Helping Tax Departments Become The HERO

I recently had lunch with a leader of a tax department, and as we were talking, it struck me as to the many challenges tax departments face. 

Challenges may include:

1. Finding the right people (level of experience, personality, culture fit)
2. Knowing how many people the tax department needs to provide value
3. Justifying and getting approval for how many people the tax department needs
4. Determining how to structure the tax department (by tax type, by company, by some other mix)
5. Getting buy-in from other company departments to obtain information at the right time, and complete special projects to provide value (i.e., implementing smart ideas that reduce taxes without creating a high level of controversy risk, and positively impacting other business functions (i.e., finding ideas that align with business objectives))
6. Outlining and determining the best process for compliance, audits, provision and planning functions
7. Implementing and utilizing the right-fit software and technology solutions
8. Managing external consultants and determining which ideas to use and which ideas to ignore
9. Not getting stuck in the 'analysis paralysis' zone
10. Not 'dying by meeting'
11. Doing more with less

These are just a few of the challenges. I know there are more. Tell me by leaving a comment or send me an e-mail at strahle@leveragesalt.com.

Key Points
The point is, tax departments must keep moving forward. They must feel like they are providing value and are respected within the company. Compliance cannot be the only thing.

Also, people within the tax department will always know more about the company than external consultants. Consequently, regardless of the pre-packed or customized planning ideas - some that may be risky, or some that, as they would say, are 'low-hanging' fruit - the company must follow their own risk compass. 

External consultants should not act like the hero. They should help tax departments become the hero.

Time for State Taxes to Be REWRITTEN

Sometimes we get so caught up in the litigation and proposed legislation that we don't stop to ask whether we should even be going in this direction. Perhaps we are getting the wrong answers because we are asking the wrong questions. It's time for state taxes to be rewritten. For politics to get out of the way. 

I read an article this week, written by Michael J. Bologna and edited by Ryan Tuck for Bloomberg BNA regarding state tax policy (entitled, "Kill Corporate Income Tax, Seek Low Rates"; requires a subscription to BBNA to access). The focus of the article were comments made at the August 10th National Conference of State Legislatures program in Chicago by William Fox, a professor of economics at the University of Tennessee, and Therese J. McGuire, a professor of strategy at the Kellogg School of Management at Northwestern University.

Overall, I agree with their comments about what a fair tax system should look like, and how the current state tax regimes are complex, unfair and inefficient. The current taxing schemes cause compliance burdens for taxpayers, administration burdens for state governments, and inconsistent revenue.

If the ideal tax structure contains low rates, broad bases and simplicity, then why do states keep making their tax systems more complex? 

States continually run into budget problems and resource constraints, yet the tax systems are not adjusted to make it possible for revenue departments to operate efficiently and effectively.

Politics makes it almost impossible for tax structures to change to fit modern economies. For example, when will all services become subject to sales tax by all states? How will states tax digital and remote sales without enacting unconstitutional taxes?

If corporate income taxes only account for approximately 8% of all state taxes collected, then why is so much effort and litigation expended by both taxpayers and governments?

States keep enacting state tax schemes that favor in-state taxpayers such as single sales factor apportionment, market-based souring, unitary combined reporting and digital sales tax laws, when the simple solution is to widen the tax base and lower the rates. This may actually cause more companies to move into a state. It would more than likely decrease the compliance burden and potential for audit controversies.

Will and should more states consider replacing their corporate income tax with a gross receipts tax similar to the Ohio Commercial Activities Tax or the Washington Business and Occupation Tax? 

Like a person that creates his own problems and then spends his life complaining about them, that's what state taxes have become. We can't expect a different result if we keep doing the same thing. It's time to get off the merry-go-round.

What's your favorite State Tax Conference (CPE)?

Here are a few SALT conferences I think are good.

Sales Tax Institute (http://www.salestaxinstitute.com) from my friend, Diane Yetter. The Institute offers live in person 3 day classes – Basics of Sales Tax and Advanced Sales Tax Workshop. These are highly rated and differ from the larger offers as they are much more intimate and provide an excellent learning opportunity. The Institute also offers monthly webinars that are not a sales pitch, but provide in depth educational content. They also have a self study online class with another coming soon.

Georgetown Advanced SALT Institute - https://www.law.georgetown.edu/continuing-legal-education/programs/cle/state-and-local-tax-institute/

Paul Hartman - http://www.hartmansaltforum.org/conference_registration

IPT has several - https://www.ipt.org/

NYU SALT conference - http://sps.nyu.edu/academics/departments/finance-tax-and-law/conferences-events/institute-on-state-and-local-taxation.html

Interstate Tax Corporation - http://www.interstatetaxcorp.com/seminars.htm

University of Milwaukee-Wisconsin SALT certificate program - https://uwm.edu/business/research/centers-institutes/deloitte-center-for-multistate-taxation/

DMA puts on several - https://www.dmainc.com/

COST and TEI have several, but only industry tax professionals are allowed to attend. 

http://www.cost.org/

https://www.tei.org/Pages/default.aspx

I would also look at the Big 4 firm websites (Deloitte, PwC, EY, KPMG), Grant Thornton, RSM, and BDO. They put on seminars and several webinars throughout the year. You can sign up for the e-mail list to be notified of free webinars.

What's your favorite? 

If yours isn't listed above, comment or send me an e-mail at strahle@leveragesalt.com.

What did you learn at the Georgetown Advanced SALT Conference?

If you attended the Georgetown Advanced State and Local Tax Institute this week, please leave a comment or send me an e-mail at strahle@leveragesalt.com to voice what you learned or what your key takeaways were.

Let's work together to fight the struggle for clarity.

State Tax Transfer Pricing - What's Next?

Recent media reports reflect that transfer pricing in the state tax area is gaining more scrutiny and attention due to international tax developments like OECD BEPS, but also the Multistate Tax Commission's Arms-Length Adjustment Service (ALAS) initiative, previous state litigation and growing interest in tax haven legislation. 

A nice presentation delivered by Michael Bryan, Karl Frieden, Jeff Friedman and Marshall Stranburg at the Federation of Tax Administrators Annual Meeting on June 13, 2016, provides good background information on the basics and importance of transfer pricing while describing the current environment.  

The presentation defines transfer pricing as "the pricing of transactions between related entities for goods, intangible assets, services, and loans." Transfer pricing is "designed to prevent tax avoidance among related entities by requiring pricing equivalent to prices available with an uncontrolled party:

• Transactions must (generally) be at arm’s length
• Non-arm’s length intercompany transactions can impact the clear reflection of income in states where income is reported on a separate or partial combination basis
• Tax evasion or avoidance generally not a pre-requisite for making a transfer pricing adjustment"

According to the presentation, the "key intercompany transactions subject to transfer pricing" are: 

• Transfer and licensing of intangible assets
• Providing and charging for common services
• Financing
• Factoring accounts receivables
• Sale of tangible goods that contain a trademark or other intangible
• Purchase and resale of tangible goods

WHAT'S NEXT?

The presentation ends with a question - "What's Next?" This is the most important question.

What should companies do now? How can companies plan? What path will states take to combat this perceived abuse? Will states piggyback off of BEPS? Will states get involved with the MTC initiative? Will states actually enact and enforce tax haven legislation? Or will states simply adopt worldwide combined reporting? Worldwide combined reporting seems to be a simpler approach. However, as I have noted before, making a simple general rule may not be beneficial to a state if applied to taxpayers across the board.

Consequently, it makes more sense for states to have discretionary authority and make case-by-case adjustments so they can better control the impact on revenue. Therefore, I think states will continue to use a combination of all of the tools that will allow them to retain discretionary authority and control. 

In the words of Dave Brunori, "when proving arm’s-length pricing, the side that can spend the most on good lawyers, accountants, and economists almost always wins." We shall see.

For more information, check out my previous post on the MTC ALAS program.

Should the Federal Government Pre-empt A State's Taxing Power?

I recently read an article by Shirley Sicilian from KPMG where she interviewed Greg Matson, the Executive Director of the Multistate Tax Commission. Good article. Recommended reading.

In the article, Ms. Sicilian asks Mr. Matson what he thinks will 'rock the tax world' in the next few years? Mr. Matson's response included the overturning of Quill, the ripple effect of BEPS on states, and states challenging congressional authority to pre-empt their taxing power.

With all of the court case challenges to Quill and the states trying to impose sales tax collection or reporting requirements on remote sellers, and the proposed federal legislation to reinforce Quill, I have been thinking about the battle between state sovereignty and federalism.

State sovereignty is the concept that states are in complete and exclusive control of all the people and property within their territory. State sovereignty also includes the idea that all states are equal as states.

Sovereignty is the power of a state to do everything necessary to govern itself, such as making, executing, and applying laws; imposing and collecting taxes; making war and peace; and forming treaties or engaging in commerce with foreign nations.

The individual states of the United States do not possess the powers of external sovereignty, such as the right to deport undesirable persons, but each does have certain attributes of internal sovereignty, such as the power to regulate the acquisition and transfer of property within its borders. The sovereignty of a state is determined with reference to the U.S. Constitution, which is the supreme law of the land.

I believe in state sovereignty and as much as I like uniformity and less complexity, I support a state's rights to make their own laws. However, when states overreach and attempt to enact unconstitutional taxes, that is when the federal government or the U.S. Supreme Court has to step in. 

When do you think the Federal government should step in?

Note: For more on federalism and state sovereignty, check out Federalism, State Sovereignty, and the Constitution: Basis and Limits of Congressional Power by Kenneth R. Thomas, Legislative Attorney.