State tax notices, got to love them.
I don't know about you, but I am seeing a lot more state tax notices being received by companies. Not only are they first time notices, but they are repeat notices, month after month. This is even after the taxpayer/company has responded to the first notice.
It often feels like the state taxing authority never looked at the response sent by the company.
Actually, I recently called a state taxing authority because a company received a repeat notice, and the state said they were probably six months behind on processing incoming responses/mail, etc. Therefore, the company would continue to receive a repeat notice every month until the company's initial response was processed.
Disregarding repeat notices for the moment, even the first notice a company receives gives the perception that the state taxing authority did not even look at the documents that were attached to the originally filed return. The attachments often explain or provide the information that the notice is now requesting. This causes companies and taxpayers to devote additional time and resources to explain something again and again.
Can't taxing authorities get better? Is it just a computer system gone awry? Lack of resources?
What can taxpayers do to eliminate notices and repeat notices?
I understand it isn't always the taxing authority's fault, some taxpayers don't provide adequate information. But for those that do, the notices keep coming.
Sometimes it just feels like a game. A game in which the taxing authorities just want a company or taxpayer to give up and pay the additional tax, interest and/or penalties being imposed.
Sales Tax and Disregarded Entities: Who is the Taxpayer?
Does your company's corporate or legal entity structure cause confusion when it comes to the sales tax area? Meaning, does your structure involve various "pass-through" or "disregarded" entities?
"Pass-through" or "disregarded entities" are generally considered divisions or a part of their owner for federal tax purposes. Hence, they are not taxed separately from their owner. However, for state and local sales tax purposes, most states treat each "pass-through" or "disregarded entity" as a separate taxable entity. Therefore, it is very important when making a purchase for a specific project or filing for a business license, that the correct entity’s name and other identification is used. This issue arises especially in states where your company has multiple entities conducting business.
"Resale Certificates" and "Direct Pay Permits" Confusion
Another situation in which the issue arises is when "resale certificates" or "direct pay permits" are utilized by multiple entities. Resale certificates and direct pay permits are generally issued to a specific legal entity and cannot be transferred or utilized by other entities. Hence, it is very important that vendors have the correct information in their records, and your invoices, contracts, etc. reflect the actual entity that is involved in the transaction.
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 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.
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.
NO REGULATION WITHOUT REPRESENTATION
The folks over at McDermott Will & Emery and the 'Inside SALT' blog made me aware of the "No Regulation Without Representation Act of 2016" (H.R. 5893). The bill was introduced by Congressman Jim Sensenbrenner (R-Wis.).
The bill would require a person to have a physical presence in a state before the state can impose a sales or use tax collection or reporting requirement, an assessment, or treat the person as doing business (having 'nexus') in the state.
In essence, this bill is a glimmer of hope for remote sellers against the onslaught of state nexus expansion laws that have been enacted over the past few years, and the current litigation in South Dakota and Alabama where states are attempting to impose collection obligations on businesses without a physical presence.
The bill defines physical presence to include:
- owning or holding a leasehold interest in, or maintaining real property such as a retail store, warehouse, distribution center, manufacturing operation or assembly facility;
- leasing or owning tangible personal property (other than computer software) of more than de minimus value in the state;
- having one or more employees, agents or independent contractors present in the state who engage in specific solicitations toward obtaining product or service orders from customers in that state, on behalf of the person;
- having one or more employees or independent contractors present in the state who provide on-site design, installation, or repair services on behalf of the remote seller;
- maintaining an office in the state at which it regularly employs three or more employees for any purpose.
According to the bill, 'physical presence' does NOT include:
- referral agreements with in-state persons who receive commissions for referring customers to the seller;
- having a presence in the state for less than 15 days in a taxable year;
- product delivery in-state by a third-party;
- Internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.
If the Act gains traction and is actually enacted, it would apply to calendar quarters beginning on or after January 1, 2017.
It is too early to tell if this bill will actually go anywhere, but it is nice to see a bill like this get introduced.