mission impossible?

Multistate tax laws are so complicated that businesses are set up to fail, to be exposed to audit assessments, to miss out on refunds due to expired statute-of-limitations, pushed to appeal assessments because of unreasonable positions by department audit divisions, and coerced to pay computer generated notices simply because the cost of fighting outweighs the benefit. Companies are forced to obtain elaborate accounting software, put procedures in place to comply, and hire experts to plan to minimize tax and mitigate the risk of exposure. The compliance burden for multistate businesses is overwhelming.

State statutes and regulations, court cases, rulings, internal audit division policies, etc. change daily. The constant change and lack of uniformity among the states produces unintended consequences. Even years later, after statutes or regulations have been in place and businesses have complied, states may choose to change the rules again(or sometimes they change their interpretation of the same rules without actually changing the rules). To complicate matters even worse, these changes may be imposed prospectively or retroactively; whichever has the least impact on the state's revenue. Consequently, taxpayers who have relied on the state's interpretation or challenged the state's interpretation, may owe additional tax or be unable to obtain refunds they deserve.

Conclusions:

1. Tax policy must be fair and provide reasonable certainty (no bait and switch).
2. The tax professional community must have access to the best tools possible (i.e. timely and accurate information), and be able to navigate their way through the minutiae to support tax positions. 
3. Fortune 500 company tax departments are continually being required to do more with less as state tax complexity worsens. 

Mission:

1. Collaborate with tax policy organizations on policy statements, amicus briefs, studies, articles, reports, comments and testimony (positively influence state tax policy)
2. Write or review technical material to expand or build out tax research publisher libraries (build better tools)
3. Act as a 'stop-gap' independent contractor to Fortune 500 company tax departments that lack resources to accomplish a variety of projects (provide companies with a partner-level experienced resource who has low overhead and isn't bound by audit independence issues or bureaucracy, so companies can achieve desired results)

This is my mission. Is the mission impossible?

What is your mission?

I challenge you to find it. Pursue it. Engage.

market-based sourcing to be analyzed by MTC special subcommittee

The Multistate Tax Commission (MTC) has formed a Special Subcommittee to review market-based sourcing regulations in the context of separate-entity filing and related party transactions. The first meeting will be held Friday, August 28, 2015 at 3:30 pm EST via teleconference. The meetings will be held every Friday at 3:30 pm until further notice.

According to media reports, the special subcommittee was formed to examine concerns about the possible impact on taxpayers filing separate-entity income tax returns. The MTC is concerned that taxpayers may manipulate market-based sourcing methodology through the use of related party transactions, distorting the result. 

The taxpayer and tax professional community must accept that market-based sourcing is here to stay and will eventually be adopted by all states. Therefore, we must be proactive in how the rules are crafted and implemented. The majority of the economy in the U.S. is derived of service providing companies, or companies that provide services along with selling tangible goods. Technology allows companies to provide several types of services across the U.S. without physically delivering the service into each state (i.e., services are performed in one state, while customers are in multiple states). Consequently, market-based sourcing in-conjunction with "factor-presence" nexus or "economic" nexus (a subject for another day) will create greater tax liability and/or compliance burdens for companies.

Be prepared. Be involved.

For more information, check out my previous posts on market-based sourcing.

Bloomberg BNA releases its 2015 state tax survey

Taxpayers are always trying to obtain certainty regarding their tax issues. Unfortunately, it is not possible to achieve 100% certainty when the facts are complex and the state's rules are grey. Consequently, the taxpayer and adviser generally review all binding authority (statutes, regulations, cases, etc.) and unbinding authority (informal guidance, etc.) to develop support for a tax position. This is why we have the lovely 'levels of assurance' such as the 'realistic possibility of success' (33%), 'substantial authority' (40%), or 'more likely than not' (> 50%).

Depending on the situation, taxpayers are commonly balancing risk and the amount of dollars to spend to chase down this elusive certainty.  Accordingly, taxpayers are trying to attain the most cost-effective and practical solution that reduces risk to an acceptable level. Thus, other factors (business, legal, financial) may determine how much effort is taken to support a specific tax position, resulting in some taxpayers choosing to default to paying more tax to avoid risk.

Bloomberg BNA released its 2015 Survey of State Tax Departments this week, which according to BBNA, clarifies each state’s position on the gray areas of corporate income tax and sales and use tax administration, with an emphasis on nexus policies. 

BBNA has added new sections addressing income and sales tax nexus for registration with state agencies, as well as sales tax nexus for drop shipment transactions. The survey also has a new focus on each state’s rules for sourcing sales factor receipts for income tax purposes. 

As I have stated in previous posts, surveys like this provide great insight into how a state will treat certain issues and fact patterns. The problem is that many answers provided by the state may not be based on actual statutes and regulations or court rulings. The answers may be based on internal policy or simply be an interpretation of a grey area (right or wrong). Regardless of the basis, the states' answers help a company formulate a conclusion.

You can download the report for FREE, just go here.

draft sales and use tax nexus model act open for public comment

The hearing is to be held on September 15, 2015. Written comments are due no later than September 11, 2015. Persons making oral presentations are requested to file written comments as well. 

The following is an excerpt of the Summary of the Important Provisions of the Model as published by the Multistate Tax Commission (MTC) Uniformity Committee:

While the model is called the “nexus” model, states generally do not define nexus as part of their sales and use tax statutes. Rather, almost all states impose tax payment or collection obligations on defined persons who engage in defined activities in the state (e.g., “retailers” or “vendors”, and “doing business” or “engaging in business”). Many statutes do this within a “general definitions” section for the particular act or article, while others do so in the imposition statute itself.

Most states explicitly or implicitly extend their statutory use tax collection obligations to the limits of what the Constitution allows. The draft model follows this general approach of defining the operative terms for imposing a collection duty. The draft consists of two main provisions – a definition and a presumption – in Sections (a) and (b) respectively.

Section (a) defines the person on whom a tax payment or collection burden is imposed (here, “retailer engaged in business”) as a retailer, whether or not authorized to do business in this state, that has a sufficient connection with this state under the United States Constitution to be subject to sales and use tax collection duties . . . .

Section (a) also contains a list of activities that would bring a person within the definition of “retailer engaged in business.”

Section (b) is the “click-through” nexus provision modeled on what other states have enacted, generally—which takes the form of a rebuttable presumption. This provision also contains a minimum threshold.

Other provisions of the bill define certain terms and also provide for the possibility that federal legislation might someday grant states authority over other out-of-state persons (i.e. remote sellers).

The workgroup discussed but decided not to include any explicit de minimis rule for the activities listed in Section (a) or any “trailing” nexus provision.

For more info, please see the MTC's Notice of Public Hearing and site.

retroactively changing state tax legislation creates uncertainty

COST or (Council on State Taxation) recently urged the U.S. Supreme Court to hear a court case involving the state's ability to retroactively change legislation enacted eight years earlier (Hambleton v. State of Washington). The case involves Washington's estate tax, but has implications for other tax types (income tax and sales tax).

what are the limits?

COST's amicus brief discusses the history of the courts allowing retroactive changes to legislation and the limits imposed. According to COST, some courts have found as little as 16 months excessive and other courts have found more than ten years permissible. COST mentions that the Court has held that retroactive changes are allowed to carry out the intent of legislation enacted slightly more than one year before. The broad range and lack of uniformity among the states not only creates compliance concerns for taxpayers, but also carries the potential for violating the Due Process Clause of the U.S. Constitution.

uncertainty creates burden

Taxpayers generally take positions based on their own risk tolerance. Taxpayers who have a high risk tolerance may be willing to take positions based on their interpretation that a grey area of tax law is not constitutional or vague. These types of taxpayers run the risk of a state not only assessing additional tax, interest and penalties, but also are exposed to a state's ability to retroactively change its law in its favor.

Taxpayers with a lower risk tolerance may choose to take a conservative position and follow the grey are of tax law despite how obvious it may be that the law is unconstitutional or vague. These types of taxpayers may choose to file amended returns claiming a refund of the tax paid. In this case, the taxpayer is protected from being assessed additional taxes, interest and penalties. However, the taxpayer is still exposed to a state's ability to retroactively change its law in its favor resulting in the disallowance of the taxpayer's refund claim. 

In both situations, taxpayers may incur compliance costs, consulting fees, attorney fees, court costs, etc. before the issue is resolved. Additionally, while the issue is being litigated or considered, the uncertainty creates additional exposure for current tax years. 

I agree with COST, and urge the U.S. Supreme Court to consider this case not only for the reasons asserted by COST in their amicus brief, but also because states have an obligation to create a stable and reasonable compliance environment that doesn't keep taxpayers guessing.

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.