How I Learned State Tax Planning is Essential

At the beginning of my career (20+ years ago), I worked in a large Fortune 500 company tax department solely in the state income tax area (compliance, audits, etc.). It was a lean tax department. It was just the state tax manager and myself handling all of the state income taxes for the company. The company had 40+ subsidiaries operating in 40+ states; meaning, we had a large volume of state tax returns and complex calculations. The group had an insurance company, a financial organization and a few transportation companies. Needless to say, I learned a great deal about state income tax rather quickly. 

They didn't teach you state tax in college, so it was all new. I became very interested in analyzing the corporate structure, the filings, and defending the company in audits. During that time is when my interest in state tax grew. I found the lack of uniformity and daily changing of tax laws challenging and surprisingly fun. 

At that time, I noticed the group was paying a large amount of tax in one state, so I analyzed the facts and law, and played around in excel and the compliance software to attempt to find a planning idea that would change the result. After some time, I did. I found an idea. I brought the idea to my manager and we mulled it over. About a week later, our external consulting firm brought us the same idea. That's when it hit me, tax departments (especially lean tax departments) are so busy with compliance and audit defense that they leave the planning to their consulting firm.

The problem with leaving the planning to the consulting firm is that the compliance and audit defense areas is where planning ideas often are identified. A consulting firm is generally bringing you ideas that they are applying to multiple clients, or they are doing a reverse audit and reviewing your returns and audit results. Consequently, the tax department is in a perfect position to identify planning ideas.

The next step involves finding a tool that allows you to quantify the idea efficiently, especially for those lean tax departments.  Helping tax departments and consulting firms analyze data and find solutions, whether it be compliance, provision, planning or audit defense, is what I am about. In the end, I don't care if the consulting firm or the tax department comes up with the idea. We need both tax departments (close to the facts) and consulting firms (close to multiple clients = opportunities to develop numerous solutions based on different fact patterns = ability to provide a fresh and unique perspective to a company's situation) to be engaged in state tax planning. What I do care about is the ability to more efficiently identify and quantify ideas.

All ideas don't have to be huge and sophisticated. Sometimes a little tweak here or there can produce unexpected value.

I will talk more about this subject in the upcoming Bloomberg BNA webinar on January 19, 2017 entitled, Unitary/Combined vs. Separate Reporting. It is the first of 4 monthly webinars exploring state tax planning strategies. I will be co-presenting with Diane Tinney. Here's a link to the webinar. I hope you register and get practical insights.

Be the state tax hero.

Identify and quantify.

New Year, New Legislative Sessions and the MTC

I hope your new year is going well. State tax legislative sessions are beginning and talks of crazy tax hikes (Illinois), and imposing sales taxation collection obligations on remote retailers is commencing (Wyoming). Some may even try to eliminate the corporate income tax (Missouri).

The Multistate Tax Commission continues its Sec. 18 Regulatory Project. According to the MTC, the Section 1 and 17 workgroups have identified a list of issues that may need to be addressed by the Uniformity Committee in light of changes to Article IV (UDITPA) adopted by the Commission in 2014 and 2015. The list includes (but is not limited to) the following:

•  Address the possible distortion that could be caused by the exclusion of functional receipts from the definition of “receipts” for purposes of the receipts factor in certain circumstances.
• Consider exceptions to the definition of “receipts,” which now excludes receipts from securities and hedging, where these receipts might represent “transactional” receipts for certain taxpayers (e.g. brokers) as well as how possible distortion might be avoided (e.g. churning of investments).
• Consider whether receipts from factoring of receivables should ever be included in the receipts factory.
• Address any situations where general population data, used under the draft Section 17 sourcing rules, might result in distortion and what methods might be used to address that distortion.
• Consider whether there needs to be a “de minimis rule” for sourcing of receipts in certain instances so that the taxpayer may use a proxy for sourcing, or possibly throw out those receipts from the factor.
• Address regulations that might be needed to interpret and implement the amendments to Article IV, Section 18 made by the Commission in 2015.
• Consider other special industry rules that might be necessary.

In addition to the technical matters we deal with, I hope your career is moving in the direction you desire. If not, remember, action over intention. Can't get a different result by doing the same thing over and over again.

DON'T BE A SALY - PREPARING FOR 2017

I hope everyone had a great Christmas. Most of you are probably sleeping in today, unless you are working this week. 

I am working this week - as is the life of a freelance consultant and writer. I work all the time, anywhere, anytime around my daily life. For example, over the past week, we have moved in to our newly renovated home and been unpacking all week. In the middle of this chaos, I have been working at night, early morning and sometimes all night (this is after being exhausted from unpacking). I don't say this to brag or get sympathy, simply to relay what it takes to work on your own. You don't work, you don't get paid. However, along with that responsibility comes freedom and the ability to work anywhere and anytime. 

Regardless of whether you are working or taking time off to spend with family this week, I hope you take a breath and appreciate 2016 (the good and the bad), and prepare for 2017 as something to look forward to. 

State taxes are constantly changing which makes this career interesting and challenging. Some of you dread your job and think of it simply as something to do, to get through the day, to pay the bills, so you can live for the weekend. DON'T LIVE THAT WAY. Either make it exciting and challenging or find something else to do. Life is too short. Live while you are alive. Be self-aware. Know what you are good at. What your strengths are. Do that. Don't focus on what you aren't good at or what others want you to do. 

As I have stated in previous posts, my story is not the traditional one, but who wants to be a cookie-cutter, spec-house. Be a custom car, a custom house. Conformity breeds mediocrity. 

Looking to do something amazing in 2017. Looking to do something new in the state tax profession this year. I hope you are too. DON'T BE A SALY (SAME AS LAST YEAR).

COST Releases 14th Annual Study of State and Local Business Taxes

The Council On State Taxation (COST) recently released its fourteenth annual study of state and local business taxes. The report, "Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2015," prepared by Ernst & Young LLP, shows all state and local business taxes paid in each of the 50 states and the District of Columbia. These taxes include business property taxes; sales and excise taxes paid by businesses on their input purchases and capital expenditures; gross receipts taxes; corporate income and franchise taxes; business and corporate license taxes; unemployment insurance taxes; individual income taxes paid by owners of non-corporate (pass-through) businesses; and other state and local taxes that are the statutory liability of business taxpayers.

According to the report, businesses paid more than $707.5 billion in state and local taxes in FY 2015, an increase of 1.9% from FY 2014. State business taxes grew less quickly than local taxes, with state taxes growing 1.0% compared to local tax growth of 2.9%. In FY 2015, business tax revenue accounted for 44.1% of all state and local tax revenue. The business share has been within one percentage point of 45% since FY 2003. 

I always enjoy these reports as they provide additional insight and context into the debate around state tax policy. The difference in the amount of sales taxes paid versus income tax paid always stands out to me: 

• General sales taxes on business inputs and capital investment totaled $150.6 billion, or 21.3% of state and local business taxes. 
• State and local corporate income and business gross receipts tax revenue was $67.3 billion, or 9.5% of all state and local business taxes. 

Will the report encourage changes in state tax policy? 

Will the report encourage taxpayers to change tax planning or operations?

do you have the 'holiday blues' about your state tax career?

As we near the end of 2016, I have a question - are you happy with your state tax job, your career, your profession? If not, what would you change if you could? What big idea have you been sitting on? What do you enjoy most about the state tax profession? What do you hate the most? Why do you feel that way? Why aren't you doing something about it? What can I do to help? 

Many colleagues I have talked to lately, have told me how they would love to have their own practice like me. They just need to be shown that it is possible, and get some help finding their path to success. I was blunt and honest about my path to success (financial, etc.) when I talked with them. I think it helped them feel that the road to success may not be as difficult as they think. I believe many SALT professionals are not happy in their roles - the constant growth pressures and fee escalations firms place on them make it difficult and simply miserable. It makes working on your own seem feasible because you can lower your fees and make more money from a personal standpoint. It's a win/win for clients and you.

Life is too short to not go for it. Stop asking, "what if I fail?" Start asking. "what if I succeed?" 

Comment or e-mail me.

YEAR-END TAX PLANNING: DON'T FORGET THE SALT

I have been swamped the past month with work and finishing our 6-month house renovation, so please forgive me for not posting as often. 2017 will be different. Looking to do great and different things in the world of state taxation next year. We are planning on moving-in this weekend (before Christmas - YES!). If you are considering renovating a house, feel free to contact me. I will give advice and my story. It may be helpful, or not.

In the midst of the chaos, I thought I would send out my annual year-end state tax planning list. Its strange, but predictable, that the list hasn't really changed from year-to-year. 

The following is a brief list of some actions you may want to take RIGHT NOW:

1. Nexus and FIN 48: At this time of year, it is a good time for companies to address their nexus position in advance of their FIN 48 analysis. Operations may also be able to be restructured. If your company or client utilizes telecommuting employees or independent contractors and hasn’t addressed their nexus position in a while, this may be a good time. Also, more states have adopted economic nexus standards and “bright line” nexus standards that may come into play.
2. Sales and Use Tax: It is also a good time to conduct a reverse sales tax audit to identify sales and use tax refund opportunities and potential exposure. If your client has purchased any software, SaaS or cloud computing recently, they may want to confirm there is no sales or use tax exposure. States are still playing 'catch-up' with cloud computing, but several states have issued rulings and guidance over the last year.
3. Income Tax: For C corporations, a reverse income tax audit could identify state income/franchise and gross receipts tax refund opportunities and potential exposure. Combined reporting and apportionment issues or opportunities may exist. Alternative apportionment and transfer pricing have become big (or bigger) issues in 2016.
4. Income Tax: For flow-through entities, a reverse income tax audit may be helpful on major states such as Texas, Michigan, Washington, Pennsylvania, etc.
5. Credits and Incentives: If your company or clients are entering into new states, hiring new employees, building new facilities, retaining employees, "going green," involved with renewable energy, etc. this is a good time to identify and capture credit and incentive opportunities.
6. Transaction Due Diligence: If your company or clients are entering into any acquisitions of other companies or assets, state and local tax issues should be reviewed to determine exposure, successor liability, and nexus impact.
7. Residency Issues: For individual tax clients that have changed their residency to another state or are considering such a change, guidance should be provided in regards to what records they need to maintain, etc.to support their residency or domicile.
8. Employee Misclassification: If your company or client utilizes a high volume of independent contractors, contracts should be reviewed to mitigate exposure of those independent contractors being reclassified as employees.

What do you think? What is a high priority for you? Comment or send me an e-mail.