market-based sourcing uniformity project continues

The Multistate Tax Commission (MTC) UDITPA Section 17 Work Group recently released its Working Draft Model for Market-Sourcing Regulations. 

States who have recently adopted market-based sourcing have similar guidelines. The goal is to develop uniformity for current and future states that enact market-based sourcing for determining the sourcing of sales of services, intangible property and other non-tangible personal property for multistate income tax apportionment purposes. 

The Working Draft provides insight into where the MTC is going and how complicated market-based sourcing really is. The support for switching to market-based sourcing from the costs-of-performance method is partially based on the claim that it is easier to implement. I think the 44-page document speaks for itself.

Check out the Working Draft and my previous posts regarding market-based sourcing for more information.

2015 state tax amnesty programs - should your company apply?

Is amnesty the way forward? Does your company have past liabilities that need paid without paying penalties or interest? Should your company participate in a state's amnesty program or utilize the state's Voluntary Disclosure Program?

These questions plague companies when faced with identified compliance exposure and failures for multiple tax years. Some states offer one-time, short time-frame amnesty periods allowing companies to come forward, file prior year tax returns, and pay tax with the promise of future compliance. Depending on the specifics of the state's amnesty program, penalties and/or interest may be abated.

Key to remember: if your company has exposure and does not come forward, then the state may assess more significant penalties and interest when it finds your company later.

The Council on State Taxation (COST) has put together a great matrix of 2015 state tax amnesty programs. Check it out here.

Also, if you would like to read more about amnesty, check out my previous posts here.

Specifically, you may like: Amnesty and Voluntary Disclosure Agreements: What, When, Why?

are sales tax auditors being 'unreasonable'?

Did your sales tax auditor ask to see 'all' of your accounts and records? 

If you answered 'yes,' you are not alone. If put in this position, what do you do? Well, ask yourself the following questions:

1. Are your records so detailed, complex or voluminous that an audit of all detailed records would be unreasonable or impractical?
2. Would the cost of an audit of all detailed records to the taxpayer or to the state be unreasonable in relation to the benefits derived and sampling procedures would produce a reasonable result?

If you answered 'yes' to any of these questions, the state should work with you to determine a reasonable method of performing the audit. Unfortunately, this is not always the case. Sometimes auditors dig their heels in, and you have to ask to speak with their manager, and then the manager's manager. It can be very frustrating. Especially if the taxpayer has been audited by the state in the past using 'reasonable' methods.

Let's face it, an auditor should not ask or reasonably believe it can review all of the records of a Fortune 500 company. Even with the best systems in place, it is a monumental task. Yet, some state auditors or states have adopted policies to push this requirement.

The ironic part of this request and requirement is that auditors don't really want all of these records because if they did, they would have to review them. Auditors don't have the time.

So why do states attempt to impose this burden?

If records are not provided, some states threaten to calculate an audit assessment using estimates (which are essentially based on bad numbers) or a 'jeopardy assessment.' 

It seems like states are simply using this strategy to be able to issue an assessment based on estimated numbers.

Why would the state do this?

Perhaps it is because they are understaffed. They don't have the resources to perform a reasonable audit. Thus, they impose an unreasonable requirement that can't be met so they can simply issue an estimated assessment and move on.

We Don't Live in a Perfect World

Common sense and reasonableness should apply on both sides of the table. In a perfect world, a taxpayer would be able to supply all records. State auditors would be able to review all records. Tax law would be simple, clear, without any room to argue or interpret. Simply push a button and 'boom,' you know what your tax is. No questions asked. No need for auditors. No need for large tax departments. No need for a tax profession. But wait, we don't live in a perfect world.

Action

The next time this happens to you, try to have a reasonable discussion with the auditor, the auditor's manager and the manager's manager (if necessary). If that doesn't work, be prepared to appeal an unreasonable audit assessment or supply all of your records. The good news is that a state's Appeals Division is usually a great place to receive a reasonable result after bad audit policies were followed. I have seen this firsthand.

Do you have any audit horror stories?

Do you have any audit strategies?

If so, feel free to share them here, or to remain confidential, contact me at strahle@leveragesalt.com.

How to request alternative apportionment in South Carolina

On June 1, 2015, the South Carolina Department of Revenue published Revenue Procedure 15-2. The purpose of the Revenue Procedure is to provide a procedure for a taxpayer to request use of an alternative apportionment method if the taxpayer believes that the prescribed statutory formula does not fairly represent the extent of the taxpayer’s business activities in South Carolina. This request is an “Application for an Alternative Apportionment Method under Code Section 12-6- 2320(A).” 

South Carolina also released Revenue Ruling 15-5. The Revenue Ruling addresses some of the issues that may arise when South Carolina requires or a taxpayer requests an alternative allocation or apportionment method, including combined unitary reporting. Noted in the Ruling is that the Department may require and a taxpayer may request combined unitary reporting as an alternative method, if reasonable. Combined reporting can be used to effectuate equitable apportionment of the taxpayer’s income when separate entity reporting does not fairly represent the taxpayer’s business activity in South Carolina. If the Department requires combined reporting, the Department will apply the Finnigan method to apportion the unitary income using a two-step process (as described in the ruling).

For prior posts on South Carolina and alternative apportionment, including the recent South Carolina Supreme Court Case, click here.

Remote Transactions Parity Act (RTPA) of 2015 Provides No Exceptions

The RTPA of 2015 was introduced by Rep. Chaffetz this week in an attempt to provide an alternative to the Marketplace Fairness Act (MFA). If you have read the numerous articles circling in the media, there are groups that praise the RTPA and several that throw stones.

Without taking sides on the issue, the RTPA proposes to reach the same goal of the Marketplace Fairness Act and that is, 'level the playing field' between remote/online retailers and traditional brick and mortar retailers. The RTPA plans to achieve that level playing field the same way the MFA proposed - by ignoring legal precedent against imposing sales tax collection obligations on out-of-state taxpayers who lack a physical presence in a state.

The RTPA proposes to allow each member state under the Streamlined Sales and Use Tax Agreement to require remote sellers not qualifying for the small remote seller exception to collect and remit sales and use taxes on remote sales. States that are not members of the Streamlined Sales and Use Tax Agreement may require remote sellers to collect and remit sales and use taxes on remote sales as long as the state adopts and implements minimum simplification requirements. The act provides a listing of the 'simplification requirements.'

Perhaps the most significant concern with the RTPA (aside from the obvious) is the definition of 'small remote seller." Small remote sellers would be excluded from the collection requirements. The small remote seller exclusion is a phased-in approach and the definition doesn't include remote sellers that use an 'electronic marketplace' (like Etsy). Consequently, any small remote seller using Etsy would be subject to the collection requirements. That is crazy my friends. Most, if not all, remote sellers using Etsy are 'small remote sellers,' otherwise they wouldn't be using Etsy.

The RTPA defines an 'electronic marketplace' as a digital marketing platform where products or services are offered for sale by more than one remote seller, and buyers may purchase such products or services through a common system.

For the first year after enactment, small remote sellers are defined as having gross receipts less than $10 million. For the second year, small remote sellers are defined as having less than $5 million. For the third year, small remote sellers are defined as having less than $1 million in gross receipts.

Despite what side of the issue you are on, you have to ask the following questions: Why does the 'small remote sellers' exception phase-out? Why tax remote sellers using an electronic marketplace regardless of the amount of sales? 

The RTPA asserts that the Act does not create any nexus between a person and a state. This is a strange statement since the effect of the RTPA is creating a nexus relationship between the remote seller and customer causing the remote seller to collect and remit sales taxes. That's like the common analogy of 'putting lipstick on a pig.' Regardless of what you do or call it, it is still a pig.

The RTPA defines a 'remote sale' as a sale that originates in one State and is sourced to another State which the seller would not legally be required to pay, collect or remit state or local sales and use taxes without the authority provided by the RTPA. Consequently, the RTPA is giving states the right to do something that (without the RTPA) would be illegal.

Regardless of what you think about the RTPA, Congress is definitely looking for solutions to resolve this perceived loophole or problem of collecting sales tax on remote sales. My intuition tells me that a solution will be enacted; however, I'm not convinced that solution should be the RTPA.

Nevada enacts 'commerce tax'

Nevada has signed into law (SB 483) the imposition of a new 'commerce tax' on each business entity engaged in business in Nevada whose gross revenue in a fiscal year exceeds $4 million. 

The Nevada gross revenue is determined by taking gross revenue and making specific adjustments.

Note: there is no adjustment for cost of goods sold.

Revenue is sitused to Nevada differently depending on the source of revenue (i.e., tangible property, real property, services, etc.).

Note: Services are sitused using market-based sourcing methodology (i.e., where the purchaser receives the benefit of the service).

The tax rate will vary based on the industry of the taxpayer.

The tax year begins July 1, 2015 and the first report is due 45 days following June 30, 2016.

Bottom Line

Taxpayers are now subject to a new tax in Nevada, similar to Texas' gross receipts tax, Washington's Business & Occupation Tax or Ohio's Commercial Activity Tax, but with deviation.

Taxpayers must prepare to comply, budget and navigate this new tax (burden).