are you going to the NYU SALT Seminar in December?

Anyone heading to the annual NYU School of Professional Studies Institute on State and Local Taxation  seminar in December? Trying to decide.

Here is the link: http://www.sps.nyu.edu/academics/departments/finance-tax-and-law/conferences-events/institute-on-state-and-local-taxation.html

Let me know if you are going. 

Thanks.

why do states enact bad tax policy?

David Brunori, Deputy Publisher at Tax Analysts, recently wrote an article entitled, "More Than a Surrender When It Comes To Taxing Business." You can see his LinkedIn post with comments here. The article discusses how states let politics, and even taxpayers cause them to enact bad tax policy. 

I am a taxpayer advocate fighting the daily struggle for clarity, but this week I find myself feeling sympathetic to the states and their challenge of collecting revenue (I know, strange right). We operate in a grey and political world with many influences and interpretations. Sometimes taxpayers are right. Sometimes the states are right. The challenge is knowing the difference.

I agree that states (and the federal government) do not make wise fiscal decisions which leads to misuse of funds and the request for more. States have "created their own mess" in regards to tax cuts and other incentives for job creation. My point is, after doing this profession for 20+ years, I think we (as tax professionals) can get used to doing what we do and fighting for taxpayers, and we don't pause to see the perception from the other side. The people we deal with in the DORs are people operating within an extremely challenging bureaucracy (run by politics, bad policies) and face challenges of perhaps bad training, and the lack of resources (people and money). Bottom line, we need to work together to find reasonable and practical solutions. We don't need to talk "at" each other. We need to talk "with" each other.

I am for fair, reasonable and constitutional tax policy. Unfortunately, that isn't what we usually get. We get ambiguity open to interpretation, and law that favors in-state taxpayers.

What do you think causes states to enact bad tax policy?

the unconstitutional tax 'witch hunt'

Based on the recent Wynne case, many corporations, practitioners and states are wondering what other taxes are not 'internally consistent.' The internal consistency test comes from the Complete Auto Transit v. Brady U.S. Supreme Court case. The internal consistency test says that a tax must be structured so that if, hypothetically, each state imposed an identical tax, no multiple taxation would result. 

Questions raised by the U.S. Supreme Court in the majority opinion of the Wynne case along with the dissenting opinions, revolve around determining what is enough to declare a tax unconstitutional. Some say double taxation is not enough, you must have inherent discrimination and double taxation. Others say the tax must be facially discriminatory against interstate commerce. Others simply want to apply a 'common sense' approach. 

Regardless of the approach, the case has increased discussion and awareness of the possibility of other state tax and credit schemes being unconstitutional. Some corporations may choose to proactively review tax and credit schemes to challenge. Some states may voluntarily admit their tax regimes are unconstitutional. Almost feels like a 'witch hunt.' 

As a taxpayer advocate, I agree that states should not have unconstitutional taxes. However, I am concerned that states are under attack and lack the resources to adequately defend themselves.  I want states to be able to obtain the revenue they need in a constitutional fashion, and the basis on which a tax is determined to be unconstitutional is a complex matter. One that generally involves lawyers, the courts and even the U.S. Supreme Court.

As a taxpayer advocate, I fight for taxpayers to obtain clarity to determine what tax positions they should take. That clarity sometimes remains out of reach. Today, I find myself feeling sympathetic to state legislatures and departments of revenue as they struggle to create clarity. We live in a state tax world of 'grey' which leaves everything open to some level of interpretation and scrutiny. Taxpayers feel like they are continually fighting an uphill battle against unfair and unclear rules and regulations. States feel like taxpayers are taking advantage of unclear rules and regulations and lack the resources (people and money) to adequately fight back. Bottom line, we need to work together (states, corporations, tax practitioners) to find solutions that are a 'win-win' for all parties involved. 

are you using ambiguity to your advantage?

If you are following state income tax developments to any degree, then you are aware of the ambiguity in state tax law that is leading to strange outcomes in court cases, new legislation by state legislatures, policies and procedures by departments of revenue, and even positions taken by taxpayers. Recent developments in tax reform, economic nexus, market-based sourcing, Multistate Tax Commission three-factor apportionment election cases, alternative apportionment, combined reporting, transfer pricing, OECD (Organization of Economic Co-Operation and Development) BEPS (Base Erosion and Profit Shifting), and tax haven legislation are creating risks and opportunities for corporate taxpayers.

Ambiguity, in general, creates challenges in the form of complicated laws (changing daily), vague statute of limitations, unreasonable audit positions, and computer generated notices. Ambiguity is allowing states to re-interpret current law so they can obtain different results without actually changing their law. States are also enacting new legislation retroactively to avoid payouts of large tax refunds. 

An example of ambiguity causing controversy is the recent Texas Margin tax case (Hallmark Mktg Co. v. Hegar, Tex., No. 14-1075, 10/9/15). The issue in the case surrounded the Texas regulation that requires “only the net gain” to be included in the apportionment factor (denominator). The state’s position was that the regulation requires both ‘net gain’ and ‘net loss’ to be included in the apportionment factor. Consequently, the state's position is that the regulation is ambiguous. The taxpayer's position is that the regulation only requires net gain. Hence, the taxpayer holds that the regulation is not ambiguous and not open to interpretation. The Texas Court of Appeals held that Texas’ interpretation of regulation was ‘reasonable’ (November 2014). Taxpayers are concerned the ruling “creates uncertainty about whether numerous sections of Texas' franchise tax regulations can be reinterpreted  by the Comptroller under the guise of ambiguity.” The Texas Supreme Court is set to hear oral arguments on December 9, 2015. 

The Texas case is only one example. I could discuss many more and may do so in future blog posts. 

The question we  should be asking is - can current law be interpreted more than one way? The law you are analyzing for your company at this very moment - is it ambiguous or is it clear? Will the state you are dealing with reinterpret the law under audit or litigation? 

Regardless of the answers, ambiguity requires action. Ambiguity requires corporations and taxpayers to be proactive and find solutions and reduce risk. Corporations need tools to determine whether a trend (i.e., court case, ruling, etc.) is a risk or opportunity. Even more than planning, corporations need to be able to determine what position they "should" take. What is reasonable? What is "more likely than not"? Compliance, controversy and provision requirements demand companies to answer these questions. How do you answer these questions? What tools do you use? Who do you talk to? 

We must eliminate ambiguity or use it to our advantage.

STATE OF STATE: COMING TO CHICAGO!

I will be co-presenting a complimentary (free) Bloomberg BNA lunch-n-learn presentation with Diane Tinney in Chicago on November 11, 2015 from 11:30 am to 2:00 pm.  

We will have an interactive discussion about the latest state income tax developments, advances in technology solutions driving change, and how you can make a positive impact on state income tax management in your organization.

If you will be in the Chicago area on November 11th, I would love the opportunity to meet you, and talk about your state income tax experiences as corporate tax executives or accounting/law firm tax professionals. I will be talking about how recent developments continue to create a complex and uncertain environment that makes it difficult to comply, plan, and obtain a fair result. I will also share some recent comments from an auditor that left me dumbfounded and even more determined to fight for fairness.

If you are planning to attend, I would love it if you sent me an e-mail regarding an issue or concern that you would like me to discuss. This would make our meeting even more valuable.

If you are unable to attend, I would still love it if you sent me an e-mail regarding an issue or concern that you have had. If we discuss it during our meeting, I will get back to you with our thoughts and conclusions.

I hope to see you there.

Fight the good-fight.

To register, go here.

state tax 'strategery'

'Strategery.' According to Wikipedia, the word "strategery" was coined for a Saturday Night Live sketch, written by James Downey, airing October 7, 2000, which satirized the performances of George W. Bush and Al Gore, two candidates for President of the United States, during the first presidential debate for election year 2000. Comedian Will Ferrell played Bush and used the word "strategery" (a mock-Bushism playing on the word "strategy"), when asked by a mock debate moderator to summarize "the best argument for his campaign", thus satirizing Bush's reputation for mispronouncing words. The episode was later released as part of a video tape titled Presidential Bash 2000.

After the 2000 presidential election, people inside the Bush White House reportedly began using the term as a joke, and it later grew to become a term of art among them meaning oversight of any activity by Bush's political consultants. Bush's strategists also came to be known within the White House as "The Department of Strategery" or the "Strategery Group.

I am in the middle of preparing for a presentation I will be giving next month in Chicago for Bloomberg BNA. As I was preparing for it, reading through recent developments, it dawned on me - we need new 'strategery' when dealing with state taxes. As taxpayers and tax professionals, we are constantly trying to find the right answer - what position to take, whether something is taxable, etc. We review explanations in tax research software, we read statutes, regulations, court cases. We call colleagues, and if we get really desperate, we call the state. I know, sometimes we call the state first, but we all know that when we call the state, we may not get the right answer. It depends on who we talk to, what department, etc. It can be very frustrating to find an answer that is reliable. 

Please note, I am not talking about tax avoidance or planning to minimize tax. I am simply talking about searching and looking for a compliant answer. We just want to know what position we are supposed to take. That's all. Should it really be that difficult to comply? 

What happens when we don't comply? We get notices. We get audits, and once we are in the middle of an audit, we get unreasonable audit requests for information. We get auditors taking positions that are in direct opposition to the state's statutes and regulations simply because the audit division has a 'policy' or 'procedure' to follow. 

Again, why is this so complicated? Do the states do it intentionally? Or is it simply a lack of resources, training? 

Regardless of the reason, we must find some new 'strategery' to navigate this playing field and reduce uncertainty.

As tax professionals, we can easily get in a rut of simply reading a tax research publisher's explanations or relying on an explanation from a 'big' accounting or law firm. I challenge you to read the cases for yourself. I promise, that if you do, you will find hidden gems of arguments and statements made by the court or the state that will give you clues as to what positions to take. I also challenge you to use other tools to be proactive, such as tax planning software.

Based on the complexity of compliance, we must play this game 'with a chip on our shoulder.' Let's not be passive and simply get tossed around.

Let's be game-changers, not just another player.