do you trust your sensors?

Sensors. They are everywhere.

A sensor is a device, module, machine, or subsystem that detects events or changes in its environment and sends the information to other electronics.

A few months ago, I bought a new car. It has sensors for everything. They would beep at me constantly about the fact that there was a car behind me, in front of me, next to me or that I was driving on the line or barely outside the lines of the road so it wanted to take control of the steering wheel. I'm sorry, but I want to drive my car. I turned most of them off.

Also, sometimes the sensor would think I was crossing a line and needed to be corrected, when in reality, I was entering an exit ramp on the interstate or I was crossing a line to avoid an object in the road. Human judgment v. electronic sensor - who will win?

It seems to me that people have forgotten that sensors are simply electronic devices and don't we all know what can happen to electronic devices? They can fail. They can make wrong decisions. They can need rebooted to work properly. Yet, we seem open to trusting electronic devices more and more. Worse yet, we are trusting electronic devices to speak to each other and then make correct decisions.

What does this have to do with state taxes? As always, I'm glad you asked.

Tax laws or interpretation and application of tax laws are constantly changing. Thus, every company needs a sensor or some type of system to warn them about the change or the business could inadvertently increase their tax liability or miss out on a refund opportunity.

The question is - what should that sensor or warning system be? Can you trust it? Is it providing you with knowledge and judgment based on experience or simply spreading fear when no real risk exists?

When tax laws change, it seems like every firm is providing guidance. Some do it in an informative manner. Some do it in a "act now or you will miss out" manner. Or they act like the new proposed (potential) change is so dramatic even when the change may never get enacted just to get your attention.

Now with the advent of AI, even if you just use the Google AI search feature, you can get a lot of information about tax law changes (if you know the right question to ask / prompt). However, those "answers" may or may not be correct. In our world of faster and faster, will we really care if those "answers" are correct? Or will we just run with it and move on thinking the "answer" has got to be accurate enough?

So now that we have the One Big Beautiful Bill Act (OBBBA), and state income tax changes are imminent (or at least expected to occur at some point), don't panic. Don't have FOMO. Be informed. Use your tools and sensors correctly. Trust. Verify. Act with purpose. Some changes will apply to you. Some won't.

do you want "moral support" or "technical support"?

Tax advice.

State tax advice.

Questions. Answers. Direction. Clarity.

Each client has unique facts that when faced with complicated state tax law can cause misalignment between the desired conclusion and reality. Thus, in those moments of grey or uncertainty, when the client pushes back against the "technically correct" answer - what will be the guidance? What conclusion will you provide? How will you communicate that conclusion?

This is a common occurence. One in which caused me to say to a colleague the other day - "sometimes it feels like clients don't want technical support. They just want moral support."

"Moral support" meaning, clients just want you to find some legal authority that will allow them to do or reach their desired outcome. They don't really just want to know the "technically correct answer."

The "technically correct" answer is cut and dry. Leaves no wiggle room (usually). It's a stronger conclusion. Less risk of challenge or an audit assessment.

The "moral support" answer is not so cut and dry. It is like trying to thread the needle. Trying to stand on legal authority to go in a different direction - to reach the desired result. This path may be more risky, but it may also be supportable by legal authority. Meaning, this position is not unsupportable, it just has a lower level of support than a "technical correct" answer. For example, it may have a "realistic possible of success" (33% probability of being sustained) or only have a "reasonable basis" (20% to 30% probability of being sustained).

The next higher level of assurance would be "substantial authority." Internal Revenue Code Regs. Sec. 1.6662-4(d)(3)(i) explains when there is substantial authority in support of a tax position. The regulation provides in part:

There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. All authorities relevant to the tax treatment of an item, including the authorities contrary to the treatment, are taken into account in determining whether substantial authority exists. The weight of authorities is determined in light of the pertinent facts and circumstances in the manner prescribed by paragraph (d)(3)(ii) of this section. There may be substantial authority for more than one position with respect to the same item. Because the substantial authority standard is an objective standard, the taxpayer's belief that there is substantial authority for the tax treatment of an item is not relevant in determining whether there is substantial authority for that treatment.

Then we get to the desired level of "more likely than not" (generally viewed as more than 50% probability of position being sustained).

More likely than not means evidence reasonably tending to support the conclusion. Evidence that is competent, relevant, and material, and which to a rational and impartial mind naturally leads, or involuntarily leads to conclusion for which there is valid, just and reasonable substantiation.

"Should" and "will" levels of assurance would be lovely, but again, that is in the more "cut and dry" fact patterns.

“Should” opinions generally provide a 70% to 75% probability of position being sustained. This opinion standard implies a reasonably high level of confidence that the position will be sustained and is significantly higher than the “more likely than not” standard but allows for a not insignificant risk of being wrong.

"Will" opinions generally provide a 90-95% probability of position being sustained.This opinion provides the highest level of comfort. But note that “a legal opinion is not an insurance policy.” A judge could still decide adversely on the matter, so the opinion should not be considered a guarantee of absolute certainty.

Consequently, when a client (or colleague) asks you a question, keep in mind that it is always a technical question. You are always providing answers which contain a level of assurance whether you specifically clarify what level of assurance you are providing. Make sure your client understands the "level" and the risk.

Most clients and colleagues are likely looking for "should" and "will" guidance at the start of the conversation, but if that answer is not giving them the desired outcome, they may start to move down the "assurance level ladder" to "substantial authority" or "realistic possibility of success."

The lower you get on the "ladder," the closer you are getting to providing "moral support" versus "technical support."

This is one time when you want to be as high up on the ladder as possible (even if you are afraid of heights).

My advice - don't get to the bottom of the ladder, and please don't fall off the ladder.

that was easy

Everyone is looking for the easy button. One click. The answer appears. AI is helping that perception or expectation increase.

Many projects I do around the house. Others expect it to be easy. It never is. At the end of the project I often say, "that was easy."

In the state tax world, clients may come to you with bad facts or facts that when you apply the law produces an unfavorable or unfair result. They already got a bad answer from the state. However, they want to know if there is another way. Another argument. Another position. A sliver of hope or option that you could possibly squeeze through to get to the other side and receive a favorable result.

That favorable result could possibly be obtained if you find someone within the department of revenue, the legal division, appeals, or taxpayer advocate office that has discretion and authority to reach a different conclusion when clearly, the facts and the law when technically applied, produce an unfavorable result.

When situations like the above arise, some clients understand what they are asking you to do and are willing to pay for you to "try." Other clients may not understand what they are asking and expect there to be an "easy button" or just call the state and see what happens. That is not how a "more favorable" result will be achieved.

Now, in some cases, I do have contacts within certain state Departments of Revenue (taxation) that do offer great assistance in reaching positive resolutions in a short timeframe. However, those cases don't generally include the combination of "bad facts" and law that contradicts. Often, those cases include good facts and good law, but the taxpayer simply misapplied the law to their facts.

If you are following.

"Good facts" are facts that if the taxpayer followed the law, they would have received a reasonable result.

"Bad facts" are facts that if the taxpayer follows the law, they will not get a positive or reasonable result. Thus, we plead for mercy or discretion by a state for a fair and reasonable exception to the law as 'it is written' based on the unfair result despite the taxpayer's bad facts or misinformed guidance or reliance, etc.

QUICK QUESTION

We have all approached someone at different times and said, "we have a quick question," when we don't really know the complexity of the issue or question we are asking. Thus, we hope and expect to get an "easy" or quick response.

Other times, we ask someone a question that we know is complex and has a narrow margin of victory, yet we still expect to get an "easy" or quick response. Hmmmm.........something is wrong here.

Substance v. Form (reasonable v. punitive)

The challenge.

We know what we did.

We know how any reasonable person would perceive what we did.

We know what we meant to do.

It should be understood that this is the conclusion and answer.

However, the technicality. The application of the law. A deadline. A procedure. A form. A description. An inadvertant explanation on a website or in sales and marketing material.

Despite the substance of a transaction, the form of the transaction may (or will likely) determine the outcome or conclusion reached by an auditor, adiministrative appeals or a court.

In the state and local tax world, we deal with these types of connundrums all the time. Either the facts aren't great or the law isn't great (when applied to the facts).

If you can't change the facts and you can't change the law, then it is up to building arguments and support for the conclusion you seek.

Big corporations and consulting firms may approach these types of issues one way.

Middle market and smaller businesses (and consulting firms) are often forced to approach these situations a different way. Lacking the dollars and/or the resources, companies are often forced to fight adversity with a skeleton crew and dig deep as quick as possible and as far as possible without breaking the bank or sometimes, pushing a legitimate position.

When a reasonable conclusion can't be reached and a conclusion seems overly punitive because "we have to follow the technicality" of the rules, that stings.

That's when we lean on appeals, a taxpayer advocate office, or some other discretionary tool (without going to court). This sometimes works and sometimes it doesn't.

I wish all businesses (who are trying to follow the rules) could get reasonable results, but that isn't always the case.

Sometimes the late filing of a document (by just a couple of days) can be costly (even when it shouldn't be).

Exceptions to rules should be made, sometimes.

It's like going to a store or restaurant or other place of business and asking for assistance when you know that you "technically" didn't follow the rules or maybe don't deserve it.

The employee at the desk can either be a stickler for the rules, or use their discretion to use "common sense" (or go the extra mile) and help the customer (providing excellent customer service) achieve a fair and reasonable result.

is the law changing or simply the interpretation of the law?

Interpretation of the law determines whether there is any retroactive changes to the law being made.

If retroactively changing the law, it may be unconstitutional.

If the interpretation is simply incorrect, then no change in the law is being suggested, the interpretation is only being corrected (changed).

However, then the interpretation could be considered to being changed retroactively.

Does it matter if the law is changed or the interpretation is changed?

The answer likely depends on who is making the change.

The issues:

• What is the law?

• What is the correct interpretation of the law?

• What is the basis of that interpretation?

• Will the courts agree?

State tax laws are challenged because either the state has made an assessment and believes additional tax is due based on the state's interpretation of the law.

But what if the law is vague or ambiguous, open to interpretation?

What if the company has a different interpretation of the law?

Who wins?

Deference. What is it?

Judicial deference is the idea that under some circumstances, a court should defer to a state agency's interpretation of a statute or regulation rather than the court imposing its own interpretation.

Recently the U.S. Supreme court ruled in Loper Bright Enterprises v. Raimondo which overturned the Chevron doctrine. The Chevron doctrine gave deference to the state agency's interpretation.

From a state perspective, several states did not follow the Chevron doctrine. Some states even have anti-deference statutes.

Georgia codified antideference in 2021 specifically for tax matters providing that all quesitons of law to be decided by a court or the Georgia Tax Tribunal are to be made "without any deference to any determination or interpretation, writen or unwritten, that may have been made on the matter."

Tennessee amended its statutes effective April 2022 providing that when interpreting a state statute or rule, a court should not give deference to a state agency's interpretation and should interpret the statute "de novo."

CONCLUSION

Interpretation matters.

Public knowledge of the state's interpretation is necessary if we are to have any level of certainty and compliance.

Public knowledge of the state's interpretation allows companies to make determinations as to whether they agree with that interpretation and either accept it or challenge it.

Retroactively changing the law or the interpretation of the law can have adverse effects on not only the taxpayer involved, but the taxpayer community at large.

Ambiguity in a law creates confusion, different interpretations, risk, opportunity and ultimately, most likely, litigation.

Stay sharp. Be safe.

Don't let state taxes play the villain in your business story

Our lives are like a book. A story. A journey. Each day is a new page, a new paragraph, a new sentence, a new word. There are chapters to our lives. There is a preface, a foreword, an introduction. There are many plot lines, unexpected twists and turns. Sometimes we are the hero, sometimes we are the villian. Sometimes we know exactly what to write and other times, we just stare at the blank page. Too many options, not enough options. Do we rewrite the story? Do we turn the page? Is it time to start a new chapter or do we keep going down the same road. When good times happen, we want it to last forever. When bad things happen, we can't wait to turn the page or move into the next chapter. Sometimes we cause change and sometimes change is forced upon us. We grow, we age, we hopefully learn. We adapt, we improvise and hopefully overcome. We learn what we like, what we don't like. Our personal and professional lives intertwined. Working to focus, to achieve, to realize goals and dreams while balancing time with families and friends. Obsession leads to great things, when obsession is focused on the right things without sacrificing the most important things (which aren't things).

I'm not quite sure why I started with that intro, but hopefully it means something to you.

As business owners, business and/or tax professionals, our work takes up a lot of our time, our lives. Thus, business is personal and should be taken seriously. It is how we support ourselves and our families. It is a big part of our story. They often say that what you do is not who you are. That what you do doesn't define you. I don't think that's necessarily true. It is often difficult to separate what you do from who you are. We all take on the identity of what we do or atleast for some part of the day. Or maybe we take on an alter ego. Regardless, we have our bios that tell people some of who we are, but not the whole picture.

Right about now, you are probably asking, "how does any of this relate to state taxes?" Well, as I have done in many of my blog posts over the last decade, I will attempt to bring this back to state taxes.

Companies have a story. They have a lifecycle. They start out with an idea, a vision, a dream, a goal. Then they get capital and make investments. They pick a location, buy or build a facility, hire people, start selling, start shipping, in one state, in multiple states. Then they grow - hire more, build more, sell more. Maybe they create new legal entities, new ownership structures. Maybe they start selling different products and services. Maybe they build new facilities and hire more employees in multiple states. Maybe the entities sell to each other. Maybe the entities start selling to customers in foreign countries. Maybe they create foreign entities that sell into the U.S. Maybe they acquire another entity or they are acquired by another entity. Maybe the owners simply sell their ownership interest and move on to begin another venture.

All of the above changes, stages, activities create different state and local tax issues, risks and opportunities. Some companies plan ahead before making a decision or taking action, but often the action happens before the state tax impact is taken into consideration. This results in potential tax exposure or liabilities that arise and can grow if they are not discovered or investigated. Sometimes planning ahead could have eliminated any exposure and perhaps even created tax savings or refund opportunites. Some state tax issues related to the above are:

• knowing when to file returns in a state (i.e., having a taxable presence or nexus)

• knowing when to collect sales tax on the company's sales (sales taxability study)

• identifying tax credits and incentives related to building/investing in a specific state, county or city

• identifying any sales tax exemptions related to the company's purchases

• knowing how each type of legal entity is taxed from a state income tax perspective

• knowing the state tax impact of integrating new companies, merging companies or selling interests in a partnership or S corporation

Each stage of a company's business tells a story. Is filled with various facts, plots and challenges. State taxes play a key role and impact every chapter, every page, and perhaps every sentence. State taxes can be the hero or the villain.

Being proactive is always better than being reactive or playing the "wait and see game."