State tax notices, got to love them.
I don't know about you, but I am seeing a lot more state tax notices being received by companies. Not only are they first time notices, but they are repeat notices, month after month. This is even after the taxpayer/company has responded to the first notice.
It often feels like the state taxing authority never looked at the response sent by the company.
Actually, I recently called a state taxing authority because a company received a repeat notice, and the state said they were probably six months behind on processing incoming responses/mail, etc. Therefore, the company would continue to receive a repeat notice every month until the company's initial response was processed.
Disregarding repeat notices for the moment, even the first notice a company receives gives the perception that the state taxing authority did not even look at the documents that were attached to the originally filed return. The attachments often explain or provide the information that the notice is now requesting. This causes companies and taxpayers to devote additional time and resources to explain something again and again.
Can't taxing authorities get better? Is it just a computer system gone awry? Lack of resources?
What can taxpayers do to eliminate notices and repeat notices?
I understand it isn't always the taxing authority's fault, some taxpayers don't provide adequate information. But for those that do, the notices keep coming.
Sometimes it just feels like a game. A game in which the taxing authorities just want a company or taxpayer to give up and pay the additional tax, interest and/or penalties being imposed.
Sales Tax and Disregarded Entities: Who is the Taxpayer?
Does your company's corporate or legal entity structure cause confusion when it comes to the sales tax area? Meaning, does your structure involve various "pass-through" or "disregarded" entities?
"Pass-through" or "disregarded entities" are generally considered divisions or a part of their owner for federal tax purposes. Hence, they are not taxed separately from their owner. However, for state and local sales tax purposes, most states treat each "pass-through" or "disregarded entity" as a separate taxable entity. Therefore, it is very important when making a purchase for a specific project or filing for a business license, that the correct entity’s name and other identification is used. This issue arises especially in states where your company has multiple entities conducting business.
"Resale Certificates" and "Direct Pay Permits" Confusion
Another situation in which the issue arises is when "resale certificates" or "direct pay permits" are utilized by multiple entities. Resale certificates and direct pay permits are generally issued to a specific legal entity and cannot be transferred or utilized by other entities. Hence, it is very important that vendors have the correct information in their records, and your invoices, contracts, etc. reflect the actual entity that is involved in the transaction.
Helping Tax Departments Become The HERO
I recently had lunch with a leader of a tax department, and as we were talking, it struck me as to the many challenges tax departments face.
Challenges may include:
- Finding the right people (level of experience, personality, culture fit)
- Knowing how many people the tax department needs to provide value
- Justifying and getting approval for how many people the tax department needs
- Determining how to structure the tax department (by tax type, by company, by some other mix)
- Getting buy-in from other company departments to obtain information at the right time, and complete special projects to provide value (i.e., implementing smart ideas that reduce taxes without creating a high level of controversy risk, and positively impacting other business functions (i.e., finding ideas that align with business objectives))
- Outlining and determining the best process for compliance, audits, provision and planning functions
- Implementing and utilizing the right-fit software and technology solutions
- Managing external consultants and determining which ideas to use and which ideas to ignore
- Not getting stuck in the 'analysis paralysis' zone
- Not 'dying by meeting'
- Doing more with less
These are just a few of the challenges. I know there are more. Tell me by leaving a comment or send me an e-mail at strahle@leveragesalt.com.
Key Points
The point is, tax departments must keep moving forward. They must feel like they are providing value and are respected within the company. Compliance cannot be the only thing.
Also, people within the tax department will always know more about the company than external consultants. Consequently, regardless of the pre-packed or customized planning ideas - some that may be risky, or some that, as they would say, are 'low-hanging' fruit - the company must follow their own risk compass.
External consultants should not act like the hero. They should help tax departments become the hero.
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's your favorite State Tax Conference (CPE)?
Here are a few SALT conferences I think are good.
Sales Tax Institute (http://www.salestaxinstitute.com) from my friend, Diane Yetter. The Institute offers live in person 3 day classes – Basics of Sales Tax and Advanced Sales Tax Workshop. These are highly rated and differ from the larger offers as they are much more intimate and provide an excellent learning opportunity. The Institute also offers monthly webinars that are not a sales pitch, but provide in depth educational content. They also have a self study online class with another coming soon.
Georgetown Advanced SALT Institute - https://www.law.georgetown.edu/continuing-legal-education/programs/cle/state-and-local-tax-institute/
Paul Hartman - http://www.hartmansaltforum.org/conference_registration
IPT has several - https://www.ipt.org/
NYU SALT conference - http://sps.nyu.edu/academics/departments/finance-tax-and-law/conferences-events/institute-on-state-and-local-taxation.html
Interstate Tax Corporation - http://www.interstatetaxcorp.com/seminars.htm
University of Milwaukee-Wisconsin SALT certificate program - https://uwm.edu/business/research/centers-institutes/deloitte-center-for-multistate-taxation/
DMA puts on several - https://www.dmainc.com/
COST and TEI have several, but only industry tax professionals are allowed to attend.
https://www.tei.org/Pages/default.aspx
I would also look at the Big 4 firm websites (Deloitte, PwC, EY, KPMG), Grant Thornton, RSM, and BDO. They put on seminars and several webinars throughout the year. You can sign up for the e-mail list to be notified of free webinars.
What's your favorite?
If yours isn't listed above, comment or send me an e-mail at strahle@leveragesalt.com.
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.