Delaware Enacts Single-Sales Factor Apportionment

The Governor of Delaware signed "The Delaware Competes Act" (HB 235) into law on January 27, 2016 (press release). 

The summary of the Act states that "the principal change in the Act is to remove disincentives for companies to create Delaware jobs and invest in Delaware property that currently exists in how income is apportioned to Delaware for purposes of the corporate income tax." The Act attempts to accomplish this goal by changing Delaware's apportionment formula from a three-factor formula (property, payroll, sales) to a single-sales factor formula.

Phase-In for Most

The change to the single-sales factor apportionment will be phased-in by first doubling the weight on the sales factor in tax year 2017, and then gradually relying exclusively on the sales factor beginning in 2020 (i.e., triple-weighted sales factor in 2018, six-times-weighted sales factor in 2019, single-sales factor in 2020). Corporations organized under the laws of foreign countries that do business in the United States may not dilute their property and payroll factors by including property and payroll that is located outside of the United States in the denominator of these fractions.

Starting in 2017

Despite the phase-in for most corporations, starting in 2017, telecommunications corporations and corporations with their worldwide headquarters located in Delaware that make capital investment in those facilities may use either single sales factors or equally weighted, three-factor apportionment.

Other Changes

The Act also simplifies business tax compliance for smaller businesses by reducing tax payment and filing burdens. For example, the Act doubles the thresholds at which businesses have to make monthly gross receipts tax and withholding filings, enabling hundreds of Delaware businesses to file quarterly instead. The Act also provides that filing thresholds and tax calculations will be indexed for inflation, which locks-in the simplification and efficiency gains for future taxpayers.

The Act attempts to simplify compliance for smaller business. Currently, all corporations must pay 50% of their estimated tax liability for the first quarter of their taxable year, followed by payments of 20%, 20% and 10% in each of their second through fourth quarters. The Act allows smaller businesses with receipts of less than $20 million to make use of a simpler, evenly-weighted (25% per quarter) schedule. Further, the Act updates the calculation for the penalty for underpayment of estimated tax, which has not changed in more than 30 years.

State Tax Burden v. Compliance Costs: 2009 v. 2016

PricewaterhouseCoopers (PwC) conducted a survey of U.S. taxes paid by Business Roundtable member companies entitled, the "Total Tax Contribution Report." It was released back in 2009, and I found a few items very interesting:

1) Large companies are major contributors to U.S. tax revenues:

The 40 companies participating in the survey remitted $94 billion of taxes, of which $71 billion were attributable to federal taxes.

2) On average, survey participants needed a full-time team of 44 staff to comply with federal, state and local tax payment obligations.

U.S. tax compliance staffing is more than three times that in any other country surveyed.

3) The decentralized U.S. tax system is more complex than in any other country surveyed:

In addition to 30 federal taxes, companies are potentially liable for over 1,100 taxes imposed by the 50 states and the District of Columbia, as well as local taxes too numerous to count due to the more than 89,000 local governmental entities in the United States.

Although state and local taxes account for only 24.5% of U.S. taxes borne and collected, companies spend 41.7% of their compliance budget on these taxes. Per dollar of tax remitted, compliance costs for state and local taxes are more than double that for federal taxes.

I obviously found this last point very interesting and to be true in my own experience. It has always seemed that state and local tax has been the "ugly step-child" to its federal tax counterparts in corporate tax departments. Yet, it is extremely complex and burdensome to keep a company in compliance with so many different jurisdictions and very little, if any, uniformity among state and local tax laws.

Do you think these same points apply today in 2016?

Tax Foundation "Climate Index" Criticized by CBPP

Erica Williams, Assistant Director of State Fiscal Research at the Center on Budget and Policy Priorities (CBPP), wrote an article last week highlighting a new website,"Grading the States: Business Climate Ranking and the Real Path to Prosperity." According to Erica's article, the website seeks to "debunk the state rankings from several organizations purporting to measure each state's 'business climate' and prospects for economic growth." In other words, the website does not believe the rankings represent a state's true business climate.

One of the several business tax climate indexes the website criticizes is the Tax Foundation's well-known index. I respect the Tax Foundation and have always viewed their research as thorough and well done. I have also always viewed such indexes and reports as helpful insights into a state's business and tax environment. However, regardless of the index or the organization releasing such a report, I always take the report with a 'grain of salt.' Any report can display facts and statistics, but just like statistics in general, I believe any report can be slanted to tell a specific story. I also believe any report or statistics cannot tell the whole story. For example, a state's tax environment and incentives will always play a role in a corporation's location decision. However, a state's tax environment is never the only factor. Also, a corporation's location or relocation decision is a 'customized' option. Meaning, every corporation does not receive the same treatment because states make custom incentive packages for different corporations. Thus, just because a state's climate index says one thing, each corporation may feel a different tax impact based on the incentives they receive or don't receive.

In summary, I do not criticize or endorse the website or the Tax Foundation's index. I believe the conversation is healthy and puts a spotlight on the importance of a state's business and tax climate for everyone. 

Just like with most things, we can all usually agree on the problems we face, we just can't seem to agree on the solutions.

State Tax Simplicity and Uniformity

I wrote the following in a blog post back in 2009. As I was re-reading it this morning, it dawned on me that several of the items I mentioned still apply in 2016. The more things change, the more they stay the same.

Side Note: PwC just released a nice document entitled, "2015 Year-End State Tax Review and A look Ahead to 2016 and Beyond."

Simplicity and Uniformity

The terms "simplicity" and "uniformity" are not usually discussed in the same breath as state and local tax. With all of the taxing jurisdictions in the United States (when you include all of the states, cities, and counties, etc.), there is very little uniformity, and nothing seems simple.

With that said, I think the states are starting to act in a uniform manner which, in some sense, is creating simplicity. What do I mean?

Well, during the first four months of this year it appears that most, if not all, states are experiencing the following:

1. Budget and financial difficulties of historical proportions

2. All tax revenues are down, including: income tax, sales tax, property tax, etc.

3. Proposing or passing legislation that closes loopholes, raises taxes or creates new taxes, and attempts to encourage in-state economic development.

4. Proposing or passing legislation enacting new minimum fees or taxes.

5. Proposing or enacting legislation to adopt combined reporting, single-sales factor apportionment, market-based sourcing of revenue from service activities instead of the past cost-of-performance rules, adopting economic nexus and "amazon" type nexus, etc.

6. Proposing or enacting "amnesty" programs to encourage delinquent taxpayers to step-forward and pay back-taxes with the benefit of penalties waived (and interest decreased, in some cases).

7. Adopting language that treats all income as "business income," as much as the U.S. Constitution allows.

8. Adopting similar language in regards to what is considered to be a "unitary group."

9. Adopting or proposing legislation that accelerates the payment of tax revenue to the taxing jurisdiction by either increasing the % paid with each quarterly estimated payment, and/or requiring non-resident withholding to be paid quarterly instead of annually.

10. Increasing interest rates and penalties for late payment of taxes.

I am sure there is more, but these are my top ten (for the moment).

CONCLUSION

In summary, the world of state and local tax has always been a world that changes daily or continually, due to court cases and legislative developments.

In 2009, the state and local tax world feels like it is changing at a whirl-wind pace with the only simplicity and uniformity being created is that soon, everything will be taxable, and penalties and interest will be a revenue stream of their own (if they weren't already).

Is Your Auditor M.I.A.?

Where is the auditor? I haven't heard from him or her in a while.

Should I call them? Or should I just wait it out, and see if they contact me again?

Have you ever asked yourself those questions?

Some taxpayers have an audit begin where the auditors come to their place of business, ask questions, review records, and then leave. When the auditors leave, they say they will let the taxpayer know if additional information is needed or if they have any questions.

Then, months go by without any contact from the auditor.

But wait, three weeks before the statute of limitations is about to expire on one of the tax years within the audit period, the state contacts the taxpayer and asks the taxpayer to sign a waiver of the statute of limitations, usually a year extension (you should attempt to negotiate a smaller extension; some states have a minimum of 6 months).

After the extension is signed, the taxpayer may receive another information request or list of questions from the auditor, with a short timeline or due date for the taxpayer to respond. After the taxpayer responds, another 6 months go by without any contact from the auditor.

Then, once again, one month before the statute of limitations is about to expire, the taxpayer receives a preliminary audit assessment. This time the state won't extend the statute, and the taxpayer has less than a month to dispute the audit assessment's findings before a final assessment is received.

QUESTIONS
If your auditor goes M.I.A. in the middle of an audit, what should you do?

Should you just play the "wait and see game"? Or should you contact the auditor sooner to find out what the status is?

If you contact the auditor sooner, you may or may not receive a response earlier? It really could go either way.

The same is true if you don't contact the auditor. You could get "lucky" and the statute of limitations could expire without receiving an assessment. On the other hand, you could receive an audit assessment with a short amount of time to respond.

What do you think? Have you experienced this?

2016 State Tax Amnesty Programs

The Council on State Taxation (COST) has released a chart reflecting state tax amnesty programs scheduled to occur in 2016. Here's the link.

If you are curious as to what states had amnesty programs in 2015, go here. 

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.

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?