are you using ambiguity to your advantage?

If you are following state income tax developments to any degree, then you are aware of the ambiguity in state tax law that is leading to strange outcomes in court cases, new legislation by state legislatures, policies and procedures by departments of revenue, and even positions taken by taxpayers. Recent developments in tax reform, economic nexus, market-based sourcing, Multistate Tax Commission three-factor apportionment election cases, alternative apportionment, combined reporting, transfer pricing, OECD (Organization of Economic Co-Operation and Development) BEPS (Base Erosion and Profit Shifting), and tax haven legislation are creating risks and opportunities for corporate taxpayers.

Ambiguity, in general, creates challenges in the form of complicated laws (changing daily), vague statute of limitations, unreasonable audit positions, and computer generated notices. Ambiguity is allowing states to re-interpret current law so they can obtain different results without actually changing their law. States are also enacting new legislation retroactively to avoid payouts of large tax refunds. 

An example of ambiguity causing controversy is the recent Texas Margin tax case (Hallmark Mktg Co. v. Hegar, Tex., No. 14-1075, 10/9/15). The issue in the case surrounded the Texas regulation that requires “only the net gain” to be included in the apportionment factor (denominator). The state’s position was that the regulation requires both ‘net gain’ and ‘net loss’ to be included in the apportionment factor. Consequently, the state's position is that the regulation is ambiguous. The taxpayer's position is that the regulation only requires net gain. Hence, the taxpayer holds that the regulation is not ambiguous and not open to interpretation. The Texas Court of Appeals held that Texas’ interpretation of regulation was ‘reasonable’ (November 2014). Taxpayers are concerned the ruling “creates uncertainty about whether numerous sections of Texas' franchise tax regulations can be reinterpreted  by the Comptroller under the guise of ambiguity.” The Texas Supreme Court is set to hear oral arguments on December 9, 2015. 

The Texas case is only one example. I could discuss many more and may do so in future blog posts. 

The question we  should be asking is - can current law be interpreted more than one way? The law you are analyzing for your company at this very moment - is it ambiguous or is it clear? Will the state you are dealing with reinterpret the law under audit or litigation? 

Regardless of the answers, ambiguity requires action. Ambiguity requires corporations and taxpayers to be proactive and find solutions and reduce risk. Corporations need tools to determine whether a trend (i.e., court case, ruling, etc.) is a risk or opportunity. Even more than planning, corporations need to be able to determine what position they "should" take. What is reasonable? What is "more likely than not"? Compliance, controversy and provision requirements demand companies to answer these questions. How do you answer these questions? What tools do you use? Who do you talk to? 

We must eliminate ambiguity or use it to our advantage.

STATE OF STATE: COMING TO CHICAGO!

I will be co-presenting a complimentary (free) Bloomberg BNA lunch-n-learn presentation with Diane Tinney in Chicago on November 11, 2015 from 11:30 am to 2:00 pm.  

We will have an interactive discussion about the latest state income tax developments, advances in technology solutions driving change, and how you can make a positive impact on state income tax management in your organization.

If you will be in the Chicago area on November 11th, I would love the opportunity to meet you, and talk about your state income tax experiences as corporate tax executives or accounting/law firm tax professionals. I will be talking about how recent developments continue to create a complex and uncertain environment that makes it difficult to comply, plan, and obtain a fair result. I will also share some recent comments from an auditor that left me dumbfounded and even more determined to fight for fairness.

If you are planning to attend, I would love it if you sent me an e-mail regarding an issue or concern that you would like me to discuss. This would make our meeting even more valuable.

If you are unable to attend, I would still love it if you sent me an e-mail regarding an issue or concern that you have had. If we discuss it during our meeting, I will get back to you with our thoughts and conclusions.

I hope to see you there.

Fight the good-fight.

To register, go here.

state tax 'strategery'

'Strategery.' According to Wikipedia, the word "strategery" was coined for a Saturday Night Live sketch, written by James Downey, airing October 7, 2000, which satirized the performances of George W. Bush and Al Gore, two candidates for President of the United States, during the first presidential debate for election year 2000. Comedian Will Ferrell played Bush and used the word "strategery" (a mock-Bushism playing on the word "strategy"), when asked by a mock debate moderator to summarize "the best argument for his campaign", thus satirizing Bush's reputation for mispronouncing words. The episode was later released as part of a video tape titled Presidential Bash 2000.

After the 2000 presidential election, people inside the Bush White House reportedly began using the term as a joke, and it later grew to become a term of art among them meaning oversight of any activity by Bush's political consultants. Bush's strategists also came to be known within the White House as "The Department of Strategery" or the "Strategery Group.

I am in the middle of preparing for a presentation I will be giving next month in Chicago for Bloomberg BNA. As I was preparing for it, reading through recent developments, it dawned on me - we need new 'strategery' when dealing with state taxes. As taxpayers and tax professionals, we are constantly trying to find the right answer - what position to take, whether something is taxable, etc. We review explanations in tax research software, we read statutes, regulations, court cases. We call colleagues, and if we get really desperate, we call the state. I know, sometimes we call the state first, but we all know that when we call the state, we may not get the right answer. It depends on who we talk to, what department, etc. It can be very frustrating to find an answer that is reliable. 

Please note, I am not talking about tax avoidance or planning to minimize tax. I am simply talking about searching and looking for a compliant answer. We just want to know what position we are supposed to take. That's all. Should it really be that difficult to comply? 

What happens when we don't comply? We get notices. We get audits, and once we are in the middle of an audit, we get unreasonable audit requests for information. We get auditors taking positions that are in direct opposition to the state's statutes and regulations simply because the audit division has a 'policy' or 'procedure' to follow. 

Again, why is this so complicated? Do the states do it intentionally? Or is it simply a lack of resources, training? 

Regardless of the reason, we must find some new 'strategery' to navigate this playing field and reduce uncertainty.

As tax professionals, we can easily get in a rut of simply reading a tax research publisher's explanations or relying on an explanation from a 'big' accounting or law firm. I challenge you to read the cases for yourself. I promise, that if you do, you will find hidden gems of arguments and statements made by the court or the state that will give you clues as to what positions to take. I also challenge you to use other tools to be proactive, such as tax planning software.

Based on the complexity of compliance, we must play this game 'with a chip on our shoulder.' Let's not be passive and simply get tossed around.

Let's be game-changers, not just another player.

the game we love/hate; and a little test

Imagine playing a game against an opponent who also makes all of the rules. An opponent that constantly changes the rules as the game is in-progress. Now imagine there are 50+ opponents. 

That is the multistate tax profession. That is what multistate corporations deal with every day.

Let's work together to fight bad audit policies and procedures, the lack of independent tribunals, and the computerized notices that cause us to surrender. 

When we feel trapped in a box or against the wall, let's fight for direction, freedom and resolution.

knowledge test

Did you know that 7 states require corporations to file separate entity income tax returns?

Did you know that 10 states allow corporations to file separate entity income tax returns or to elect to file consolidated returns?

Did you know that 1 state requires corporations to file a nexus consolidated return?

Did you know that 14 states (plus DC) require corporations to file a combined return or allow taxpayers to elect to file a combined return?

Did you know that 12 states require corporations to file a combined return or allow taxpayers to elect to file a combined return or consolidated return?

TEST:

Can you categorize the states into the above categories?

Which states are not included in the above categories?

is ignorance bliss?

DIAGNOSIS

I recently went to the doctor. I hadn't been in a couple of years. With changing health insurance plans, I also had to change doctors which made it a little less convenient to go. While at the doctor, I had my blood drawn to test for different things, one of which was cholesterol. I got my test results and was shocked to learn my cholesterol was high. About ten years ago my cholesterol was high, I changed my diet and lowered it. Since then, admittedly, I have slowly not eaten as strict. However, I don't really eat that bad, relatively speaking. Meaning, I don't eat fried foods, I don't eat hamburgers, french fries, creamy, saucy food - or anything that tastes 'really' good, on a regular basis. In other words, I try to eat healthy. I am also an exercise addict. I lift weights and do some type of cardio about 4-6 times a week. I have been doing that since I was 13. So, again, when I heard my cholesterol was high, I was shocked.

NEW STRATEGY

Despite my diet being relatively good, I have eaten a lot of eggs (with yolks) and cheese over the past year or two. I love cheese (on just about everything). When I say I eat a lot of eggs, I mean several times a week. Thus, if there is one explanation for why my cholesterol is high, I am guessing that's it. So for now, I have cut out eggs and cheese. I have started eating oatmeal every day and have increased my cardio. I will get my blood rechecked in six months and learn if my new strategies worked.

Going through this, I jokingly said to my wife that if I never went to the doctor, I wouldn't have changed my behavior. I would not have known my cholesterol was high. I would have continued to eat eggs and cheese, no oatmeal. It's like when you take the car to the mechanic for a tune-up or oil change. We are all afraid the mechanic is going to find something serious and want us to fix it. We don't think there is anything wrong because the car has been operating completely fine.  

QUESTION

This begs the question - is ignorance bliss? Is it better to live not knowing what is really going on, as long as everything is operating fine? Or is it better to know and change behavior before you have a real problem?

STATE TAXES

This real life story parallels what companies do with state taxes. As long as nothing bad is happening (audit, notices, etc.) or the pain isn't too bad (annual liabilities), a company doesn't change its behavior or take a closer look.

EARLY DETECTION IS KEY

Just like with your health, being proactive about state taxes is a smart thing to do. Reviewing tax positions and returns prior to filing or prior to an audit is recommended. Resolving an audit controversy at the audit level or appeals level is better than going to court (in  most cases). Now, is better than later. 

Have you taken a closer look at your state tax returns and positions lately? Or is ignorance bliss?

that's the worst thing I've ever heard

We have tried to raise our daughters to have good morals and values, and we have tried to keep their exposure to 'bad movies' to a minimum. Consequently, we don't let our girls watch "R" movies or movies with sexual content or lots of bad language, if possible. However, my oldest daughter loves action movies, like the Bourne movies. Thus, sometimes, the limit gets pushed. I know they are exposed to these things through other kids at school, etc. We just try to be a positive influence and a place of refuge at home.

With that said, about a year ago on a rainy, cold weekend, my oldest daughter wanted to watch an action movie. So we looked through the movies we own, and found "Collateral." If you don't know what it is, it's a movie about a hit man (Tom Cruise) that comes to town for one night to kill several people. Jamie Foxx is the unfortunate taxi cab driver that drives Tom around town. In one part of the movie, Tom Cruise's character gets on the radio and puts on a 'tirade' to Jamie Foxx's boss, putting Jamie's boss in 'his place.' During the 'tirade,' Tom Cruise's character uses a lot of expletives and cuss words. Right after that, we paused the movie and my oldest daughter said, "that's the worst thing I've ever heard." My heart sank (and we laughed). We had been trying to keep our daughters from being exposed to bad language. We hadn't let them watch bad movies at other kid's houses, and here, at our own house - we expose them to the worst thing they have ever heard. We laugh about it today. (Note: we stopped watching the movie at that point)

What does this have to do with state taxes? Well, I'm sure you have heard auditors say some things that just don't make sense - that go blatantly against statutes, regulations and court rulings. I recently had an auditor take a position that was obviously against the state's law. I dug up the statutes and regulations and sent them to him. After a few days, he responded saying he sent them off to the legal department and the department said I was right. A few days later, he sent me revised assessments. As I opened the files, I was thinking I would see a better number for my taxpayer. To my surprise, I saw a worse number. Why? The auditor had corrected the issue I won, but subsequently, took a new position on another issue that raised the assessment. At first glance, I thought the new position was clearly wrong. I did some research and my instincts were correct. I called the auditor and we talked about the issue. During our call he said one of the worst things I've ever heard - "I know the law doesn't say it, but it should." He went on to say that rules weren't written to explain all of these issues and the department was taking a position on 'what should be there.' I got off the phone - a little shocked and to admit, a little pissed. The department was taking a position not supported by law and requiring my client to protest it. 

I know other tax professionals and taxpayers have their own horror stories that are very similar to what I just described. Why is this the case? Why do states take policy positions that are not supported by law? Why are taxpayers forced to fight or to surrender when the rules are clear?

I would love to hear your 'horror story.' Please feel free to comment on this post; or for confidentiality reasons, you can contact me directly.