building a sustainable state tax consulting practice takes a 'village'

what people think, but do not say

Did you ever see the movie, "Jerry Maguire"?  In the beginning of the movie, Tom Cruise (as Jerry Maguire) has a breakdown or "break-through" as he called it.  He had been working for a large sports agent firm and had grown tired of the profession, the way he treated clients, the focus on money, etc.  Hence, he woke up in the middle of the night and wrote a several page "mission statement."  The mission statement described how the firm should change everything - how it should change its focus from solely making money and treat clients like people, develop true relationships and actually care. 

The mission statement was called, "What People Think, But Do Not Say."

I have been working in the public accounting field for 20 years and most of that time I have been a state and local tax consultant.  I worked in industry at some large Fortune 500 companies and several accounting firms (large and small).  Based on my experience and from talking to my SALT colleagues at other firms, some disturbing trends exist in our profession:

1. SALT consultants tend to move from firm to firm at a high rate, with the average length of time at one firm being 2 years.
2. Accounting firms that hire SALT consultants to build SALT practices don't always know what that actually means; they don't know what it actually looks like for their size firm (or office) and target market.  They just know they want to build one.
3. SALT consultants often struggle in getting the tax and audit folks to invite them to client meetings and pull them into projects earlier rather than later.
4. Most tax and audit folks are often used to doing things themselves - hence, their first inclination is to use SALT consultants on an as needed basis or as a "help-desk."  I get it.  I am a "do it yourself" kind of guy as well.  Often times, it is a cost/benefit or materiality issue.  I understand.
5. SALT consultants struggle with their billable time getting written off by tax or audit partners because SALT consultants are often not in control of the billing process on engagements which were obtained or started by non-SALT folks.
6. Most firms recognize SALT is a growing area and need/want a SALT resource to grow their firm; however, most firms may not be able to support or sustain a full-time SALT group.

The trends listed above do not apply to every firm.  Some SALT consultants have had long careers at one firm.  This is especially common in larger firms. The trends described are just a product of reality - or economic pressures on the firm or the partners themselves.  Everyone is just trying to meet their goals in the best way they can.  With that said, it is also a fact that so many SALT practices suffer from these trends.  Hence, the question is - is there a cure? 

You have probably heard the saying - "don't keep doing the same things and expect a different result."  Well, I very much agree with that statement in this area.  I am passionate about changing these trends - in helping SALT consultants get off of the "merry-go-round." 

These trends can be overcome by building strong relationships with partners, positioning the SALT practice effectively within the firm and/or office, marketing the SALT practice effectively in the marketplace and focusing on your highest and best use - the actions that will produce the most effective results. 

Another solution for firms would be to outsource their SALT function - this would allow the firm to have access to SALT resources they need, when they need it, without having to invest a great deal upfront or year after year.

What do you think?  Have you suffered from these trends?  What solutions can you think of?

connect and build community

Join with me in building a state tax community that builds real relationships and works together to help each other resolve complex state tax problems, influence state tax policy and further our careers and profession. 

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don't let state tax 'blind spots' wreck your company

WHAT IS A BLIND SPOT?

According to Wikipedia, a blind spot, also known as a scotoma, is an obscuration of the visual field. A particular blind spot known as the blindspot, or physiological blind spot, or punctum caecum in medical literature, is the place in the visual field that corresponds to the lack of light-detecting photoreceptor cells on the optic disc of the retina where the optic nerve passes through it. Since there are no cells to detect light on the optic disc, a part of the field of vision is not perceived. The brain fills in with surrounding detail and with information from the other eye, so the blind spot is not normally perceived.

Now, that wasn't exactly what I think of when I think of a blind spot.  I usually think of a blind spot when I am driving my car.

In that context, Wikipedia says a blind spot in a vehicle is an area around the vehicle that cannot be directly observed by the driver while at the controls, under existing circumstances. Blind spots exist in a wide range of vehicles: cars, trucks, motorboats and aircraft.

As one is driving an automobile, blind spots are the areas of the road that cannot be seen while looking forward or through either the rear-view or side mirrors. The most common are the rear quarter blind spots, areas towards the rear of the vehicle on both sides. Vehicles in the adjacent lanes of the road that fall into these blind spots may not be visible using only the car's mirrors. Rear quarter blind spots can be:

• checked by turning one's head briefly (risking rear-end collisions),
• eliminated by reducing overlap between side and rear-view mirrors, or
• reduced by installing mirrors with larger fields-of-view.

STATE TAX BLIND SPOTS

Now, what does this have to do with state taxes?  

Well, I believe most, if not all, companies have state tax blind spots.  These blind spots may include:

1. nexus (taxable presence) in states in which the business is not filing income tax returns or collecting sales tax
2. using the incorrect apportionment formula, including the wrong items or amounts in apportionment factors or using the wrong method to apportion different types of income (tangible, intangible, service, etc.)
3. including the wrong entities in a combined or consolidated state income tax return due to incorrect unitary group analysis
4. classifying business income as nonbusiness income (or vice versa)
5. misapplying P.L. 86-272 protection (i.e., business is not operating within limits of protection or business is applying P.L. 86-272 protection to the wrong type of tax)
6. misapplying sales and use tax exemptions
7. not self-assessing and remitting use tax on purchases of taxable items
8. assuming the business is selling is a nontaxable service, when it is actually selling tangible property
9. assuming the business is selling intangible property, when it is actually selling tangible property
10. not adding back related-party expenses on the business' state income tax return when required
11. adding back related-party expenses on the business' state income tax return when NOT required
12. when acquiring or merging entities, failing to perform state and local tax due diligence to uncover liabilities and determine a tax-efficient way to combine the entities (before and after the acquisition/merger)
13. failing to comply with state bulk-sale notification requirements
14. filing a separate return when a combined group return should be filed
15. allowing a FIN 48 reserve for state uncertain tax positions to grow year after year without attempting to reduce uncertainty

And the list goes on and on and on.

YOUR COMPANY / YOUR STATE TAX BLIND SPOTS

In regards to your company's state tax "blind spots," it usually depends on the stage your company is in and the size of your business.

As your business grows and changes, it is vital that your business examines its state tax "blind spots" before a "wreck" (audit assessment, nexus questionnaire, etc.) occurs.

Do you know what your state tax 'blind spots' are?

Do you need to install a warning system?

it depends on the state

We have all heard the phrase from a state tax consultant, "it depends on the state." Why do they say those words? Why can't they just answer my question? Well, the states are not the same. Each state has it's own unique rules. Even if they have the same rule, they have different interpretations and applications. Each day, states are proposing legislation, issuing court case decisions and other rulings that impact a state's position or a taxpayer's ability to take a position. 

All state tax consultants could provide you with a general answer - a likely answer. But without conducting specific research for that state and applying that state's specific rules to your specific facts, the answer would be just that - a general answer with no authority to stand on. We most likely don't know the answer to your specific question at this very moment without performing research to some extent. Generally.

"dissociation" dead for Washington B&O tax?

A taxpayer loses the dissociation argument in a Washington Business & Occupation (B&O) Tax case. The Washington Court of Appeals held Washington's statutes and regulations subject both categories (streams) of the taxpayer's Washington bound sales to the B&O tax. The court also held the application of the B&O tax is consistent with the commerce clause. (see Avnet Inc. v. State of Washington, April 28, 2015)

The taxpayer shipped all of its products from distribution centers outside Washington. During the time period at issue, the taxpayer maintained an office in Washington. The taxpayer excluded two categories of Washington bound sales described as "National Sales" and "Third Party Drop-Shipped Sales." The "National Sales" category involved transactions where the taxpayer's customer places an order from a location outside Washington with the taxpayers office outside Washington, but directs the taxpayer to ship the products to Washington.  The drop-shipped category involves a customer located outside Washington placing an order with the taxpayer's office outside Washington, but directs the taxpayer to ship products to a third party located in Washington. Nothing in the record indicated that the taxpayer's Washington office participated in soliciting or filling orders, investing customer credit, or providing technical support to the end users in the specific sales at issue in the case.

The case discusses the interpretation and application of Washington's statutes and regulations regarding when the B&O tax applies to a sale. The case discusses WAC Rule 193 in the context of the taxpayer's argument that sales "not significantly associated in any way with  the taxpayer's activities in Washington" could be excluded from the B&O tax (dissociation). The court reasoned that Rule 193 was interpretive and can not provide a greater exemption than that provided by B&O statutes. The court held the taxpayer's claim must be determined according to constitutional arguments.

The taxpayer conceded that it has nexus in Washington. The dispute centers around whether the commerce clause allows the taxpayer to "dissociate" its Washington bound national and drop-shipped sales by showing that its instate personnel played no significant role in those transactions. Previous court cases, including those in Washington, held dissociation to be a viable position. However, the court asserted, agreeing with the Department, that subsequent precedent has shown a progressive broadening of the types of activities that may establish substantial nexus. Those precedents, according to the court, show that a state need not demonstrate a direct connection between a taxpayer's nexus-creating activities and particular sales into the state in order to tax those sales.

Take Away

If you or your clients have utilized dissociation to keep specific Washington bound sales from taxation, it is time to review that position and determine the prudent path forward.

letting go - no more 'quiet desperation'

Yesterday was my birthday. That infamous day when time stands still. When you stop to look back and reflect. When you look forward to plan, to achieve things that you want to do before you die. 

I don't mind getting older. I like the wisdom gained from experience. Just wish my body could keep up. Anyway, at age 42, I am truly blessed. My path to here has contained numerous twists and turns - some I worked for, others I tried to avoid. In either case, things always worked out.

One thing I've learned recently is that life is better when you have community - you are not alone. Many people, especially business men, live a life of 'quiet desperation' dreaming of some place else. Thinking of the things they haven't accomplished or the risks they didn't take. This is why I am trying to create a platform, a place for business men to interact and build community. Please join me. Tell me your story. Don't go it alone.

As a state tax professional, another year means more experience gained, and more of the same - states becoming more aggressive, taxpayers fighting to comply and keep more of what they make.

Life, like state taxes, changes every day. You can't predict the future, you can only prepare as much as possible and be flexible enough to adapt when necessary.

Take my advice. Life is too short. Today is the day to move towards your dream. Most importantly, don't hold onto life so tight that you choke the fun out of the gift each day presents. Sometimes we get so busy running, that we don't enjoy the ride. Let go, ride the roller coaster of life with your hands up.

this week's top 10 developments include: nexus, alternative apportionment, amnesty, transfer pricing and more

Rulings, court cases, and proposed legislation change the landscape of multistate taxation every day. It is impossible to follow all of it. I attempt to keep you aware of the items that may have a significant impact on a broad range of taxpayers. If you are following a major issue in your state that isn't listed below, and would like me to highlight it on this blog, please contact me.

Here are my top 10 for the week:

1. Tennessee is looking to establish click-through nexus for sales tax and economic nexus for income tax. Legislation moving to Governor (HB 644).
2. South Carolina issued draft guidance on alternative apportionment methods. Open for public comments until May 14th. Conference to be held on May 21st.
3. Maryland enacts favorable Amnesty? See McDermott Will & Emery's Inside SALT post for details.
4. North Dakota enacts law to phase-in single sales factor and repeal some Multistate Tax Commission provisions (SB 2292).
5. Louisiana proposes combined reporting (HB 775).
6. Missouri General Assembly passes bill that would establish market-based sourcing for sales other than sales of tangible personal property (SB 19).  
7. Nevada Senate approves bill to broaden definition of physical presence to cause remote sellers to collect sales tax, including a click-through nexus provision (SB 382).  
8. New York enacts multiple tax law changes as part of 2015-2016 budget (AB 3009).
9. New York enacted legislation makes numerous changes to New York City's taxation of corporations (SB 4610).
10. District of Columbia's transfer pricing enforcement program and combined reporting regime - appropriate? - read McDermott Will & Emery's post for details.

If you would like assistance in determining how any of the above will impact your company or clients, please contact me. Also, please contact me if you would like LEVERAGE SALT, LLC to comment, on your behalf, on the South Carolina draft guidance on alternative apportionment methods.