states change interpretation without any change in law?

Throughout my career I have faced several instances where states have made audit assessments or taken positions under audit that contradict the position the state has taken in the past when it has audited the company.  This change in position by the state has occurred even when there has been NO CHANGE in the state's statutes, rulings and court cases since the last audit.

Should the state be able to change their position without any change in authority?  In most cases I would say no.  Unfortunately, when you challenge the position within the audit, you may not get anywhere.  You may have to go to appeals or even court to resolve.  My experience is that resolution is highly likely at the appeals level (this obviously depends on the facts of each case).

With that said, getting back to my original question, should a state be able to change its position without any change in authority?  Allowing states to do so causes a taxpayer to incur time and money to challenge the change in position, when there is no reasonable basis for the change.  

Why would a state make an assessment when there is no change or basis for the assessment?  Well, the answer may be that the state has changed its policy or interpretation of a statute or regulation.  The state may believe that this change in interpretation is enough.  It may or may not be, depending on the facts of the case.

Overall, if you run into this situation don't just accept it.  Question it.  Challenge it.  Just remember, you may have to go to appeals to resolve the matter.  

DISCLAIMER:  Each case is different and states may have justification for their change in position.  This is a reminder to not just accept the change, but to seek to clearly understand the state's position so you can determine if you should challenge it. 

the first day . . . . . "elbows and knees"

Today is the first day of school for my daughters. One is a sophomore in high school and the other is starting middle school. I know for some of you, school started weeks ago. Well, regardless of when, the situation is the same. We all go through the preparation, the planning, the registering, the fee-paying, school supplies and clothes shopping, etc. Then the day draws closer, the last day of summer dawns, the night before comes. After all of the preparation, the reality of new classes, new teachers, new schools, new friends, tests and quizzes sets in. A little anxiety (or a lot) comes to mind. That's when we pray. We trust. 

As my daughters start back today, I have the innate feelings of my responsibility. My natural instincts and priorities are to: provide, protect and lead. These are my objectives and my role in my family. As most parents, we seek to provide for our families. Provide them not only with material things, but with love, confidence, self-worth and a place of serenity so they can grow to be strong and independent. We want to provide them with opportunities and freedom to pursue the gifts and talents that were given to them. 

We also want to protect them. I can't tell you how strong this emotion is in me. Maybe it's because I have daughters, but I would do anything to protect them. I have a phrase that I created and I tell my girls, "elbows and knees." It stands for two things. One, the elbows and knees are the hardest parts of your body. Use them to defend yourself physically if necessary. Second, it is a philosophy for life. Many things in our lives will push us down. Will attempt to discourage and make us feel less than. The road to achieving our dreams and goals will be difficult (if the dream is worth pursuing); thus, we must be willing to do the work. To dig in. To fight back against a world that seems to push. We must use our "elbows and knees."

Last but not least, we must lead our families. We cannot rely on the world, the schools, church or the government to teach our kids how to live, how to treat others, how to achieve, how to love, etc. That is our jobs as parents. 

How does this relate to state taxes?

Well, state tax compliance, audits or planning can sometimes cause anxiety. That's when we are instincts to provide, protect and lead our companies and tax departments must kick-in. We must use our 'elbows and knees' to stand. To fight for what we know is right. To dig deeper. To have wisdom to discern when to fight and when to walk away.

taxpayer rights have expiration dates

Taxpayers have rights at the federal and state levels. Do you know what they are? Have you really looked at them? We often assume we know what the taxpayer bill of rights say, or that they don't really matter, but it's good to be reminded.

I am planning a series of blog posts covering private letter ruling request procedures by each state, but wanted to start with taxpayer rights. Since I am based in Virginia, let's start here.

In Virginia, the Taxpayer Bill of Rights are provided to guarantee that (1) the rights, privacy, and property of Virginia taxpayers are adequately safeguarded and protected during tax assessment, collection, and enforcement processes administered under the revenue laws of the Commonwealth, and (2) the taxpayer is treated with dignity and respect.

The Taxpayer Bill of Rights compiles, in one document, brief but comprehensive statements which explain, in simple, nontechnical terms, the rights and obligations of the Department and taxpayers. The rights afforded taxpayers to assure that their privacy and property are safeguarded and protected during tax assessment and collections are available only insofar as they are implemented in other sections of the Code of Virginia or rules of the Department.

The rights guaranteed to Virginia taxpayers in the Code of Virginia and the Department's rules and regulations are:

1. The right to available information and prompt, courteous, accurate responses to questions and requests for tax assistance.
2. The right to request assistance from a taxpayers' rights advocate of the Department, who is responsible for facilitating the resolution of taxpayer complaints and problems not resolved through the normal administrative channels within the Department.
3. The right to be represented or advised by counsel or other qualified representatives at any time in administrative interactions with the Department; the right to procedural safeguards with respect to recording of meetings during tax determination or collection processes conducted by the Department; and the right to have audits, inspections of records, and meetings conducted at a reasonable time and place except in criminal and internal investigations.
4. The right to abatement of tax, interest, and penalties attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.
5. The right to obtain simple, nontechnical statements which explain the procedures, remedies, and rights available during audit, appeals, and collection proceedings, including, but not limited to, the rights pursuant to this Taxpayer Bill of Rights and the right to be provided with an explanation for denials of refunds as well as the basis of the audit, assessments, and denials of refunds which identify any amount of tax, interest, or penalty due and which explain the consequences of the taxpayer's failure to comply with the notice.
6. The right to be informed of impending collection actions which require sale or seizure of property or freezing of assets, except jeopardy assessments, and the right to at least fourteen days' notice in which to pay the liability or seek further review.
7. After a jeopardy assessment, the right to have an immediate review of the jeopardy assessment.
8. The right to seek review, through formal or informal proceedings, of any adverse decisions relating to determinations in the audit or collections processes.
9. The right to have the taxpayer's tax information kept confidential unless otherwise specified by law.
10. The right to procedures for retirement of tax obligations by installment payment agreements which recognize both the taxpayer's financial condition and the best interests of the Commonwealth, provided that the taxpayer gives accurate, current information and meets all other tax obligations on schedule.
11. The right to procedures for requesting release of liens filed by the Department and for requesting that any lien which is filed in error be so noted on the lien cancellation filed by the Department and in a notice to any credit agency at the taxpayer's request, provided such request is made within three years of the release of the lien by the Department.
12. The right to procedures which assure that the individual employees of the Department are not paid, evaluated, or promoted on the basis of the amount of assessments or collections from taxpayers.
13. The right to have the Department begin and complete its audits in a timely and expeditious manner after notification of intent to audit.

The key to the taxpayer bill of rights is to know them and know the procedures surrounding each right. Some taxpayer rights require action by the taxpayer to enforce the right within a specific passage of time (i.e., 30 days, 60 days or 3 years). This is specifically true in regards to protesting audit assessments and filing refund claims. Consequently, some rights have expiration dates.

They say, "knowledge is power." They also say, "the greatest gap in the world is the gap between knowing and doing." When dealing with state taxes, they couldn't be more right.  

random thoughts from your fellow state tax professional

Taking a break from working this afternoon. In the middle of doing multiple state market-based sourcing research. Earlier this week I spent time researching California apportionment and allocation rules and writing technical support. I also worked on Florida enterprise zone refund claims and other miscellaneous research.

Question for the day: what did you spend your time doing this week? what would you do differently if you could? what would you change?

My philosophy is that life is too short to be boring or do boring work. I have been a state tax consultant for 20+ years and I know what part of my work I enjoy and what part I don't. Consequently, I seek to spend more time doing what I like and less time doing otherwise.

Random thought - one of my favorite television shows is "Suits." A little sad that the season finale was this week. Looking forward to it starting again in the winter. If you enjoy "Suits" as well, drop me a line. The show can be a little tense and stressful. Nobody takes any crap from anyone, and they are constantly jumping to incorrect conclusions. However, I enjoy the creative problem solving and perspectives they execute.

I hate the 'bait and switch.' I hate it when products at the store say they solve a certain problem or perform a certain function, then you get it home and does nothing. Isn't that false advertising? How many products or services have you experienced this phenomenon with? Unfortunately, that's how it feels with state tax laws. They are so complicated to begin with, and then states pull the bait and switch after a negative court ruling. 

I leave you with this - life AND work are supposed to be fun. I hope you had a great week and don't spend your days living for the weekend.

Take care and talk to you next week.

mission impossible?

Multistate tax laws are so complicated that businesses are set up to fail, to be exposed to audit assessments, to miss out on refunds due to expired statute-of-limitations, pushed to appeal assessments because of unreasonable positions by department audit divisions, and coerced to pay computer generated notices simply because the cost of fighting outweighs the benefit. Companies are forced to obtain elaborate accounting software, put procedures in place to comply, and hire experts to plan to minimize tax and mitigate the risk of exposure. The compliance burden for multistate businesses is overwhelming.

State statutes and regulations, court cases, rulings, internal audit division policies, etc. change daily. The constant change and lack of uniformity among the states produces unintended consequences. Even years later, after statutes or regulations have been in place and businesses have complied, states may choose to change the rules again(or sometimes they change their interpretation of the same rules without actually changing the rules). To complicate matters even worse, these changes may be imposed prospectively or retroactively; whichever has the least impact on the state's revenue. Consequently, taxpayers who have relied on the state's interpretation or challenged the state's interpretation, may owe additional tax or be unable to obtain refunds they deserve.

Conclusions:

1. Tax policy must be fair and provide reasonable certainty (no bait and switch).
2. The tax professional community must have access to the best tools possible (i.e. timely and accurate information), and be able to navigate their way through the minutiae to support tax positions. 
3. Fortune 500 company tax departments are continually being required to do more with less as state tax complexity worsens. 

Mission:

1. Collaborate with tax policy organizations on policy statements, amicus briefs, studies, articles, reports, comments and testimony (positively influence state tax policy)
2. Write or review technical material to expand or build out tax research publisher libraries (build better tools)
3. Act as a 'stop-gap' independent contractor to Fortune 500 company tax departments that lack resources to accomplish a variety of projects (provide companies with a partner-level experienced resource who has low overhead and isn't bound by audit independence issues or bureaucracy, so companies can achieve desired results)

This is my mission. Is the mission impossible?

What is your mission?

I challenge you to find it. Pursue it. Engage.

market-based sourcing to be analyzed by MTC special subcommittee

The Multistate Tax Commission (MTC) has formed a Special Subcommittee to review market-based sourcing regulations in the context of separate-entity filing and related party transactions. The first meeting will be held Friday, August 28, 2015 at 3:30 pm EST via teleconference. The meetings will be held every Friday at 3:30 pm until further notice.

According to media reports, the special subcommittee was formed to examine concerns about the possible impact on taxpayers filing separate-entity income tax returns. The MTC is concerned that taxpayers may manipulate market-based sourcing methodology through the use of related party transactions, distorting the result. 

The taxpayer and tax professional community must accept that market-based sourcing is here to stay and will eventually be adopted by all states. Therefore, we must be proactive in how the rules are crafted and implemented. The majority of the economy in the U.S. is derived of service providing companies, or companies that provide services along with selling tangible goods. Technology allows companies to provide several types of services across the U.S. without physically delivering the service into each state (i.e., services are performed in one state, while customers are in multiple states). Consequently, market-based sourcing in-conjunction with "factor-presence" nexus or "economic" nexus (a subject for another day) will create greater tax liability and/or compliance burdens for companies.

Be prepared. Be involved.

For more information, check out my previous posts on market-based sourcing.