21 State Tax & Business Developments You May Want to Know - July 17, 2017

During the past few weeks, state legislatures ended their sessions with many changes and many problems left unanswered. I've also been traveling lately for work and personal reasons, and haven't posted in a while. To make up for it and provide some useful information, I posted several tax developments in the LEVERAGE SALT LinkedIn group that you may find helpful:

1. State Tax Changes Taking Effect July 1, 2017
2. Sales and Use Tax Compliance Legislation was a Big State Tax Trend This Year
3. State and Local Sales Tax Rates, Midyear 2017
4. Ten States Begin FY2018 Without Budget In Place
5. State Rundown 7/11: Some Legislatures Get Long Holiday Weekends, Others Work Overtime
6. Should the Corporate Rate and the Pass-Through Rate Be Identical?
7. With Veto Override, Illinois Legislature Abandons Reform Efforts
8. Important Announcement from the California Department of Tax and Fee Administration, Formerly Part of the California State Board of Equalization
9. $75 Million Available During the First Application Period in the California Competes Tax Credit Program’s Final Year
10. What Is Minimal Substantial Nexus?
11. Illinois Passes a Budget, But it's No Time to Celebrate
12. State Tax Quarterly Insights April to June 2017
13. Illinois – Corporate rate increase, repeal of separate unitary groups for certain industries, R&D credit retroactively reinstated, IRC 199 addback required, and other tax changes
14. Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget
15. North Carolina Legislature Overrides Governor Veto of Budget Bill
16. Should Corporations Pay Higher State Income Tax? Are Corporations Paying a Small % of State Income Tax Because of Credits & Incentives?
17. Oregon Adopts Market Based Sourcing
18. New Ohio Law Includes Amnesty Program with Potential 100 Percent Penalty Waiver and 50 Percent Interest Waive

19. A Closer Look at NY Draft Proposed Regulations under Article 9-A Business Corporation Franchise Tax Under Subpart 3-9 - Computation of the UNOL

20. Illinois 2017–2018 state budget bill enacted | Deloitte US

21. Ohio fiscal year 2018–2019 budget bill enacted | Deloitte US

Tax Legislation: Are We Asking The Right Questions?

State tax developments are everywhere. They happen daily. The question is - are we just reporting them or are we challenging them?

This legislative season has seen crazy proposals to raise revenue, balance budgets - all influenced by political pressures and confusion. We have policy organizations submitting reports and studies asserting that certain proposals are ridiculous or would either be unfair or detrimental to the state and specific taxpayers. This complexity not only applies to state tax legislatures, but also the federal government - as we know. The problem is that states generally have to balance their budgets every year to operate (although apparently that doesn't apply to Illinois).

One thing I noticed is that state legislative sessions are focused on raising revenue. Always asking what can or should be taxed? What new forms of business do we need to tax? What tax revenue are we missing out on?

I think those are the wrong questions. The questions we should be asking are:

• What services should the state or federal government provide?
• To what extent ($$) should the government provide those services?
• How do we prioritize those services?
• What is the cost/benefit of providing those services?
• At what point does the provision of those services cause detriment to citizens and our economy? 
• What oversight will each service have to avoid waste and efficient use of taxpayer dollars?

We don't always need more revenue. We need to rethink and revamp the purpose of government. Our governments should be lean and efficient. They should provide us with what we need most - not more or less. It's not about tax revenue, it's about efficient government. It's about the health and wealth of our country - financially, physically and spiritually. 

If we never ask the right questions, we won't get the right answers.

STATES are living in 'VIRTUAL REALITY,' are YOU?

The states are living in virtual reality. They want out-of-state companies who don't have a physical presence in the state to pay income tax, and collect sales tax.

You may know about all of the talk to enact federal legislation to require remote sellers to collect sales tax when they don't have a physical presence. You may even know about the legislation some states have enacted to require remote sellers to collect sales tax based on having 'economic nexus.'

ECONOMIC NEXUS: Economic nexus is simply having customers in a state and deriving income or sales from those customers. Economic nexus does not require the seller to have a physical presence in the state.

Before states started using economic nexus to require out-of-state companies to collect sales tax, some states enacted economic nexus legislation to require out-of-states companies to pay income tax. In addition to economic nexus, many states have adopted market-based sourcing for apportionment purposes.

APPORTIONMENT: Every company that operates in multiple states has an apportionment factor. The apportionment factor is used to determine the portion of the company's tax base that should be taxed by a state. Historically, the apportionment factor was based on a ratio of the company's in-state property/payroll/sales over the company's everywhere property/payroll/sales. Most states now use an apportionment factor solely based on sales. The property and payroll factor have become less important.

Now, back to market-based sourcing. Market-based sourcing applies to the sales of services and intangibles. It simply says that for apportionment purposes, a service provider's sales are sourced to where the customers are located. 

This leads to why it is important to know where a company's customers are located versus where the company is located for both nexus and apportionment purposes. A service company or any company that sells over the internet could have economic nexus and customers in multiple states creating a large tax liability, possibly over multiple years.

Personally, I think economic nexus and market-based sourcing should not be allowed. I think states need to stop living in virtual reality and live in the physical realm. 

Regardless, if you are a service provider or Internet retailer, please review your situation to reduce the likelihood of having a large tax assessment fall on your doorstep. Virtual reality could simply become reality.

DON'T BE A ROBOT. PROVIDE LEVERAGE.

With all the talk of innovation, robotics and artificial intelligence changing the landscape of how tax departments function, it is imperative that tax professionals position themselves as something more than data movers.

Certain areas of accounting and tax have been commodities for years. Now, with technology, it will become even more so. As I have been saying for years, the real value of a tax consultant is providing leverage - knowledge, judgment and advocacy. In other words, it isn't the data that helps a company win an audit, determine a position on a return, or plan to minimize tax on a merger or acquisition. It is the knowledge, judgment and advocacy (expertise) of the tax professional and his or her ability to interpret and apply the law to specific data. The experience and connections of a tax professional cannot be mimicked by a computer or robot.

Position yourself to be valuable. Position yourself to provide leverage.

That's my objective.

Why Corporations Don't File State Tax Private Letter Rulings

• 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.

Why would you request a private letter ruling?

• To avoid receiving an assessment for additional tax, interest and penalties in the future

How do you file a private letter ruling?

• get your facts straight
• do it timely

Any questions?

Middle Market Companies Fight State Tax Surprises

As a CFO, controller or finance executive in a middle market company, you have a wide range of responsibilities to manage.  State and local tax matters can pop up when you least expect it and cause compliance and financial burdens.

Some of those state tax surprises could be (regardless of industry):

1. State tax registration requirements - when should you register?  If you register, will that create tax filing obligations?  When can you withdraw your registration?
2. State income tax apportionment - when can your company allocate income instead of apportion income?
3. Sales taxability of digital goods, licenses, subscriptions, computer hardware, software, cloud computing, etc.
4. Sales tax audits and appeals
5. Choosing sales tax codes for your sales and purchases to correctly utilize your sales tax compliance/decision software with your ERP system
6. Knowing when your company has a filing obligation in a state
7. Filing Voluntary Disclosure Agreements to mitigate prior year tax exposure
8. Determining sales tax consequences of "bundled transactions" or "mixed transactions" (transactions that include taxable items with non-taxable items)
9. Determining sales and use tax consequences for entities that conduct transactions with governmental entities.  When does the exemption apply?  What does the exemption apply to? 
10. If my company is a service provider, is my company paying use tax on purchases?

Several of my clients have had these issues recently.  Do any of the above items sound familiar to you?