your client or company was going to take.

Positions that a company makes are not just words on paper, they are real dollars. This is important and not just business. It's personal.

The positions a company takes (or doesn't take) have a financial impact on a company. The positions can determine whether a company has the funds to make investments or even keep operating. So understanding and identifying the facts that matter and the legal authority to stand on is not only part of the job, it is the job.

• Ask the Right Questions = Get the Right Answers

• Knowing what to ask, what facts are important, where to look, how to search, filtering through the trees to find the path or the one tree to climb - that's what I call experience and judgment.

• Never giving up, looking at every angle, gaining new perspectives, thinking outside the box - that's what I call advocacy.

I call all of the above "leverage."

This week I've been working on several projects with unique fact patterns and grey tax law (as I'm sure you have as well). Each one causing me to do all of the above. But what do you do when do all of the above and you still have questions?

That's when you have to reach conclusions with certain levels of assurance AND still provide your clients with recommended courses of action. Those recommended action steps should seek to reduce risk and uncertainty and/or take positions that have a level of assurance that supports taking the position.

Some potential courses of action may be:

• taking the position and filing amended returns (refund claims)

• requesting a Private Letter Ruling (PLR)

• filing a Voluntary Disclosure Agreement (VDA)

• documenting the file with a technical memorandum and taking the position

These complex positions and decisions can arise out of the basic areas of state taxation such as:

• whether a company has nexus (a taxable presence) in a state.

• determining whether a state imposes sales tax on what a company is selling.

• how to source a company's sales by state for both income tax and sales tax purposes.

• determining if a specific election to file a return in a certain way should be made.

• And many more......

I've been in the tax profession for 28 years and all of the complexity and never-ending change has been part of the intrigue AND pain. It can be positive and negative. The answers you give clients can be positive and negative.

• Risk management is not the fun part of the job.

• Getting clients refunds = fun.

• Telling a client they need to file historical tax returns and pay a lot of money = not fun.

• Winning an audit protest and saving the client thousands of dollars = fun.

• Telling a company to pay historical tax and interest (even if you reduce the number of tax years and eliminate penalties) = not fun.

So there are fun and not so fun parts of the job. There are easy and difficult conversations to be had. Thus, knowing what questions to ask AND then knowing how to move forward after you get the answers - that is the key. That is the "LEVERAGE."