the fixer and preventer

At my house, I often refer to myself as "the Fixer."  Why?  Well, I live in a house full of girls (my wife, two daughters and a shitzu).  As most men encounter, they often have a "honey do list" that accumulates over time.  However, on a weekly basis there seems to be things that constantly need attention, maintenance or "fixing."  Examples may include:  cell phones not working properly, computers not working properly, IPads, toys, etc.

Every family needs a "fixer" (whether it is male or female).  Someone who can fix almost anything because unfortunately, everything in this world seems to be made to break down at some point.  Everything needs constant maintenance or "fixing."

In the state and local tax world, this seems to be the case as well.  Every day represents a new court case, new legislation, new business decisions, new fact patterns, and lovely audits and notices, etc.  Constant change is inevitable.  Constant change can lead to problems and issues that require maintenance or "fixing."  Hence, every company needs a state and local tax "fixer."  Someone who can provide leverage when it is required.  Someone who lightens the burden, and is a strong advocate when needed.  Someone who can identify the right-size, most cost-effective and practical solution.  

The key to being a good "fixer" is also being a good "preventer."   The more problems you can prevent, the less problems you will have to fix.  Hence, a good fixer will be as proactive as possible instead of just reacting to the constant "nagging" or "fire drills" that pop up.

Do you have a "fixer" at home? 

Do you have a state and local tax "fixer" and "preventer" for your business?

"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.

State Tax Haven Legislation (Update and Resources)

The number of states introducing or enacting some form of state tax haven legislation is increasing annually. To help you keep track of it, I have included links to several resources that may be helpful:

• PwC State Tax Haven Legislative Tracker
• Reaching for Revenue Offshore, States Push Tax Haven Laws
• State Tax Haven Legislation: A Misguided Approach to a Global Issue
• Tax Haven Legislation is Growing in Popularity
• Connecticut Limits New Tax Haven Law
• Tax Haven Legislation Was a Hot Topic in State Legislatures in 2015
• State and Local Tax Policy Statement Regarding State Tax Haven Laws
• States Eye Tax Havens
• “Tax haven” state enactment status, with 2015 proposals
• Recent Trends in Combined Reporting and Apportionment

According to EY, arguments for tax haven legislation:

• $20b in state tax revenue loss – multinational corporations hide profits in “island economies.”
• Big business does not pay its “fair share.”
• Small business disadvantaged, unable to use tax haven “loophole.”

According to EY, arguments against tax haven legislation:

• Is it even constitutional?
• Japan Line vs. Los Angeles – US S. Ct. (1979) – US must “speak with one voice” in international relations
• Tax haven “blacklisting” is arbitrary.
• Can’t prove its $20b in state tax losses
• States are adopting a go-it-alone approach, out of sync with the rest of the international community
• (OECD Base Erosion and Profit Shifting project rejects approach these states want to follow!)

Based on reviewing the above resources, 6 states plus D.C. have enacted some form of tax haven legislation (Alaska, Connecticut, Montana, Oregon, Rhode Island, and West Virginia). A multitude of states have proposed some type of tax haven legislation. Most of the proposals have been connected to combined reporting proposals or revisions. Some of the proposed legislation has not gotten very far along in the process before being declared 'dead.' Other proposals were eliminated from the legislation or changed to provide that the state perform a 'study.' States that have introduced legislation include:

1. Alabama (HB 142/ S 202 / S 51 / S 12
2. Colorado (HB 1275 / HB 1346)
3. Florida (HB 1221)
4. Illinois (HB 4300)
5. Indiana (S 323)
6. Kansas (HB 2680)
7. Kentucky (HB 861 / HB 342 / HB 374 / HB 132)
8. Louisiana (HB 74a / HB 775)
9. Massachusetts (HB 2477 / HD 1234 / SD 1699 / S 1524  / H 4200 / HB 3400)
10. Maine (HB 1110 / LD 1634 / HB 235 / LD 341 / HB 273 / LD 407 / S 392 / LD 1120)
11. Minnesota (SF 3318 / HF 3898)
12. New Hampshire (HB 551)
13. New Jersey (A 1720 / S 982 / A 4826)
14. Pennsylvania (HB 1758 / S 117)
15. Vermont (S 138 / HB 489) - enacted, but not*

* Note: Vermont never enacted tax haven legislation. Vermont HB 489, as proposed and introduced, had language requiring the Commissioner of Taxes to make recommendations on how to include income from tax havens in the calculation of Vermont’s corporate tax. That language was struck and not part of HB 489 that was eventually enacted in June 2015. Thus, Vermont never repealed it because it was never enacted.

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.

ADAPT. IMPROVISE. OVERCOME.

When you woke up this morning, did you feel the way you wanted to feel? Did your breakfast and "morning time" (with family, getting ready for school and work, etc.) go smoothly? Was your morning commute a breeze, smooth, no delays, no wrecks, no construction? How about when you got to the office - did you have a 100 e-mails from the night before? Client voice-mail messages demanding their work done yesterday?

I could go on and on, but you get the point. Life does not usually happen as we plan - either on a daily basis or when big life-altering decisions or situations happen in our life. These moments require us to adapt, improvise and overcome. This motto is generally referenced in relation to the U.S. military, but has obvious applicability to every day life. Every day we are forced to become flexible to achieve success, to meet goals, to keep our house in order, to pay the bills, to get the family to all of its functions and extracurricular activities on time. It is a constant and never-ending battle. Thus, we have to constantly adapt, improvise and overcome.

The same can be said when it comes to multistate taxes. Working in the state tax field is a constant barrage of daily change. Every state's laws are different, every client's situation is unique and court cases / rulings are continually changing the interpretation and application of vague tax laws. Every question requires research to be conducted to obtain a conclusion with substantiated certainty. Businesses receive tax notices and assessments that require perseverance and a 'never give up' attitude at times to keep digging (researching) to develop arguments and a strong defense to assessments that appear unreasonable. State tax professionals must adapt, improvise and overcome.

How have you adapted, improvised and overcome in your life or in the state tax field?

What best practices or advice would you give other state tax professionals?