If alternative apportionment is wide open and anything goes, why have statutes?
Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?
Is single-sales factor apportionment 'fair apportionment'? It moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.
Are throwback and throwout rules unconstitutional because they look beyond the borders of the state?
Should states be able to enact retroactive legislation to protect the state budget from financial loss?
Should retroactive legislation be limited to a state's statute of limitations?
Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?
My recent posts have contained some of my notes and questions I recorded from attending the Paul J. Hartman State and Local Tax Forum last week. This is my last post which lists 20 takeaways or 'food for thought.'
- The Organisation for Economic Co-operation and Development (OECD) does not identify tax havens, so why are the states?
- Discretionary Authority is no warning. It doesn't allow taxpayers to know what a state will do (i.e., using alternative apportionment or combined reporting to force a taxpayer to deviate from the standard apportionment formula; or modifying a costs-of-performance statute to get a market-based sourcing result).
- International taxation is starting to use state tax concepts such as combined reporting and apportionment.
- "Are 'bright-line' tests knee-jerk reactions?" - quote from one of the speakers
- "Tax Haven legislation should be trashed. Tax haven legislation picks winners and losers." - quote from one of the speakers
- The only way to fight retroactive legislation is to monitor it and lobby against it before it is enacted.
- Should states be able to enact retroactive legislation to protect the state budget from financial loss?
- Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?
- Retroactive legislation should not be able to increase revenue.
- Ask yourself, if a 'technical correction' is creating new law or changing the interpretation of the law from the original interpretation that has been followed by taxpayers for years. If the answer is yes, do something.
- Should retroactive legislation be limited to a state's statute of limitations?
- Prior legislatures can't bind future legislatures.
- New legislatures can't determine, or know, the intent of prior legislatures. Shouldn't be able to unbind or unwind prior legislation.
- "Retroactive legislation is telling you what the law was." - quote from one of the speakers
- Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?
- Is single-sales factor apportionment 'fair apportionment'? Moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.
- "Throwback and throwout rules are unconstitutional because they look beyond the borders of the state." - quote from one of the speakers
- If alternative apportionment is wide open and anything goes, why have statutes?
- "To gain true insight, read the entire case - don't just read the blurb. See what it says and what it doesn't say." - quote from one of the speakers. Get creative. See the case, the issue from a different perspective. Ask "why not."
- Does common sense apply? If so, is your definition of 'common sense' the same as mine?
Obviously, I obtained all of the thoughts above from the Forum. Some are quotes from speakers, some are ideas paraphrased from a speaker's discussion, and others are personal reflections.
David Brunori will be in Las Vegas this week speaking at the Council On State Taxation annual meeting (Friday morning) with Doug Lindholm, Helen Hecht, and Richard Pomp. They are leading a debate/discussion on the most significant issues in state tax policy. I can't be there, but thought I would give my two cents.
I think some of the most significant state tax policy issues are:
- the imposition of sales tax collection obligations on remote retailers;
- expanding the sales tax base to services;
- whether states should ramp-up transfer pricing training/positions or join the MTC ALAS program;
- whether states should adopt tax haven legislation which allows them to cherry-pick the taxation of foreign income or simply adopt mandatory worldwide combined reporting;
- whether states should continue to enact unconstitutional legislation forcing taxpayers to go to court;
- whether states should continue to enact retroactive legislation;
- whether states should continue to enact legislation that benefits in-state taxpayers vs. out-of-state taxpayers (i.e., market-based sourcing, single-sales factor apportionment, credits and incentives).
What do you think are the most significant issues in state tax policy?
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.
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.
The Governor of South Dakota signed SB 106 on March 22, 2016. The law requires any seller selling tangible personal property, products transferred electronically, or services for delivery into South Dakota, who does not have a physical presence in the state to remit sales tax 'as if the seller had a physical presence' in the state. For this new requirement to apply, the seller must meet one of two criteria in the previous calendar year or the current calendar year:
- The seller's gross revenue from sales into South Dakota exceeds $100,000; or
- The seller has 200 or more separate transactions in South Dakota;
The law applies to sales made on or after May 1, 2016.
If you disagree with South Dakota's new law, you can voluntary comply and request a refund. However, the law explicitly provides that no claim will be granted on the basis that the taxpayer lacked a physical presence in the state.
In the new law, South Dakota states that the inability to effectively collect sales or use tax from remote sellers is "seriously eroding the sales tax base," "causing revenue losses" and "imminent harm" through the "loss of critical funding for state and local services."
South Dakota asserts that their revenue loss is more problematic because the state has no income tax.
WANT U.S. SUPREME COURT TO RECONSIDER QUILL
South Dakota also states in its new law that the U.S. Supreme Court has an urgent need to reconsider Quill and the physical presence requirement. The law provides that the legislature recognizes that the enactment of this law places remote sellers in a complicated position because existing constitutional doctrine calls this law into question. In other words, South Dakota is enacting an unconstitutional law to create a case to litigate with the hopes of overturning Quill.
The law states that the Legislature intends to clarify that the obligations created by this law would be stayed by the courts until the constitutionality of the law is clearly established by a binding judgment.
WARNING: ENFORCEMENT OF PROVISIONS CURRENTLY BARRED
As the state tax group at McDermott Will & Emery reported in their INSIDE SALT blog, two declaratory judgment suits have been filed which now bars the enforcement of the provisions until the litigation is resolved. The plaintiffs are trade associations representing catalog marketers and e-commerce retailers.
The bottom line is that remote retailers can breathe easy for a moment and do not have to comply with this new law while we wait for the courts to decide. For more details, read the INSIDE SALT post.