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."

navigating the state tax "mind-field" without "burning your popcorn"

If you work in my profession, you are likely aware of The Tax Foundation, the Multistate Tax Commission (MTC), the Council on State Taxation (COST) and the Streamlined Sales Tax Governing Board. However, were you aware of some of the resources they have?

History of Sales Tax

For example, I found this lovely webpage from the Multistate Tax Commission (MTC) which talks about the history of sales tax. https://www.mtc.gov/uniformity/sales-tax-on-digital-products/history/

• According to the MTC, "this page is intended as background to aid in the review of the issues that arise when we consider a sales tax on digital goods. We begin by clarifying some of the terminology we use on this project, then move on to a brief history of the sales tax and some similarities and differences in how states treat the tax. You can use the links below to jump to a specific section."

I recommend you take a peek if you are looking for a quick and concise summary of the history of sales tax and basic terminology and some uniform rules shared by the states.

History of Indivual Income Taxes

The following link from the Tax Foundation provides a brief history of state individual income taxes. https://taxfoundation.org/data/all/state/when-did-your-state-adopt-its-income-tax/

The following link from the Tax Foundation provides additional insight into the history of state individual income taxes and the trend towards a flat tax rate structure. https://taxfoundation.org/blog/flat-tax-state-income-tax-reform/

Key State Tax Issues

The Council on State Taxation (COST) has several state tax resources. One of their webpages (https://www.cost.org/state-tax-resources/cost-policy-positions/) provides COST's policy positions regarding several key issues and areas of state taxation such as:

• alternative apportionment

• confidentiality of taxpayer informatoin

• digital service taxes

• financial reporting consequence of significant tax law changes

• Gross Receipts Taxes

• Independent Tax Appeals Tribunals

• Mandatory Unitary Combined Reporting

• Markeplace Facilitators Collection of Sales, Use or Similar Taxes

• Property tax administration systems - fair and equitable

• related company expense disallowance

• Remedies for unconstitutional or otherwise judicially invalidated taxes

• Reporting requirements for federal tax changes

• retroactive tax legislation

• sales taxation of business inputs

• simplification of the sales, use or simliar transaction tax system

• state corporate income tax filing methods

• throwback and throwout rules

• unclaimed property

Another COST webpage (https://www.cost.org/state-tax-resources/cost-studies-articles-and-reports/) provides links to COST studies, articles and reports on topics such as:

• e-invoicing for sales tax

• digital-business input exemptions

• mandatory worldwide combined reporting: elegant in theory but harmful in implementation

• COST scorecard: the best and worst of state tax administration

• state digital services taxes: a bad idea under any theory

• resisting the siren song of gross receipts taxes: from the middle ages to Maryland's tax on digital advertising

Remote Sellers and Marketplace Facilitators

The Streamlined Sales Tax Governing Board website has great sales tax information for sellers in general, but also specifically for remote sellers and marketplace facilitators.

• Remote sellers - https://www.streamlinedsalestax.org/for-businesses/remote-seller-faqs

• Marketplace facilitators - https://www.streamlinedsalestax.org/for-businesses/marketplace-facilitator

• Marketplace sellers - https://www.streamlinedsalestax.org/for-businesses/marketplace-sellers

State Tax Climate, Trends and Maps

The Tax Foundation has a great page entitled, "Center for State Tax Policy" (https://taxfoundation.org/research/state-tax/) which has several articles and tools such as:

• 2024 State Business Tax Climate Index

• State Tax trends

• State Tax maps

• State Reform guides

• State and Local Tax collections

• Excise Taxes

• Taxes and Inflation

• Cost Recovery

Be Aware

Regardless of whether you use any of these resources, you should be aware of these organizations that seek to provide support for taxpayers and/or influence state tax policy to create more uniformity and/or fairness among the states.

The "Mind-Field"

State taxation is ever changing and is influenced by many forces. Middle market companies struggle to stay on top of these changes and can't afford to litigate every matter or issue (that perhaps, should be challenged or raised by law firms as issues that should be challenged). Consequently, middle market companies are in constant need of clarity to reduce uncertainty, to mitigate risk of exposure and obtain practical solutions to navigate this "mind-field."

"Don't Burn your Popcorn"

As I've mentioned in other editions of this newsletter, the more I see artificial intelligence (AI) being used, the more I am convinced that the best "tool" or guide a company can have is human, real intelligence. The "easy button" or "microwave" may not be the most reliable tool.

Popcorn still gets burned in the microwave due to user error or incorrect correlations between the popping instructions and specs of the microwave. Don't burn your "popcorn."

Stay smart. Do the work. Don't settle.

don't let uncertain state tax positions surprise your company or client

Uncertain state tax positions are everywhere. Your company or your clients likely have them. Have you identified them? Have you addressed them?

During ‘busy season’ or ‘tax season, state tax questions often arise or lay there quietly in the background while federal tax issues get all of the attention.

State tax issues or the state tax impact of an issue or transaction is generally considered after the federal tax impact is addressed.

Non-state tax experts are sometimes just too busy to give state tax issues adequate time before a deadline. In other situations, non-state tax experts may simply view a state tax issue as less complicated than it really is. Consequently, state tax issues may not get addressed before the original due date of the returns and may only get addressed in late summer or early fall prior to the extended due date. This often creates a time crunch for uncertain state tax positions to get adequately addressed. That's one of the problems.

The other problem is that most state tax issues are more complex than they appear. A high-level overview or two hours of research won't cut it, especially when you are trying to determine the state tax impact of a large transaction or adequately source the gain on a sale of a partnership interest to the right state or states.

What are these 'uncertain state tax positions'?

Where can they appear?

The following is a summary of some of the areas or items that create uncertain state tax positions on state income tax returns:

1. Structure - intangible holding companies; REIT / RIC; buy / sell companies, management / services companies; state-specific structures; captive insurance companies; finance companies; factoring companies; check-the-box entities; pass-through entities;

2. Transactions - mergers, acquisitions, divestitures; repatriation dividends; reorganizations; bankruptcy issues;

3. Nexus - P.L. 86-272; economic nexus; attribution of activities; forced combination; foreign company nexus despite no permanent establishment in U.S.;

4. Filing Options - separate, nexus combined, hybrid nexus combined, unitary combined (waters-edge, worldwide); consolidated;

5. Apportionment - ability to apportion income; choice of formula; throwback / throwout; joyce vs. finnegan; sales factor sourcing (destination, market-based sourcing, cost of performance, commercial domicile, location of payor);

6. Tax Base - business v.s nonbusiness income vs. separate accounting; Internal Revenue Code (IRC) conformity; related party addbacks; depreciation adjustments; dividends received deduction conformity; transfer pricing; foreign source income; state specific additions/subtractions;

7. Treatment of Partnerships - entity vs. aggregate theory; unitary (tax base / factor flow-up) vs non-unitary (allocation); sale of partnership interest;

8. Tax Attributes - NOLs (pre-apportioned vs. post-apportioned); IRC Sec. 382 limitations; survivor / non-survivor limitations; credits (claw-backs; compliance with agreements);

How do you ensure these items are addressed adequately?

• Get a state tax expert involved early.

How do you know when your client has any of these issues?

• Create a checklist that helps you identify clients or when your company may have these issues. That checklist may be based on the amount of sales a company has, the amount of taxable income, the number of states they file returns in (or the number of states they should file in), or if they have a specific structure or entered into a transaction that obviously needs reviewed.

There are multiple checklists you could create, the key is to make one that works for your company or firm that doesn't slow down the compliance process, but does allow you to reduce risk and adequately document a supportable, defendable or winnable position.

I hope you have a great tax season (now and in the fall). I hope all of your uncertain state tax positions achieve as much certainty as they can and are adequately addressed and documented.