State Taxpayer Advocate Services?????

State taxpayer advocate services - ever used them?

I consider myself to be a taxpayer advocate and risk manager when it comes to state and local taxes. My job is to advocate taxpayer's positions whether it be in a response to a notice, audit defense or appeals representation. However, what do you do when a state's normal day-to-day procedures don't seem to be working?

What Would You Do?

For example, when a state says it is backlogged with incoming mail, protests, responses to notices or amended returns, and won't be able to process anything for some time, what do you do?

What if that amended return was your response to a notice you received which would erase the liability assessed on the notice; however, when you call the state to find out the status, the state says the amended return won't be processed for 9 to 12 months; and therefore, you will still continue to receive notices?

If you don't pay the amount on the notice, eventually your account will be put into collections? Do you pay the notice? Or do you wait for the amended return to be processed and hope your account doesn't get put into collections?

Taxpayer Advocate?

The scenario I just described sounds like a good time to contact the state's taxpayer advocate office. My question is, will the taxpayer advocate office do anything about it?

During these tough economic times, with state governments hurting for revenue, it may not be "what will they do," but "what can they do."

I'm concerned that taxpayers are going to find it even more difficult to navigate through the bureaucracy of government, to a solution to their tax issues and problems.

Just a thought. What do you think?

Wisconsin Tax Law Update

As you may know, Wisconsin enacted some corporate tax law changes back in February within the budget legislation signed by Wisconsin Governor Jim Doyle. Here is a high-level summary of the main changes. Please click on the following link to access the entire Bill (S.B. 62) for the details:

http://www.legis.state.wi.us/2009/data/SB-62.pdf

Unitary Combined Reporting

The legislation enacted mandatory combined reporting for corporations engaged in a unitary business with any other corporation (based on 50 % ownership) for tax years beginning on or after January 1, 2009.

Cost-of-Performance to Destination Sourcing

The legislation repeals the cost of performance method for sourcing sales other than sales of tangible personal property. The prior method sourced sales based on the common cost-of-performance method and where the income-producing activity took place. This is just another state that has moved from the "service performed" to the "benefit derived" method. I believe Illinois and Michigan are other states that made this same change recently. This change is applicable to tax years beginning on or after January 1, 2009.

Taxation of "Pre-Written Software"

The legislation further defines "pre-written software." We can only conclude this was due the State's loss in the Menasha Corporation case. Anyway, one definition that is worded in such a way as to even treat modified software as pre-written software is as follows:

“Pre-written computer software” or a pre-written portion of computer software that is modified or enhanced to any degree, with regard to a modification or enhancement that is designed and developed to the specifications of a specific purchaser, remains “pre-written computer software,” except that if there is a reasonable, separately stated charge or an invoice or other statement of the price given to the purchaser for the modification or enhancement, the modification or enhancement is not “pre-written computer software.”

However, as you can see, the second part of the paragraph provides a way for the modifications to the pre-written software to be treated as custom software and not be taxable. Please make sure that the purchase of any software (in any state) is reviewed upfront. The contract language and how the transactions are billed are extremely important from a taxation standpoint.

Other Changes:

1. Additional Addbacks for Intangible Expenses and Management Fees

2. Department has authority to adjust taxpayers' income for transactions that lack economic substance or lacks a substantial non-tax purpose.

3. Definition of Financial Organization is modified to include subsidiaries of financial organizations

4. Imposes Sales Tax on "specified" and "additional" digital goods

5. Other changes to Credits and Incentives, etc.

If you have any questions regarding this legislation, please contact me at leveragesalt@earthlink.net.

The Nexus Epidemic

“Got Nexus”? Of course you do. You just don’t know it.

If you are asking yourself, what am I talking about? I am talking about having a “taxable presence” in a state for state tax purposes, whether it be sales tax, income tax, gross receipts tax, margin tax, business tax, commercial activities tax, minimum taxes, limited liability entity taxes, LLC fees, and the list goes on.

If you didn’t know, basically if you sneeze or spit in a state, you’ve got nexus. There are all kinds of nexus, such as: affiliate nexus, agency nexus, economic nexus and my favorite of all, “Amazon Nexus.” All of these are diversions from the “old time” nexus we like to call “physical presence” nexus. You know, the old days when a company had to have a physical presence in a state to have nexus. Another old time nexus principal is “substantial nexus.” Often times, a company might have “due process” nexus or de minimus nexus, but not “commerce clause” nexus (“substantial nexus”).

Economic Nexus = The New Bright Line

Another point I would like to make, seems like the new bright line test for nexus or the desire of many states, is economic nexus. Meaning, if you make a sale into a state, “BOOM,” you have manipulated the market in the state and received benefits from the state (legal protection, right to sue, etc.) that require you to pay tax on that sale (whether it be income tax, sales tax, etc.) Yeah, yeah, I know, the Quill case is supposed to require physical presence in a state for a state to charge sales tax. But what the heck is “Amazon” nexus? “Amazon” nexus, in simple terms, is catching nexus from services provided to your customer by an unrelated third party. Supposedly the third party is doing so much for you, that the third party is acting as your agent or on your behalf. Therefore, it is like “they are you, and you are them.”

Questions and Answers

My questions are: what taxpayers or companies in a state are receiving the most benefit from the state? What taxpayers or companies are using more of the resources of the state? What taxpayers or companies are driving on the roads, polluting the air, etc.? IN-STATE taxpayers. I know I am crazy, but there I said it. Out-of-state taxpayers and internet-sellers may travel into the state a little, or not at all. However, most states want to tax the out-of-state taxpayer more and the in-state taxpayer less. Hmmmm, why do you think that is?

Economic Incentives (Single-Sales Factor and Economic Nexus)

Every state wants to provide economic incentive for companies to build, expand and base their operations in their state by creating credits and incentives, but also going to a single-sales factor apportionment factor and imposing economic nexus on out-of-state taxpayers. With a single-sales factor, obviously the out-of-state taxpayer ends up paying more to the state and the in-state taxpayer pays less. The “old time” apportionment factor was three-factor (property, payroll and sales). I believe 10 or less states still use a three factor formula today.

So WHAT?

So, what’s next? Expansion of P.L. 86-272 to protect more in-state activities by out-of-state taxpayers; OR economic nexus so everyone is taxable for sneezing or spitting in a state?

Unconstitutional State Taxes: In Search of a Remedy

I wrote my thesis on this very topic several years ago. However, the issue remains alive and well today.

When a state enacts legislation that later is found to be unconstitutional, what is the appropriate remedy? Prospective relief only? Retroactive refunds for all taxpayers for all years still open under statute? Retroactive refunds for only those taxpayers that have filed protective refund claims? Or better yet, should states be allowed to change the unconstitutional legislation/statute in such a way as to make it constitutional? If yes, should states be allowed to make that change retroactive to limit the amount of refunds they will have to pay to taxpayers who paid the tax in prior years (or filed protective refund claims)?

The answers to these questions are currently being played out in California, with the court cases that have found the California LLC Fee to be unconstitutional. California has changed the unconstitutional statute to make it constitutional in order to limit the amount of refunds it will have to pay. However, should that be allowed?

State Budget Problems = Unconstitutional Taxes and Fees?

In regards to other states, I am concerned that as states are fighting one of their worst financial budget crises, they will enact, knowingly or unknowingly, unconstitutional state taxes or fees. At this moment when states need new revenue (without "raising taxes” or political “fall-out") certain fees or taxes will become attractive alternatives. However, will those alternatives be constitutional?

Unfortunately, if the past repeats itself, we may only recognize these statutes to be unconstitutional several years from now after the state has collected the taxes and fees. Again I ask, should this be allowed?

It seems not only unfair, but perhaps “illegal,” for states to collect taxes by enacting laws later to be found unconstitutional, and then refuse to give the money back to taxpayers. How can a state profit from collecting taxes it should not have been allowed to collect in the first place?

Remedy?

Kentucky: Notices are Coming!

If you are a corporation or a limited liability pass-through entity operating in Kentucky, you might receive a notice in the coming weeks.

According to the March, 2009 issue of the Kentucky Tax Alert, a publication written by the Kentucky Department of Revenue, the Department is in the process of sending delinquency letters to entities registered with the Secretary of State that have not filed a tax return with the Department.

If you are familiar with Kentucky, then you know they changed their tax laws for the tax years 2005 through 2007 and beyond. I'm sure those changes created confusion and mistakes by taxpayers trying to comply with Kentucky tax laws.

2005 Changes

As stated in the Kentucky Tax Alert, Kentucky imposed a new "doing business" standard starting in 2005. Kentucky also started requiring limited liability pass-through entities to be taxed as corporations, and to file a nexus consolidated return if it was part of an affiliated group.

This caused all limited liability pass-through entities to register and file a corporate income tax return, except disregarded single member limited liability companies owned by a corporation or limited liability pass-through entity.

Obviously, these changes required more entities to file a tax return with Kentucky.

2007 Changes

Starting in 2007, Kentucky amended the "doing business" standard to state that simply maintaining an interest in a pass-through entity doing business in Kentucky creates nexus.

On the flip side, at the same time, Kentucky no longer required limited liability pass-through entities (PTEs) to be treated as corporations for Kentucky tax purposes. That didn't mean limited liability PTEs were no longer taxable, because Kentucky created the limited liability entity tax for all corporations and limited liability PTEs doing business in Kentucky, including limited liability companies owned by individuals.

So once again, these changes required more entities to file tax returns with Kentucky.

Sound confusing?

CONCLUSION

If you receive a notice and the "doing business" standard has been met, you will need to file a tax return for the tax year or years stated on the notice. Depending on the year involved, at least a minimum tax of $175 could be due.

If you have any questions, please contact me at leveragesalt@earthlink.net or

contact Kentucky at 502-564-8139 or WEBResponseCorporationTax@ky.gov.

Click on the following link to see the March 2009 Kentucky Tax Alert:

http://revenue.ky.gov/NR/rdonlyres/A5FE4C4B-A5B1-4BB0-9D9F-22FC1BC7EC43/0/KYTaxAlertMarch2009_v3revised.pdf

Combined Reporting Update and Summary

Just to get everyone up-to-date, the following states have either introduced bills in their legislature to enact combined reporting into their state income taxing structure, or their governors have actually enacted the legislation:

1. Massachusetts (SB 2685 and HB 4672) enacted legislation; begins 2009;
2. Wisconsin (SB 62) enacted legislation; begins 2009;
3. Maryland (HB 1244) introduced legislation;
4. Iowa (SF 211) introduced legislation;
5. Tennessee (SB 502) introduced legislation;
6. Missouri (SB 241) introduced legislation;
7. Rhode Island (HB 5832) introduced legislation:
8. Connecticut (SB 807) introduced legislation;
9. New Mexico (SB 389) introduced legislation;
10. West Virginia (SB 680) enacted legislation; begins 2009;

A number of the states above have introduced similar legislation in prior years with no success; however, with the current environment and budget crises states are enduring, the legislation may have a greater chance of passing than in the past.

North Carolina: LLCs as S corporations Pay Franchise Tax

Limited liability companies (LLC) electing to be taxed as a C corporation or S corporation for federal income tax purposes are now both subject to North Carolina's franchise tax.

2006 Amendment

In 2006, North Carolina amended G.S. 105-114(b)(2) in 2006 to include in the definition of "corporation" a LLC that elects to be treated as a C corporation. The purpose of the change was to close a loophole that permitted an entity to elect corporate status for federal income tax purposes, but at the same time avoid the franchise tax liability imposed under G.S. 105-122.

However, by the amendment specifying "C Corporation," the statute left open the possibility for a LLC to elect S corporation status for federal purposes and continue to avoid the franchise tax liability.

2008 Amendment

To close this loophole, the definition was further amended in 2008 to replace the reference to "C Corporation" with "corporation," which also includes S Corporations.

The amendment is effective for tax years beginning on or after January 1, 2009. This impacts the franchise tax reported on the 2008 S corporation franchise tax returns due on or before April 15, 2009.

LLC Franchise Tax Credit

As a side note, North Carolina allows LLCs subject to the franchise tax, a credit equal to the difference between the annual report fee imposed on LLCs and the annual report fee on corporations. The fee for LLCs filing an annual report is $200.00. Effective September 1, 207, the fee for corporations filing annual reports in paper form increased to $25.00.

The allowable credit for LLCs taxed as a corporation and subject to the franchise tax is $175.00 (G.S. 105-122.1).


Source: Limited Liability Companies (LLCs) Electing to be Taxed as S Corporations Subject to Franchise Tax, North Carolina Department of Revenue, March 18, 2009

Click on the following link for the Statute itself (G.S. 105-114):

http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/ByArticle/Chapter_105/Article_3.html

Compliance Services - Not Required!

Have you received a document in the mail entitled, "Annual Minutes Requirement Statement Directors and Shareholders" from a company called "Compliance Services"?

DO NOT fill out the form and pay the requested $100. The form is not a government form or required obligation.

The key when receiving forms like this, is to look for the following language:

"This product has not been approved or endorsed by any government agency and this offer is not being made by an agency of the government."

Over the last year, these statements have become more prevalent.

If you have any questions, please contact me at leveragesalt@earthlink.net or comment on this post.

Nexus: To File or Not to File?

This time of year, or any time of year, a company analyzes what activities it has across the country and in different states. Did the activity change from last year? If so, what activity is the company engaging in, in that particular state? Is it enough to give the company "nexus" or a taxable connection to the state?

Different Types Of Nexus

The answer to that question is not as easy as you might think. The technically correct answer, these days, is that just about any activity in a state gives you nexus. There are different types of nexus, such as: due process clause nexus, commerce clause nexus, substantial nexus, economic nexus, etc.

P.L. 86-272

The other question might be, is your activity protected by P.L. 86-272? To be protected by P.L. 86-272, the tax has to be an "income tax" or a "tax on income." That isn't always a clear cut answer either. After that, you have to be selling tangible personal property, and your only activity in the state can be solicitation of sales where the acceptance of the sale is done out of state. Lastly, the product should be mailed common carrier, not using your own trucks. Sounds easy?

De Minimis?

Now, if your activity isn't protected under P.L. 86-272, is your activity de minimis? Meaning, is your activity in the state not substantial enough to create nexus? Again, these days, everything seems to be substantial enough as states are looking for revenue from out-of-state companies.

Technical vs. Practical?

Okay, so that is the technically correct answer. But what do companies do on a practical level? What level of activity does a company say, okay, we will file a return. What if the apportionment factor is less than 1%? Is that the threshold that determines filing in state on a practical level? That probably isn't the sole factor, other factors might be the amount of tax at stake, the number of years of activity in the state, the future predicted activity in the state, etc. and the list goes on.

What I am trying to say, is that determining if you have nexus or not is a difficult answer. The next question that follows is, "should we file?" Now, I know state tax department of revenues don't like that question, but in any occupation there is the technically correct answer and the practical answer. Sometimes it just depends on what day of the week it is that determines the answer to the question.

Proactive vs. Reactive = Voluntary Disclosure

Please note: I am in no way condoning the "practical approach" I have stated above. It's just throughout my career I have experienced companies that play the "wait and see" game when their activity in a state is minimal. On the other hand, companies can choose to be proactive and start filing; or when they have had a presence in a state for a number of years and haven't filed, they may choose to file a "voluntary disclosure." A voluntary disclosure allows a company to come forward to a state, file a few back year returns, and obtain some penalty and/or interest relief in the process. Usually the taxpayer and the state agree to only require four back years' worth of tax returns in exchange for future compliance.

Remember, a voluntary disclosure is only able to utilized if the state has not already contacted you. If the state contacts you first, technically, the state can make the taxpayer file returns for all back years since the company started activity in the state. However, usually the state requires six or seven years of back tax returns. But unlike a voluntary disclosure, there is no relief for interest and penalties.

Notices, Legislation and ????

Notices without Oversight?

I know I have mentioned this in an earlier post, but it sure feels like the states have picked up the notice and audit activity. They also seem to be slow in processing responses to notices.

I have one state that keeps sending notices month after month regarding the same issue. This is in spite of sending multiple responses in writing, and after trying to resolve it over the phone. At this point, not sure what is going to fix the problem.

Aggressive Legislation (On the Attack)

Also, as you may be aware, states are passing or proposing legislation (seems like every day) focused on combined reporting, single-sales factor apportionment, and economic nexus. States are being more aggressive as they search for revenue.

What's next?

California: Minimum Tax and LLC Fee Reminders

Here are some reminders regarding California's minimum tax and LLC fee.

CA $800 Minimum Tax

The $800 California (CA) minimum tax is due with the 1st quarter estimate (f0r 2009) for S corporations (due 3/16/09) and LLCs (due 4/15/09). Unlike S corporations and LLCs, the $800 is due with the 2008 CA return for LPs (due 4/15/09).

CA LLC Fee

To clarify, the CA LLC Fee is not the same thing as the $800 minimum tax. The CA LLC fee is a sliding scale fee based on the LLC's CA gross receipts. Unlike the $800 minimum tax, the LLC fee is due with the return for 2008 (due 4/15/09).

PLEASE NOTE, beginning in 2009, the LLC fee for the tax year 2009 is due 6/15/09. It is now due 6/15 of the tax year instead of with the 2009 return due 4/15/2010.

If you have any questions regarding the minimum tax or LLC fee, please contact me at leveragesalt@earthlink.net.

My Dad (3-11-08)

Today is the anniversary of my dad's death. He died one year ago today. I can't believe it's been one year.

My dad was diagnosed with lung cancer on July 4th, 2007. My dad never smoked a day in his life. The doctors said it was from second-hand smoke. My dad worked at a company where they allowed people to smoke about 20 years ago. My dad later told me that they had to wash down the walls every year because they would turn yellow. He also said that other people in his department who did smoke have since died from emphysema. Despite what caused my dad to get lung cancer, it was still the strangest thing to hear that my dad had lung cancer. My dad had had blood clots over the years, high cholesterol, etc., but lung cancer? That was like someone saying the moon shines during the day, and the sun shines at night. It just didn't sound possible.

My dad had stage 4 lung cancer. Too late to do anything to really get rid of it. Even so, my dad went through chemo and fought the fight. It did go into remission in December 2007, but came back with a vengeance in January 2008. After that, it was just down hill.

I will say, God allowed us to have some good time together. My sister, who lives in Colorado, (I live in Minnesota), and I were able to go back to Illinois to be with my mom and dad for a week in January 2008. It was like we went back in time and we were kids again. We played games. But my dad was having a hard time swallowing, and it kept getting worse. He was a trooper, fighting it. In the end, his body just couldn't take anymore.

My dad had a strong personal relationship with Jesus. Jesus, the son of God. The one who died on the cross for our sins and rose from the grave on the third day. His relationship grew stronger over the months he battled cancer. In the end, he was healed. He was given a new heavenly body instead of these old, tired ones.

My journey from July 4th, 2007 to March 11, 2008 and up to now, has involved the common cycle of shock, anger, denial, coping, acceptance (with repeating the cycle again and again). I just couldn't get over it, and sometimes I can't still, that my dad is no longer here. I feel robbed. I feel like he is still here or at least should be. I really miss him. I have two daughters (ages 5 and 9). They loved playing with my dad. He would play with them in the yard, and play games with them. I really miss him.

My dad was a handyman. He could fix anything. Over the years, we have done a lot together. We have worked on cars, built decks, workshops, done electrical work, installed ceiling fans, etc. Just to name a few. I can look around my house today, and think of the things my dad helped me do. I have learned to do a lot myself, and it all started with him. I miss talking to him on the phone and asking what I should do or how should I fix this or that. He loved to fix things. He had a workshop with every tool known to mankind. Some, I don't even know what they are for.

My dad was sweet, kind, dependable and reliable. If he said he was going to do something, he was going to do it. He had a strong work ethic and cared about church, family, his work, and his community. He worked at the same company for over 40 years and was married to my mom for over 40 years. He was a committed man and a great example for me.

On this day, I want to say, I love you dad. I miss you. I wish so much that you were here, but I will see you again. Love, your son.

Texas: Passive Entities and Rental Income, Rule Pulled

Does you or your client operate a partnership in Texas? Is more than 90% of the income received by that partnership derived from distributions received from other flow-through entities (partnerships, etc.)? If yes, then your partnership may qualify as a "passive entity" and not be subject to the Texas Margin Tax (the recently new and improved Franchise Tax).

However, as you may or may not know, rental income, for Texas Margin Tax purposes, does not qualify as "passive income." Therefore, Texas originally proposed a rule to clarify its interpretation that if a partnership receives income via a K-1 (distributions from other partnerships or other pass-through entities), and that K-1 contains rental income, then the rental income retains its character and is not considered passive. Hence, when attempting to determine if your partnership which receives 90% or more of its income from K-1s qualifies as passive, the rental income would be considered non-passive when calculating the 90%.

I know this sounds confusing and complicated. It is. If you would like further clarification, please contact me at leveragesalt@earthlink.net.

Despite Texas' interpretation as state above, Texas has pulled its proposed rule amendment for franchise tax reports originally due in 2008 or 2009 to allow taxpayers an opportunity to seek clarification through the Legislature or to consult with their tax practitioner or legal counsel on tax planning. If no clarification is provided by the Legislature, the Comptroller will propose the rule amendment for franchise tax reports originally due on or after January 1, 2010.

When the Texas Margin Tax rules came out, many taxpayers and tax practitioners did not understand the Texas Comptroller's position. Believe me, this wasn't the only rule that required clarification. In any case, the Comptroller believes its position or interpretation of the statute is accurate; however, it apparently cares more about the negative consequences that the interpretation may have had on taxpayers. Therefore, the Comptroller is going to wait and see if clarification comes from the Legislature, and give taxpayers more time to adjust.

The proposed amendment was to the Comptroller's Rule 3.582 (Margin: Passive Entities).

For more details, click on the following link to Texas' Tax Policy News, Vol. XIX, Issue 2, Texas Comptroller of Public Accounts, February 2009.

http://www.cpa.state.tx.us/taxinfo/taxpnw/tpn2009/tpn902.html#toc

California: Refunds are Coming!

Yes, the California Franchise Tax Board (FTB) has announced that they are working to issue delayed corporation franchise, income, and personal income tax refunds.

If you are an individual taxpayer, you can check the status of your refund on California's website. You will need your Social Security number, mailing address, and refund amount.

Click on the following link to California's website to check the status of your refund:

http://www.ftb.ca.gov/online/refund/index.asp

Wisconsin: Related Entity Expenses; Disclosure Required

Wisconsin recently released additional guidance for disclosing related entity expenses. The guidance addresses three important issues:

1) When Pass-Through Entities and Their Members Are “Related Entities”

Wisconsin uses the loss disallowance rules provided in section 267 of the Internal Revenue Code (IRC) to determine if a taxpayer is a “related entity.” Section 267(b), IRC, lists relationships which are considered to be “related entities” for Wisconsin purposes. Section 267(e)(6) incorporates section 707(b), IRC, relating to partnerships. Under these sections, Wisconsin would determine that:

* A tax-option (S) corporation and its shareholder are “related entities” if the shareholder owns directly or indirectly, more than 50 percent in value of the S corporation’s outstanding stock.

* A partnership and its partner are “related entities” if the partner owns, directly or indirectly, more than 50 percent of the capital interest or profits interest in the partnership.

2) How Partnerships and S Corporations Report Addbacks

A partnership or S corporation that has interest or rent expenses paid, accrued, or incurred to a related entity must make a Wisconsin addition modification for those expenses. If the expenses meet the criteria given in Schedule RT, Part II, the partnership or S corporation may make a subtraction modification for the qualifying amount. These modifications must be reported as follows:

S Corporations: On Schedule 5K (and the respective Schedules 5K-1), report these modifications in two places:

Column c of lines 1 through 12d, according to the type of pass-through item to which the expense relates (if the entire amount of expense is deductible, the addition and subtraction modifications would cancel out and result in $0 net adjustment), and

Column d of lines 18a through 18d.

Partnerships: On Schedule 3K (and the respective Schedules 3K-1), report these modifications in two places:

Column c of lines 1 through 13d, according to the type of pass-through item to which the expense relates (if the entire amount of expense is deductible, the addition and subtraction modifications would cancel out and result in $0 net adjustment), and

Column d of lines 21a through 21d.

3) When to Disclose “Other Related Entity Expenses” on Schedule RT, Line 4c

The “other expenses” that must be disclosed on line 4c of Schedule RT include any expenses paid, accrued, or incurred to a related entity other than those already listed on lines 1 through 4b. In other words, line 4c of Schedule RT is for related entity expenses which are not for interest, rent, royalties, management and service fees, or inventory purchases.

However, line 4c is only required to be completed if the total “other related entity expenses” deducted on the return for the taxable year exceed 10 percent of the taxpayer’s total expenses. In determining whether the expenses exceed 10 percent of total expenses, “total expenses” include the following:

Cost of goods sold,

Any expenses already disclosed on Schedule RT, lines 1 through 4b, and

Any other expenses that are deducted on the return for the taxable year, whether or not they are paid, accrued, or incurred to related entities.

Click on the following link to Wisconsin's website for additional information:

http://www.dor.state.wi.us/taxpro/news/090304.html

Combined Reporting: Who's Next?

As stated in an earlier post on February 25, 2009, combined reporting is being proposed in several states in an effort to close corporate tax loopholes and level the playing field for small businesses, etc.

Two states who recently proposed legislation to require combined reporting are Iowa and Rhode Island. The legislation in both states is similar to the combined reporting legislation in other states.

In Iowa (S.F. 211), an affiliated group of corporations that meets the requirements to file a consolidated federal return and is engaged in a unitary business, would be required to file an Iowa combined return. The bill would apply to tax years beginning on or after January 1, 2009.

Click on the following link to access the Iowa bill (S.F. 211):

http://coolice.legis.state.ia.us/Cool-ICE/default.asp?Category=billinfo&Service=Billbook&menu=false&hbill=SF211

In Rhode Island (H.B. 5832), a taxpayer engaged in a unitary business with one or more corporations would be required to file a combined report that includes the income and apportionment factors of all corporations that are members of the unitary business. The bill gives the revenue director discretionary authority regarding which members are included in the group, and discretionary authority to determine what apportionment factors are included to properly reflect the income apportionment of the entire unitary business. The provisions of this bill would take effect upon passage.

Click on the following link to access the Rhode Island bill (H.B. 5832):

http://www.rilin.state.ri.us/BillText/BillText09/HouseText09/H5832.pdf

State and Local Taxes: Tax Burden vs. Tax Compliance Costs

PricewaterhouseCoopers conducted a survey of U.S. taxes paid by Business Roundtable member companies entitled, the "Total Tax Contribution Report." It was recently released, and I found a few items very interesting:

1) Large companies are major contributors to U.S. tax revenues:

The 40 companies participating in the survey remitted $94 billion of taxes, of which $71 billion were attributable to federal taxes.

2) On average, survey participants needed a full-time team of 44 staff to comply with federal, state and local tax payment obligations.

U.S. tax compliance staffing is more than three times that in any other country surveyed.

3) The decentralized U.S. tax system is more complex than in any other country surveyed:

In addition to 30 federal taxes, companies are potentially liable for over 1,100 taxes imposed by the 50 states and the District of Columbia, as well as local taxes too numerous to count due to the more than 89,000 local governmental entities in the United States.

Although state and local taxes account for only 24.5% of U.S. taxes borne and collected, companies spend 41.7% of their compliance budget on these taxes. Per dollar of tax remitted, compliance costs for state and local taxes are more than double that for federal taxes.

I obviously found this last point very interesting and to be true in my own experience. It has always seemed that state and local tax has been the "ugly step-child" to its federal tax counterparts in corporate tax departments. Yet, it is extremely complex and burdensome to keep a company in compliance with so many different jurisdictions and very little, if any, uniformity among state and local tax laws.

Source: PricewaterhouseCoopers, Total Tax Contribution Report (released in Feb/Mar 2009).

Minnesota: Proposed Tax Changes (H.F. 1136)

A 92-page bill was introduced in the Minnesota House of Representatives on February 26, 2009. The bill would implement many of the tax changes proposed by Minnesota Governor Tim Pawlenty in his State of the State Address.

The following are some of the proposed changes in the bill:

1) Reducing the corporate franchise tax rate from 9.8% to 4.8% over six years;

2) Reducing the alternative minimum corporation franchise tax rate from 5.8% to 2.9% over six years:

3) Eliminate the addition to federal taxable income for corporation and personal income taxpayers that claim an IRC Sec. 179 expense deduction on property placed in service in taxable years beginning after December 31, 2008;

4) Allow certain small business owners who, between July 1, 2009 and September 30, 2009, purchase depreciable property located in Minnesota to claim a tax refund equal to $5,000 or a portion of the cost of the property;

5) Permit corporation and personal income taxpayers to subtract from federal taxable income a portion of the capital gains from the sale of stock held in certain small business companies;

6) Exempt purchases of capital equipment from sales tax;

7) Reduce the rent percentage for purposes of the property tax refund;

8) Create new credits for green job opportunity building zones (JOBZ) and investments in Minnesota small businesses; and

9) Update references to the Internal Revenue Code (IRC) to mean federal provisions as amended through December 31, 2008, for purposes of computing the Minnesota corporate franchise tax, the personal income tax, the property tax refund, and the estate tax.

Click on the following link to read the text of the bill:

https://www.revisor.leg.state.mn.us/bin/getbill.php?number=HF1136&session=ls86&version=list&session_number=0&session_year=2009

H.F. 1136, as introduced in the Minnesota House of Representatives, February 26, 2009.

State Tax Notices: A Game?

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.