don't let uncertain state tax positions surprise your company or client

Uncertain state tax positions are everywhere. Your company or your clients likely have them. Have you identified them? Have you addressed them?

During ‘busy season’ or ‘tax season, state tax questions often arise or lay there quietly in the background while federal tax issues get all of the attention.

State tax issues or the state tax impact of an issue or transaction is generally considered after the federal tax impact is addressed.

Non-state tax experts are sometimes just too busy to give state tax issues adequate time before a deadline. In other situations, non-state tax experts may simply view a state tax issue as less complicated than it really is. Consequently, state tax issues may not get addressed before the original due date of the returns and may only get addressed in late summer or early fall prior to the extended due date. This often creates a time crunch for uncertain state tax positions to get adequately addressed. That's one of the problems.

The other problem is that most state tax issues are more complex than they appear. A high-level overview or two hours of research won't cut it, especially when you are trying to determine the state tax impact of a large transaction or adequately source the gain on a sale of a partnership interest to the right state or states.

What are these 'uncertain state tax positions'?

Where can they appear?

The following is a summary of some of the areas or items that create uncertain state tax positions on state income tax returns:

1. Structure - intangible holding companies; REIT / RIC; buy / sell companies, management / services companies; state-specific structures; captive insurance companies; finance companies; factoring companies; check-the-box entities; pass-through entities;

2. Transactions - mergers, acquisitions, divestitures; repatriation dividends; reorganizations; bankruptcy issues;

3. Nexus - P.L. 86-272; economic nexus; attribution of activities; forced combination; foreign company nexus despite no permanent establishment in U.S.;

4. Filing Options - separate, nexus combined, hybrid nexus combined, unitary combined (waters-edge, worldwide); consolidated;

5. Apportionment - ability to apportion income; choice of formula; throwback / throwout; joyce vs. finnegan; sales factor sourcing (destination, market-based sourcing, cost of performance, commercial domicile, location of payor);

6. Tax Base - business v.s nonbusiness income vs. separate accounting; Internal Revenue Code (IRC) conformity; related party addbacks; depreciation adjustments; dividends received deduction conformity; transfer pricing; foreign source income; state specific additions/subtractions;

7. Treatment of Partnerships - entity vs. aggregate theory; unitary (tax base / factor flow-up) vs non-unitary (allocation); sale of partnership interest;

8. Tax Attributes - NOLs (pre-apportioned vs. post-apportioned); IRC Sec. 382 limitations; survivor / non-survivor limitations; credits (claw-backs; compliance with agreements);

How do you ensure these items are addressed adequately?

• Get a state tax expert involved early.

How do you know when your client has any of these issues?

• Create a checklist that helps you identify clients or when your company may have these issues. That checklist may be based on the amount of sales a company has, the amount of taxable income, the number of states they file returns in (or the number of states they should file in), or if they have a specific structure or entered into a transaction that obviously needs reviewed.

There are multiple checklists you could create, the key is to make one that works for your company or firm that doesn't slow down the compliance process, but does allow you to reduce risk and adequately document a supportable, defendable or winnable position.

I hope you have a great tax season (now and in the fall). I hope all of your uncertain state tax positions achieve as much certainty as they can and are adequately addressed and documented.

conduct state tax "year-end" planning early, often & always

This is a Public Service announcement. Revealing a secret from the state and local tax underground. A secret that makes it difficult for companies to do business. To stay in compliance. To avoid compounding tax liabilities and interest and penalties.

What is this secret?

Wait for it . . . . . . . .

State taxes are a "moving target."

A "moving target" is defined as:

• something that moves while someone is trying to hit it

• something that is always changing

Some state tax rules don't change. Some state tax rules change at a certain time or in a certain tax year based on federal or state legislation. Some state tax rules change every year. Some state tax rules change suddenly based on a court case or ruling. Some state tax rules change without you knowing it based on a state's internal policy decision or change in interpretation of a statute or regulation.

• So how does a company plan?

• Conduct year-end planning?

• Conduct beginning of the year planning?

• Plan for acquisitions, mergers, divestitures?

Companies must stay on top of income tax laws on a tax year by tax year basis. Meaning, income tax laws are generally static for a specific tax year, but can change from year to year. Thus, tax pros should not follow "SALY" (same as last year) when preparing returns. This can lead to "IAP" (interest and penalties). With that said, there are situations when court case decisions or rulings happen that may have retroactive impact and create amended return / refund opportunities or may simply alter prospective returns.

In regards to sales tax, there are static rules but the interpretation of some of those static rules can change and are definitely not the same in every state. Sales tax rules and tax rates can change at different times of the year due to court cases, rulings and state legislation. Unlike income tax, sales tax periods are generally monthly, quarterly or annual

It's the lack of uniformity among state tax laws that creates risks and opportunities.

Some state income tax laws that may differ from state to state are:

• Economic Nexus (creating a taxable presence)

• Sales sourcing of sales of tangible property and services

• Requiring throwback of sales

• Allowing or requiring combined reporting

• Allowing a pass-through entity (PTE) to make a PTE tax election (i.e., $10,000 SALT-CAP work around)

• If PL 86-272 protection applies

• Conformity to federal international tax considerations (i.e., GILTI, FDII, deemed dividends, ECI, etc.)

• Treatment of bonus depreciation

• Treatment of disregarded entities (i.e., single-member LLCs or Q-Subs)

Some sales tax laws that may differ from state to state are related to the following:

• Sourcing of sales of services (including multiple points of use)

• Sourcing of sales to/from non-US countries

• Sales of software, SaaS, and other computer services

• Sales of information services or data processing

• Sales of services

• Sales by construction contractors

• Treatment of sellers in drop shipment transactions

• Allowable or acceptable forms of exemption certificates

• Treatment of leases (lessors and lessees)

• Width and breadth of manufacturing exemption

• Occasional sale or casual sale exemption when selling assets or business

• Treatment of repairs and maintenance (labor and parts)

• Treatment of research and development activities

• Sales to governmental and non-profit entities

I could keep going, but I think you get the point.

So what is a company supposed to do?

Depending on what stage your business is (i.e., start-up, emerging, growth, mature), I recommend you inquire of your tax professional about the state tax impacts of your business. You may only have one or a few states to deal with right now. Some of you may have 20 or more states to consider. The key is to get on top of it now. To know what you don't know so you can make informed decisions. To stop problems from growing out of control and implement proper procedures and tax decisions. Be proactive. Don't let blind spots create a compound effect of problems.

Conduct year-end state tax planning, early, often and always.

QUOTES

• "In all affairs, it's a healthy thing now and then to hang a question mark on the things you have long taken for granted." - Bertrand Russell

• "Bureacracy is the art of making the possible impossible." - Javier Pascual Salcedo

• "Knowledge is the beginning of practice; doing is the completion of knowing." - Wang Yangming

Are Remote Retailers and Marketplace Providers in the 'Path of Totality'?

Well, it's the day - solar eclipse day. A once in a lifetime event. Are you ready? Do you have your glasses? Will you see the total eclipse or partial eclipse?

According to the Washington Post, "the path of totality — the 70-mile-wide strip of America from Oregon to South Carolina in which the moon will, for a couple of minutes, block the sun — crosses the homes of an estimated 11 million people."

A total eclipse is something that happens once in a lifetime (if you are lucky; every 400 years or so). Well, today, our modern economy is converging with past sales tax law creating a sales tax 'eclipse' and is having difficulty figuring out how to look at it. We need the 'right glasses' to be able to tax remote retailers (online sellers) and marketplace platform providers. Amazon, since it is the largest marketplace provider I am aware of, has become the creator of this convergence, or sales tax 'eclipse.' 

We - state and federal governments, departments of revenue, taxpayers and tax professionals - must accept the fact that this sales tax 'eclipse' is happening. We must also work together to find the 'right glasses' or we will cause damage to our 'eyes' (economy and state revenue). 

Currently, states have imposed economic nexus standards and use tax notice and reporting requirements ALL with the intent to skirt the physical presence standard established by the Quill court case. The physical presence standard requires a retailer to have a physical presence standard in the state before the state can require the retailer to collect sales tax. 

I am all for states figuring out the best way to tax these remote retailer transactions; or first determining if they should tax it. I get that the states need revenue. What I disagree with is how states are going about trying to make it happen. Adopting economic nexus laws that fly in the face of Quill to simply get companies to challenge the economic nexus law is ridiculous. States want taxpayers to either comply or challenge the law, hoping the U.S. Supreme Court will take the case and overturn Quill. 

The use tax notice and reporting requirements are more burdensome and complicated than simply collecting and remitting sales tax. Again, another indirect way that states are simply trying to get companies to collect sales tax. If you can't change the law, create a law that is more complicated so companies choose the less burdensome road. I get it, but I disagree with it.

Companies want certainty. Companies don't want to focus on sales tax, they want to focus on their business. They want taxes to get out of the way or at least be something easy and clear to comply with. Companies don't want to get caught not complying and have to pay additional taxes, interest and penalties. The problem is, states are trying to force new tax collecting obligations without working together with businesses and tax professionals. They are forcing it, which is producing uncertainty and more confusion. 

State taxes already present a maze of taxing jurisdictions all competing for business and revenue with non-uniform tax laws. With this sales tax 'eclipse' staring us down, all I ask is that we work together to find the 'right glasses.' I ask the states to stop forcing damage to our eyes.

PROVIDE REAL VALUE. NOT NOISE.

If you've been paying attention, which I'm sure you have, I am constantly changing my website and thinking of ways to market, re-market, re-package or change the way I present my services and myself. This is the life of a solo state tax consultant. I am always thinking. Always learning. AND I can implement changes whenever I want - maybe sometimes hastily, but I would rather be innovative and try things, then to be stuck in the trap of 'that's the way we have always done it,' or changes take time to get approved by layers of bureaucracy and by the time they get approved all momentum and enthusiasm about the change is long gone.

Life is too short to be the same as everybody else, and that is exactly what we have in the public accounting and law firm world. Everybody is the same. The same boring websites. The same descriptions. The same strategic visions. The same services. The same message. The same hot topics. Every firm is trying to be the first to write about a hot topic, or the first to go in-depth about a topic. I should know. I spend my days daily reviewing state tax developments and writing about them. I also conduct research for clients and attempt to provide insight and actionable, innovative, intelligence (I just made that term up, you can feel free to use it). 

There is so much 'noise' in the world. So much knowledge and information being spewed on the internet and social media, while you are just trying to do your job. The question is - what do you need to know to do your job? How can you best help your company or your client? Are you going deep enough into the details of the law, cases, etc. to find true value? Or are you just scratching the surface, going from meeting to meeting, running around with your head cut-off, waiting for lightning to strike? 

Life is too short to be boring. Too short to not take the risk to be creative. 

BE AUTHENTIC. BE REAL. DON'T TRY TO BE SOMETHING YOUR NOT.

What is your firm good at? What are you good at? How can you be different? How ARE you different? 

Be different. Be creative. Provide REAL VALUE, NOT NOISE.

I HATE STATE TAXES AND WHY YOU SHOULD TO

I am a state tax consultant and I hate state taxes. Why? Because state taxes are a burden to every company doing business. The registration to do business, the business licenses, the sales AND use tax, franchise taxes, income taxes, property taxes (personal and real property), local income or gross receipts taxes, etc.

Companies are in business to make money and use it to grow their business, not pay the government. I am not a state tax consultant because I love the complexity of state taxes and the fact that it changes daily. I am a state tax consultant because companies need help navigating the complexity of state taxation or they can end up in some big financial trouble that impacts cash flow. 

Now, your Fortune 500 companies may not care as much - meaning, their federal tax liability is usually relatively much larger than their state tax liability, so state taxes usually take a back-seat. However, your growing middle market companies and smaller companies must pay attention or face material liabilities that impact their ability to do business. 

The problem for a state tax consultant is that the correlation between the size of a company and importance of state taxation, is sometimes in contrast to how much a state tax consultant can charge for his or her work. Fortune 500 companies can afford to pay more for state tax consulting services and usually the project or issue has more zeros behind the dollar amount involved. So it makes sense that the fee is larger. 

For middle market companies and smaller companies, even though the dollar amount at issue may not be as large as it is for a Fortune 500 company, the issue is just as valuable or more so because of the relative effect it could have on the cash flow of the company. 

As a result, state tax consultants often have a hard time deciding which type or size of companies they should focus their services on. Each group (large and small) have a need with different means to pay or priorities. 

Regardless of size, companies are not in business to pay taxes. CFOs, Controllers and privately held company business owners are not in business to learn and study state taxes. They don't want to know the technical complexities, they just want solutions. They want to do business with as little tax burden as possible (in dollar amount and compliance). Our job as a state tax consultant is not to explain the technical difficulties and show how smart we are. Our objective should be to resolve state tax issues in practical and cost-effective ways, with as little technical jargon and difficulty as possible. If the client wants to know more, provide it. But otherwise, just do it without explaining the technical theories and potential 'greyness' of the issues involved. Clients don't want to know how difficult it is, they want to know you are on top of it and can resolve it with as little pain as possible.

As a state tax professional, don't fall so in love with the complexity of state taxation that you forget why you are studying it in the first place. That's why I like to keep my perception as one that hates state taxes, because every business does. This ensures that we are on the same page.

ONE-STOP SHOP FOR FREE STATE TAX RESOURCES

I have put together a web page of sites that offer FREE updates on state tax developments. I have also included some of my favorite business and practice management sites, magazines and blogs. 

Please take a look - ONE-STOP SHOP.

Please let me know which sites you find most useful and if you have a site I should add. 

Thank you and enjoy.