California's 20% Understatement Penalty: Further Analysis

The following is additional analysis on the California Superior Court ruling on the Constitutionality of California’s Large Corporate 20% Understatement Penalty.

Tax or Penalty?

The Court stated the following:

To determine whether an exaction is a tax or penalty requires the Court to consider both the intended purposes of the exaction as well as its actual effects.

The difference between a tax and penalty is not always clear. In general, however, taxes are defined as compulsory contributions which raise revenues for general governmental purposes, whereas a penalty is defined as an exaction imposed to regulate conduct by prohibiting, punishing, or discouraging a particular act or omission. Still it is not uncommon for taxes to have the dual purposes of raising revenue and regulating (discouraging) conduct. Likewise, nearly all penalties have the (intended or unintended) effect of raising revenue.

If the primary function of the exaction is to regulate (punish) conduct, it is properly characterized as a penalty; but if the primary function is to raise revenue, it is properly characterized as a tax. Towards that end, there is one important distinction between a penalty and a tax; while a tax raises revenue if it is obeyed, a penalty raises revenue only if some legal obligation is disobeyed.

The Court held in this case, although the exaction clearly will have revenue-raising effects, the primary function of the exaction is to deter and punish understated returns.

COMMENT: if the primary function of the exaction in this case is to deter and punish understated returns, then why isn’t the exaction prospective only? In addition, why was the exaction enacted during a time when the state is in a ‘deep’ financial crisis? To punish or simply raise revenue? I think it could be argued that the primary purpose of the exaction is to raise revenue, not to punish.

Is the Penalty Excessive?

In other words, does the fine violate the Excessive Fines clause of the U.S. Constitution?

The Court held it does not. However, the Court also stated that this is a heavily fact intensive inquiry, and section 19138 may be found to be unconstitutional as applied to a particular taxpayer.

Does the Retroactivity of the Penalty violate Substantive Due Process?

The Court held it does not.

In its defense, the Court stated the Legislature had a rational legislative purpose to make the penalty retroactive to encourage taxpayers who filed returns in which they took “questionable positions” to come forward and amend their returns.

The Court also states, while a period of retroactivity longer than the year preceding the legislative session normally would raise constitutional issues, in this case, the constitutional concerns are allayed by the taxpayers’’ ability to file an amended return, which will be treated as the original return for purposes of determining the penalty. (NOTE: Must be filed by May 31, 2009).

Does the Statute (Penalty) Provide Pre- or Post-Deprivation Relief?

The California Taxpayers’ Association argues the statute does not on the basis that the statute states “a refund or credit for any mounts paid to satisfy a penalty imposed under this section may be allowed only on the grounds that the amount of the penalty was not properly computed by the FTB.”

The FTB argues that the statute does not preclude taxpayers from contesting the validity of the penalty in an action in superior court. Therefore, a constitutionally adequate post-deprivation remedy in the form of a refund suit in superior court is provided.

The Court agreed with FTB’s interpretation. However, the Court did state that if section 19138, subdivision (e) were construed to preclude all pre- or post-payment review, except on grounds that the amount of the penalty was not properly computed by the FTB, the Court would have little difficulty in concluding that the statute is unconstitutional and unenforceable.

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

California: Understatement Penalty Held to Be Constitutional: Action Still Required by May 31st!

The California Superior Court has ruled California's Large Corporate 20% Understatement Penalty is Constitutional. The ruling was filed on May 20, 2009 and is in response to the challenge brought by the California Taxpayers' Association. (the case number is 34-2009-80000168).

The Court held the following:

1. The California Taxpayers' Association did not meet its burden to prove that Section 19138 violates Proposition 13. The court held that if the primary function of the exaction is to regulate (punish) conduct, then it is properly characterized as a penalty; but if the primary function is to raise revenue, it is properly characterized as a tax. The court held the understatement penalty is a "penalty" and not a "tax."
2. The Court held that the Legislature substantially complied with the reading requirement by virtue of its non-rollcall vote, and was validly enacted.
3. The Court denied the claim that section 19138 violates the Excessive Fines Clause of the U.S. Constitution.
4. The Court denied the claim that section 19138 violates the substantive due process guarantees of the Fourteenth Amendment. The Court did not find the retroactive application of the penalty to be so harsh and oppressive as to transgress the constitutional limitation of the substantive due process clause.
5. The Court concluded that the statute may be invoked because it provides a constitutionally adequate post-deprivation remedy in the form of a refund action in which a taxpayer may contest the validity of the tax penalty. The Court found it unnecessary to invalidate or reform the statute as long as due process requirements are met. (The interpretation and application of the statute may be cause enough for the legislature to amend the statute.)
6. The Court denied the Commerce clause claim.
7. The Court denied the Equal Protection claim.

Legislature May Amend Statute

In addition to the ruling, some of the "Big 4" accounting firms have reported that the California legislature may amend the statute prior to May 31, 2009 to address some of the concerns raised in the lawsuit and ruling. This makes it difficult for taxpayers to know what to do.

ACTION:

Therefore, at this time, taxpayers may want to continue to follow the statute as required and take action by May 31st, but wait until the last minute to mail the information, just in case California amends the statute.

More analysis to come.

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

California Processing LLC Fee Refund Claims! (FTB Notice 2009-04)

California issued FTB Notice 2009-04 on May 22, 2009, to inform limited liability companies (LLCs) that California will process claims for refund for LLCs with substantially the same factual situation as Ventas Finance I, LLC v. Franchise Tax Board, an LLC that earned income within and outside of California.

For LLCs with the same facts as Ventas, and who filed protective refund claims, the Notice states the refund will be computed using one of two methods:

The Default Method:

• If the LLC attached a Schedule R to its LLC Return of Income (Form 568) filed for each year that a claim for refund has been submitted, the FTB will use the amount reported on Schedule R, Schedule R-1, Total Sales, Column (b), Total within California, to calculate the revised LLC fee and compute the available refund, if any.
• No additional information is needed if the LLC attached a Schedule R to its Form 568. The LLC does not need to resubmit a Schedule R.
• However, if the LLC did not attach a Schedule R with its Form 568, the LLC needs to complete a Schedule R for each year that a claim for refund has been filed and submit the Schedule(s) R to FTB, as described below.

The Alternative Method (w/August 20, 2009 DEADLINE!):

• An LLC may choose to have its refund calculated by completing the LLC Income Worksheet from the 2008 LLC Tax Booklet (Form 568 Booklet) with the respective information for each tax year that a claim for refund is filed.
• The LLC must provide the completed LLC Income Worksheet to FTB with a revised calculation of the LLC's Total California Income no later than August 20, 2009.
• If the LLC does not provide this information by August 20, 2009, FTB will compute the revised LLC fee and the refund amount, if any, using the Default Method described above.

ACTION REQUIRED

If you are using the Default Method to calculate your refund, but did not attach a Schedule R to the Form 568, or you choose to have the refund calculated using the Alternative Method, you must provide the following information:

1. The LLC's name and address, together with the name and phone number of the managing member or designated contact person.
2. The LLC's Secretary of State file number or Franchise Tax Board temporary LLC number (for unregistered entities), and Federal Employer Identification Number.
3. Tax years involved.
4. The LLC must choose either "(a)" or "(b)":
   (a) For the Default Method: a completed Schedule R if the LLC did not attach a Schedule R to the original Form 568 filed for each tax year that a claim for refund is filed, or
   (b) For the Alternative Method: a completed 2008 LLC Income Worksheet with the respective information for each tax year that a claim for refund is filed.

NO ACTION REQUIRED

If the LLC is using the Default Method and has provided the completed Schedule R, you are not required to submit any further information at this time.

FAX Info To:

This information may be faxed to the FTB at: (916) 845-9796,

Or Mail To:

ABS 389 MS: F340
Franchise Tax Board
C/O FTB Notice 2009-04
P.O. Box 942867
Sacramento, CA 94267-8888

For Courier Service Delivery or Private Courier Mail:
ABS 389 MS: F340
Franchise Tax Board
C/O FTB Notice 2009-04
Sacramento, CA 95827

According to the Notice, faxed information will expedite the receipt of your information.

NEW CLAIMS for Refund Based on the Ventas Decision

If an LLC hasn't filed a claim yet, a claim may be filed, assuming the statute of limitations is still open.

If an LLC wants to file a claim for refund based on the Ventas decision, the LLC or its representative should fax a letter to the FTB stating, "This letter constitutes a claim for refund for (taxpayer's name) – Income Earned Within and Outside of California."

The letter must include:

1. For LLCs using the Default Method: the information listed above in items 1-4(a)
   under "Claims for Refund Previously Filed."
2. For LLCs that choose the Alternative Method: the information listed above in items 1-3 and 4(b) under "Claims for Refund Previously Filed."

Fax this letter and additional information to (916) 845-9796 or mail to one of the addresses shown above. The LLC's managing member or representative with a power of attorney must sign this letter, under penalty of perjury. Note that claims may only be filed for those tax years for which the statute of limitations remains open.

VIEW NOTICE: Click on the following link to access the Notice (FTB 2009-04):

http://www.ftb.ca.gov/law/notices/2009/2009_4.pdf

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

Arizona Amnesty Reminder: Time is Running Out!

The state of Arizona's tax amnesty program ends June 1, 2009. Taxpayers who take advantage of the program will not have to pay penalties, and will pay a reduced interest rate. Amnesty applies to individual and corporate income, transaction privilege (sales), use, withholding, partnership, fiduciary, and luxury taxes. The program covers taxable periods between January 1, 2002 and December 31, 2007.

The City of Phoenix's two-month tax amnesty program ends June 15, 2009. Under the program, taxpayers can pay delinquent privilege license tax (sales tax) or license fees without paying penalties, and only pay half the interest. The City has stated that stronger enforcement efforts will be put in place after the amnesty program ends.

Please note, there is additional criteria to be met to qualify for the amnesty programs.

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

Texas: In Good-Standing? / The Hurdles to a Tax Clearance Certificate

Is your company in "good-standing" with Texas? Are you sure? One way to find out is to go to Texas' website and enter your info. You can click on the following link to access Texas' website:

http://ecpa.cpa.state.tx.us/coa/Index.html

Why do I ask?

Well, I have had several companies or clients receive notices from Texas stating they need to file their 2008 Franchise Tax Report (2007 tax period). Some companies also didn't file their Public Information Report or Ownership Information Report.

The main reason these companies received notices is because they were included in a "combined return," and the "reporting entity" did one of three things:

1. didn't attach the "affiliate" schedule,
2. didn't attach the correct "affiliate schedule" (there is one for extension purposes and a different one for return filing purpose), or
3. filled out the "affiliate schedule" incorrectly.

The catch is, once these entities file the correct information, according to sources at Texas, it takes 6 to 8 weeks for Texas to process the response. Therefore, your company may still not be in "good-standing" for another couple of months.

Nexus Questionnaire Impact

In addition, I was recently told by Texas that a company wasn't in "good-standing" because it needed to file a nexus questionnaire.

The nexus questionnaire issue makes no sense to me. First of all, the company is being included in a combined return simply because of its affiliation with other related entities that have nexus in Texas. The company does not have nexus in Texas on its own; therefore, that is why it is not registered in Texas. Obviously, Texas cannot figure this out without the company filling out a nexus questionnaire. However, why does Texas really care, if the company is already being included in a combined return, their income or gross receipts are already being taxed? In any case, can Texas really keep a company from being in "good-standing" simply because it hasn't filled out a nexus questionnaire?

Tax Clearance Certificate?

You may be asking, why does this matter so much? Well, when a company needs to obtain a "tax clearance certificate," they need to be in good-standing with Texas. Hence, you can see how important it is to fill-out these reports correctly the first time. If you don't, it can cause costly delays for your business when attempting to make sales, obtain loans, etc.

These hurdles can be overcome, but it is not without a test of the patience and will.

What has your experience been with Texas?

Last Half of 2009: Here Comes the Stick!

This post is a "breather," if you will, a brief synopsis of the first 5 months of 2009, and a prediction for the rest of 2009.

The majority of states during the first 5 months of 2009 have experienced the harsh realities of the economic downturn, just like so many companies and individuals have. In response to that reality, they have focused on enacting amnesty programs, expanding "nexus" boundaries/limits, increasing tax rates or the tax base (depending on the tax type), instituting or proposing combined reporting, disallowing NOLs, not conforming to federal bonus depreciation, etc.

The amnesty programs, specifically, are often viewed as a "carrot" to get taxpayers to come forward and clean-up past liabilities while paying less interest and/or penalties, etc.

However, moving forward to the back-half of 2009, I believe the states will do the following:

1. Increase enforcement efforts via Notices and Audits
2. Assess Penalties on taxpayers who should have taken advantage of the Amnesty program and didn't
3. Continue to expand the application of Nexus (nexus questionnaires are coming)
4. Decrease time periods for taxpayers to file refund claims
5. OTHER (the other category includes anything and everything that will raise revenue but not appear as though it is raising taxes, at least on in-state taxpayers).

As companies downsize or right-size due to the "great recession," the burden of state and local tax compliance will only get worse, not better. Meaning, more to do, more difficult to resolve, with less resources to get it done. But remember, you are not alone.

And by the way, have a great Memorial Day Weekend!

Missouri Update: Combined Reporting FAILS! / No FAIR SALES TAX!

As reported earlier on this blog, Missouri was considering two bills, one that would have replaced individual and corporate income taxes, withholding tax, sales and use tax, and the bank franchise tax with a new "fair sales tax;" the other bill would have made several changes to the corporate income, personal income and sales and use tax, including implementing combined reporting.

As you may have guessed, both bills did not pass. The Missouri General Assembly adjourned on May 15, 2009 without passing either bill (HJR 36 and S.B. 241).

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

Minnesota: Legislation Signed by Governor (H.F. 1298)

Minnesota Governor signed legislation (H.F. 1298) on May 16, 2009, making changes to the corporate franchise tax, individual income tax, estate tax, sales and use tax, property tax and other miscellaneous taxes.

Click on the following to access the bill:

https://www.revisor.leg.state.mn.us/revisor/pages/search_status/status_detail.php?b=House&f=HF1298&ssn=0&y=2009

Some of the highlights of the bill are:

1. GENERAL conformity (with exceptions) to the Federal American Recovery and Reinvestment Act of 2009 (P.L. 111-5).
2. Bonus Depreciation is NOT adopted.
3. Increased Sec. 179 amounts are NOT adopted.
4. Federal deferral of discharge of indebtedness income resulting from reacquisition of business indebtedness in 2009 and 2010 NOT adopted.
5. New property tax exemptions and amendments for several types of properties such as: electric generation facilities, railroad property, nursing homes, and elderly living facilities.
6. Several other modifications made to property tax procedures and requirements.
7. Several amendments to sales tax exemptions, and provisions for miscellaneous items, including a Notification Requirement (by 12/31/2009, sales tax permit holders must be notified electronically of any statutory law change, and any issuance of or change in any administrative rule, revenue notice, or sales tax fact sheet or other guidance provided by the MN DOR).

For complete details or changes, click on the link provided above or contact me at leveragesalt@earthlink.net.

Minnesota: Budget Deal Awaits Governor's Action

According to StarTribune.com, the Minnesota legislative session ended yesterday without a budget deal.

The DFL-led House and Senate did pass an extremely large $2.7 billion bill that would erase the state's budget deficit through a $1 billion tax increase and a one-time shift. However, the Governor has vowed to use his veto power and unilaterally cut the bill or use "unallotments" to balance the budget without tax increases.

We shall see.

California: Is the New 20% UNDERSTATEMENT Penalty Constitutional? (ACT BY MAY 31st)

The California Taxpayers' Association (CalTax) filed a Complaint on February 17, 2009 challenging the constitutionality of California Revenue and Taxation Code section 19138 (which was added by section 5 of Senate Bill X1 28, and became effective on December 19, 2008). The Complaint contained six causes of action.

A Hearing was held on Friday, May 8, 2009 and Tentative Rulings were reached on several of the causes of action. Some of the tentative rulings and open items provide an opportunity for the "right" taxpayer to meet the burden of persuading the courts that California's 20% understatement penalty is unconstitutional.

The following is a summary of the background, complaint and tentative rulings:

BACKGROUND

Section 19138 purports to impose a "penalty" on any corporate taxpayers with an understatement of tax in excess of one million dollars ($1 million) for any taxable year. The penalty is equal to twenty percent (20%) of the total amount of the understatement, which is measured by the difference between the correct tax liability and the tax reported on the taxpayer's "original return."

Taxpayers required to be included in a combined report under Revenue and Taxation Code section 25101, or authorized to be included in a combined report under Revenue and Taxation Code section 25101.15, are combined and treated as a single entity for purposes of determining whether the understatement exceeds $1 million.

Section 19138 applies retroactively to each taxable year beginning on or after January 1, 2003, for which the statute of limitations on assessment has not expired. However, a taxpayer may reduce the likelihood of an underpayment penalty for prior taxable years by filing an amended return. For the 2003-2007 taxable years, if a taxpayer files an amended return and pays the tax shown on the amended return by May 31, 2009, the taxpayer may treat the tax shown on the amended return as the tax shown on the "original return" for purposes of determining any understatement of tax.

There are two express exceptions to liability under section 19138; no penalty shall be imposed where the understatement is attributable to (1) specified changes in law; or (2) the taxpayer's reasonable reliance on a legal ruling by the Chief Counsel of FTB.

The procedures of the Revenue and Taxation Code governing deficiency assessments – including the protest and appeal procedures -- do not apply to the assessment and collection of penalties under section 19138. Further, section 19138, subdivision (d) provides that a refund or credit for any amounts paid to satisfy a penalty imposed under section 19138 "may be allowed only on the grounds that the amount of the penalty was not properly computed by the Franchise Tax Board."

THE COMPLAINT

The Complaint contains six causes of action.

1. The First Cause of Action alleges that section 19138 violates article XIIIA, § 3 of the California Constitution because section 19138, while termed a penalty, in substance imposes a tax that was not approved by two-thirds of all members elected to each of the two houses of the Legislature.
2. The Second Cause of Action alleges that section 19138 violates article IV, § 8(b) of the California Constitution because SB X1 28 (which enacted section 19138) was not "printed and distributed" to the members of the Assembly and Senate before it was passed, and because the Senate failed to "read the bill by title" on three separate days or to dispense with this requirement by a two-thirds roll call vote.
3. The Third, Fourth, and Fifth Causes of Action allege that section 19138 violates the Due Process, Equal Protection, and Commerce Clause of the United States Constitution, respectively, because, among other reasons, it (a) affords no prepayment or post-payment review; (b) operates retroactively for an excessive period of time; (c) fails to give clear notice of what conduct it seeks to prohibit; (d) treats individual corporations different than combined groups of "unitary" corporations; and (e) disproportionately burdens interstate commerce.
4. The Sixth Cause of Action seeks declaratory relief that section 19138 is illegal and invalid for each of the reasons set forth above. CalTax seeks a declaration that section 19138 is unconstitutional on its face and a judgment enjoining its enforcement.

TENTATIVE RULINGS

1. CalTax did not meet its burden of proving that section 19138 violated Proposition 13.
2. No tentative ruling reached on this Complaint/Issue. At oral argument, the parties are directed to be prepared to address (1) how the "Enrolled Bill Rule" applies to this case; and (2) whether the facts presented show substantial compliance.
3. Excessive Fines Clause: CalTax did not meet its burden to show that section 19138 was unconstitutional on its face; though the Court did not foreclose the possibility that section 19138 may be found to be unconstitutional as applied to a particular taxpayer.
4. Substantive Due Process: The Court did not find the retroactive application of the penalty to be so harsh and oppressive as to transgress the constitutional limitation of the substantive due process clause.
5. Procedural Due Process: CalTax persuaded the Court that taxpayers lack a constitutionally adequate remedy in which to challenge the penalty. Accordingly, the portion of section 19138 purporting to limit the grounds upon which a refund claim may be allowed is unconstitutional and unenforceable. However, the Court is not necessarily persuaded that this renders section 19138 void in its entirety. At oral argument, the parties should be prepared to discuss whether it is possible to reform the statute to preserve it against invalidation under the Constitution.
6. Commerce Clause: CalTax failed to show that section 19138 facially discriminated against interstate commerce. According to the Court, a statute that has only incidental effects on interstate commerce must be upheld unless the burden imposed on interstate commerce is "clearly excessive" in relation to the putative local benefits.
7. Equal Protection Clause: CalTax has failed to show that the classification in section 19138 between taxpayers required to be included in a combined report, and those that are not, is not rationally related to a legitimate governmental purpose.

SUMMARY in Layman's Terms:

In layman's terms, the imposition of the 20% understatement penalty is like playing a game, following the rules outlined, and then after the game is over, the other player or judge changes the rules.

What Should Taxpayers Do?

At this time, taxpayers should review their California tax returns for 2003 through 2007 to determine if they understated their tax liability in excess of $1 million. They should also review their federal tax returns to determine if a federal return change could cause a California understatement in excess of $1 million. If the result is "yes" in either case, taxpayers must decide if they will file an amended return by May 31st to treat the tax shown on the amended return as the tax shown on the "original return" to avoid the 20% penalty.

At this time, the penalty has not been proven to be unconstitutional, but the door is open for the challenge to be made by a taxpayer that can meet the tests and burdens it takes. In the future, the statute could be determined to be unconstitutional, or the statute could be revised to make it constitutional. In either case, May 31st will come before that is decided.

California Taxpayers' Association v. California Franchise Tax Board, et al.,; Dept 29, Superior Court of California, County of Sacramento; (Case Number: 34-2009-80000168)

CLICK ON THE FOLLOWING TO ACCESS THE COURT CASE:

http://tr.saccourt.com/courtrooms/trulings/dept29/2009-80000168--05.07.2009.doc

Contact me at leveragesalt@earthlink.net if you have any questions.

New York Voluntary Disclosure and Compliance Program: Who are You Disclosing to?

New York state has amended their Voluntary Disclosure and Compliance program (VDC) to allow the Tax Department to disclose any return or report filed by a taxpayer under the VDC program to the Secretary of the Treasury of the United States, his or her delegates (this includes the IRS), or the proper tax officer of any state or city, as otherwise permitted in the Tax law.

Prior to the amendment, the law allowed for the disclosure of returns and reports filed under the VDC program to another agency only if the taxpayer failed to comply with the terms of a voluntary disclosure and compliance agreement.

The amendment took effect on April 7, 2009, and applies to returns or reports filed under the VDC program on or after that date. The amendment does not apply to any other information obtained from a taxpayer during the voluntary disclosure process, including the taxpayer's actual disclosure under the VDC program. That information remains confidential and will not be shared with another agency.

New York State Department of Taxation and Finance, Office of Tax Policy Analysis, Taxpayer Guidance Division

NY TSB-M-09(6)I, TSB-M-09(6)C, TSB-M-09(5)M, TSB-M-09(1)R, TSB-M-09(5)S; May 13, 2009

Budget Shortfalls = States Increasing Taxes

The Center on Budget and Policy Priorities recently published a couple of articles discussing how states are raising taxes to deal with their budget shortfalls. One of the articles reports that raising taxes is consistent with how states have responded during past recessions, and that raising taxes is sound policy.

The report also communicates that 16 states have enacted tax increases this year, and another 17 states are considering revenue-raising options. On the flip-side, 36 states have cut public services to reduce spending.

Click on the following links for access to the complete articles:

http://www.cbpp.org/cms/?fa=view&id=2816

http://www.cbpp.org/cms/?fa=view&id=2815

My Thoughts

As a taxpayer advocate and consultant, I can't say I agree with all of the writer's viewpoints. My first reaction would be that states, and the federal government, should cut spending when their revenue declines, just like you and me. On the other hand, if states choose to increase taxes, they need to ensure they follow proper procedures and enact taxes (and penalties like California) that are constitutional and fair. My major disagreement with the article is that I believe most Americans already feel they are taxed everywhere they look. Do we really need more taxes, fees and penalties?

I apologize for the 'soapbox,' I really didn't mean this post to go that way. But in any case, the activity among the state legislatures is hectic, which means, there is a great deal of change going on.

Wisconsin: Combined Reporting Guidance

Wisconsin has devoted several pages on their website to provide guidance regarding "combined reporting" that became effective for taxable years beginning on or after January 1, 2009.

Click on the following link to access Wisconsin's site:

http://www.revenue.wi.gov/combrept/index.html

After you click on the link, you will notice Wisconsin has created a "frequently asked questions" section. The FAQs are divided into the following categories:

1. Who Must Use Combined Reporting
2. Income Includable in Combined Reporting
3. Apportionment
4. Business Losses
5. Credits
6. Forms, Payments, and Administrative Issues
7. Other Issues Affecting Combined Filers

If you have any questions regarding Wisconsin combined reporting, please contact me at leveragesalt@earthlink.net.

Texas: Franchise Tax Returns DUE MAY 15th!

Texas Franchise Tax (Margin Tax) returns for the 2009 Report Year (2008 Tax Year) are due this Friday (May 15, 2009).

Here are a couple of reminders/tips:

1. If you will be filing an extension, remember 90% of the current year's tax is due with the extension to avoid interest and penalties.

2. If you are filing a combined return, remember to file the correct "Affiliate Schedule." There is one for extension purposes and a different one to be filed with the actual return.

3. If you have any limited partnerships that qualify as "passive entities," remember passive entities are not included in a combined return. In addition, information reports are not required to be filed for passive entities.

4. For all entities that have nexus in Texas, information reports are required to be filed in addition to the Texas Franchise Tax return. Remember to file the correct information report ("Ownership Information Report" or "Public Information Report").

If you have any questions regarding the Texas Franchise Tax (Margin Tax), please contact me at leveragesalt@earthlink.net.

Florida Update: Combined Reporting FAILED!

As previously reported, Florida was proposing enacting combined reporting; however, the legislature has adjourned without passing the legislation.

S.B. 2270 and H.B. 1247.

California: Large Corporate Understatement Penalty - Opportunity to Avoid 20% Penalty: Act by May 31st!

In California's May Tax News, California provides guidance regarding the payment of tax and filing of amended returns under California Revenue and Taxation Code Section 19138, subdivision (b). Section 19138 became effective December 19, 2008, and applies to taxable years beginning on or after January 1, 2003, for which the statute of limitations on assessment had not expired as of December 19, 2008.

Who does the penalty apply to?

Section 19138 imposes a large corporate understatement penalty to taxpayers who have understated their tax in excess of $1 million.

What is the amount of the penalty?

The penalty is 20% of the entire amount of the understatement, which is measured by the difference between the correct tax liability and the tax reported on the original return or an amended return filed on or before the extended due date.

When does the penalty NOT apply?

The penalty will not be imposed to the extent the understatement of tax is attributable to a change in law that is enacted, promulgated, issued, or becomes final after the earlier of the date the taxpayer files the return or the extended due date of the return for the taxable year for which the change is operative. In addition, the penalty will not be imposed to the extent that the understatement of tax is attributable to the taxpayer's reasonable reliance on a legal ruling by California's Chief Counsel.

When is penalty due?

The penalty is payable upon notice and demand, and claims for refund of amounts paid in satisfaction of the penalty may be allowed only if the penalty was computed incorrectly.

OPPORTUNITY TO AVOID PENALTY - Act by May 31, 2009

For the 2003-2007 taxable years, a taxpayer can file an amended return and pay the tax shown on the amended return by May 31, 2009, in order to treat the tax shown on the amended return as tax shown on the original return for purposes of the penalty. This action will increase the taxpayer's self-assessed tax base against which the understatement of tax is measured to reduce the likelihood of receiving the penalty for those years.

Click on the following link to access California's May Tax News article:

http://www.ftb.ca.gov/professionals/taxnews/2009/May/Big_Business.shtml

California Resources

California has a webpage on ftb.ca.gov for the large corporate understatement penalty that brings together all Section 19138 information and resources. California provides additional information and procedural guidance relating to the penalty, including payment of tax, and filing of amended returns for the 2003-2007 tax years.

SIDENOTE - Constitutional Challenge to Imposition of Penalty

The California Taxpayer's Association filed a lawsuit in the Sacramento Superior Court on April 24, 2009 alleging that the new penalty violates both the California and U.S. constitutions. It is currently not know when the court will decide the case or how it will rule.

As always, if you have questions, please contact me at leveragesalt@earthlink.net.

Maryland: Amnesty Set for September 1st!

Recent legislation (S.B. 552) signed by the Governor of Maryland, creates an amnesty program set to begin September 1st and run through October 30, 2009.

Amnesty from what?

The amnesty program applies to taxpayers who failed to file a return or pay personal income, corporate income, withholding, sales and use, or admissions and amusement taxes.

Benefits of Amnesty?

Under the program, Maryland will waive civil penalties (except previously assessed fraud penalties), and half of the interest due.

What must a taxpayer do?

A taxpayer must file all delinquent returns, pay all of the tax, and half of the interest due; or enter into an agreement with the comptroller during the amnesty period.

Who doesn't qualify for the amnesty?

1. Taxpayers who have more than 500 U.S. employees as of September 1, 2009 or are a member of a corporate group that has more than 500 employees
2. Taxpayers who participated in the 2001 Maryland amnesty program
3. Taxpayers who were eligible for the 2004 Delaware holding company settlement period

Applicability to Criminal Tax Offenses?

Taxpayers cannot be charged with a criminal tax offense arising out of any return filed or tax paid during the amnesty period, but amnesty does not apply to criminal charges that are already pending or under investigation.

Summary

It is in your best interest to consult a state tax professional before taking advantage of any amnesty program to ensure that you qualify, and to clearly understand the advantages and disadvantages of utilizing the program.

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

Click on the following link to access the bill:

http://mlis.state.md.us/2009rs/bills/sb/sb0552e.pdf

California LLC Fee: New Estimated Payment Due Date Guidance

In California's May edition of Tax News, California provides a reminder and additional guidance regarding the new estimated payment due date and forms to use.

New Estimated Payment Requirement

According to California, for taxable years beginning on or after January 1, 2009, the annual LLC fee must be estimated and paid by the 15th day of the 6th month of the current taxable year. For calendar-year LLCs, June 15, 2009 is the first due date for the new estimated fee for LLCs.

Who is Subject to the LLC Fee?

LLCs are subject to an annual fee based on their total California annual income. Total California annual income, for purposes of the LLC fee, means gross income plus the cost of goods sold that are paid or incurred in connection with the trade or business of the taxpayer derived from or attributable to this state.

If an LLC has a total California annual income of $250,000 or greater, the LLC must report a fee. The annual fee is due by the original due date of the return, which is the 15th day of the 4th month following the close of its taxable year.

A new penalty of 10 percent of the underpayment of the estimated fee will apply if the estimated LLC fee is underpaid.

Who is required to make an estimated payment?

An LLC makes an estimated LLC fee payment if they expect to owe a fee for the 2009 tax year.

LLCs will use new form FTB 3536 , Estimated Fee for LLCs, to remit the estimated fee. LLCs will also use form FTB 3536 (or FTB 3588 for an e-filed return) to pay by the due date of the LLC’s return, any amount of the LLC fee due which was not paid as an estimated fee payment.

How to Compute Fee

The new FTB 3536 has been revised to provide guidance on how to compute the estimated fee. The guidance provides that as the fee owed for 2009 may not be known by the 15th day of the 6th month of the current taxable year, LLCs may estimate the 2009 fee by completing the prior year LLC Income Worksheet, included in the 2008 Form 568 Booklet. LLCs use amounts of income expected for the 2009 taxable year to estimate the 2009 fee amount.

File on Time to Avoid Penalties and Interest

Mail the form along with the check or money order payable to us by the 15th day of the 6th month of the current taxable year (fiscal year) or June 15, 2009 (calendar year), to avoid late payment penalties and interest.

Note Regarding $800 Minimum Tax

Continue to use form FTB 3522 , LLC Tax Voucher, to pay the annual tax of $800 for taxable year 2009.

All forms are available on the Internet. Go to ftb.ca.gov and search for forms.

Click on the following link to access California's Tax News:

http://www.ftb.ca.gov/professionals/taxnews/2009/May/Index.shtml

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

State and Local Tax Consultants and Practices: Improve the Client Experience

What makes a state and local tax practice successful?

What makes a good state and local tax consultant or client experience?

Here are some of my thoughts regarding SALT practices:

1. SALT practices need to be more interactive and accessible by clients and prospective clients

2. SALT consultants need to understand a client’s business just as much as they understand SALT

3. SALT practices need to create customized solutions

4. SALT practices need to differentiate themselves from other SALT practices based on:

• technical expertise


• reputation


• client experience / attention


• responsiveness


• understanding of client’s business


• timeliness


• experience with issue


• relationships with clients and taxing authorities

Other Thoughts:

Clients with in-house SALT professionals generally want SALT consultants who:

• know more than they do


• have experience with their industry, issues and state


• have inside connections with taxing authorities


• have handled the same issue for other clients

Clients with in-house SALT professionals generally use SALT consultants:

• as a sounding board or second opinion


• for difficult research


• for projects / big dollar issues


• for audits / appeals for refund reviews


• as additional resource if they lack expertise, time, or people, etc.

As a fellow state tax professional or client, what do you think?

Please post a comment or send me an e-mail at leveragesalt@earthlink.net.

Alabama: Watch Out for NEW PENALTY!

Effective March 24, 2009, Alabama is imposing a new failure to timely pay penalty. The new penalty applies to any tax amount that was required to be shown on any tax return, if the tax remains unpaid after 30 calendar days from the date the department notifies the taxpayer of the unpaid amount (Alabama Act 2009-144).

According to the Alabama Department of Revenue (ADOR), the most common situations where the new penalty would be imposed are tax audits or tax return adjustments. The new late payment penalty would apply to a tax liability determined during an audit or following the adjustment of a taxpayer's return, if the tax remains unpaid for over 30 days after the taxpayer receives notice that the tax is due.

Application to Annual Returns

For annual returns with unpaid tax amounts, the new late payment penalty is calculated at one percent of the amount of tax due per month, or fraction of a month, that the tax remains unpaid. The failure to pay penalty cannot exceed 25 percent of the total amount of tax determined to be due.

Application to Monthly or Quarterly Returns

In the case of monthly or quarterly returns with unpaid tax amounts, the new law provides that the failure to timely pay penalty will be 10 percent of any tax not paid after 30 days from the date the ADOR notifies the taxpayer of the liability.

For more information about Alabama's tax penalties, go to http://www.revenue.alabama.gov/.

As always, if you have any questions, please contact me at leveragesalt@earthlink.net.

Los Angeles: Tax Penalty Amnesty Program

The City of Los Angeles has announced a tax penalty amnesty program to be conducted during the period of May 1, 2009 through July 31, 2009.

The program applies to penalties for delinquent tax liabilities for tax periods ending on or before July 31, 2009, and applies to the following taxes: Business Taxes; Telephone, Electricity and Gas Users Taxes; Commercial Tenant's Occupancy Taxes; Transient Occupancy Taxes; and Parking Occupancy Taxes.

Do You Qualify for the Program?

The program applies to any taxpayer who, on or after May 1, 2009, and on or before July 31, 2009, files an application for tax penalty amnesty and complies with the following conditions:

1. Files completed tax statements or returns for all periods and taxes for which the taxpayer has not previously filed a tax statement or return and files completed amended tax statements or returns for all periods for which the taxpayer underreported the taxes due;

2. Pays in full all taxes and interest due; and

3. Pays all costs and fees incurred and due with respect to the collection of any delinquent taxes.


(L.A. Municipal Code Article 1.12, amended by Ord. No. 180,598, Eff. 4/19/09)

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

North Carolina: Voluntary Disclosure Program Info

In April, the North Carolina Department of Revenue (DOR) released a communication discussing their Voluntary Disclosure Program. The NC DOR would like taxpayers to take advantage of the program, especially during this slow economy.

Details and Benefits

Now, the Voluntary Disclosure Program allows taxpayers who have never filed returns or registered for state taxes, such as sales and withholding, and who have not been contacted by the North Carolina Department of Revenue about their taxes, to file and pay those taxes without the usual civil penalties and other consequences.

While certain penalties may apply to Voluntary Disclosure participants, the penalties are much less severe than for oversights uncovered during audits or other examinations.

As stated in NC DOR's communication, to qualify for Voluntary Disclosure, a taxpayer must meet all of the following conditions:

1. Not have been contacted by the Department of Revenue about any state tax for which voluntary disclosure is requested
2. Does not owe any state taxes
3. Is not being audited for any state taxes
4. Was never previously registered for the tax schedule being disclosed
5. Has never filed a return with the department for the tax schedule being disclosed
6. Must pay the tax due plus accrued interest; the department will calculate the interest due and notify the taxpayer upon request
7. Must make records available to the Department of Revenue for audit to verify the amount of the tax liability and the accuracy of the representations
8. Must comply with all tax laws for all state tax schedules after the disclosure

As stated in the NC DOR communication, initial requests to participate in the Voluntary Disclosure Program are anonymous; often taxpayers make such requests through tax preparers, accountants or attorneys.

Also, Voluntary Disclosure is available for individual taxpayers as well as businesses. The benefits include the waiver of civil penalties and an agreement not to pursue criminal charges by the department. Taxpayers can save hundreds or potentially thousands of dollars in penalties by coming forward. In addition, taxpayers who qualify for Voluntary Disclosure must pay any taxes due for the past four delinquent years.

Click on the following link to directly access the NC DOR Communication:

http://www.dornc.com/aboutus/education/voluntary_disclosure.html

Voluntary Disclosure Programs in General

Generally, as discussed in earlier posts, "nexus" or having a taxable presence in a state creates filing obligations that are often overlooked. Hence, your business may have tax obligations in NC or other states and not know it. Voluntary Disclosure Programs are good "tools" to allow your business to get in compliance at reduced costs.

If you are not familiar with Voluntary Disclosure Programs, most, if not all states, have similar types of programs. Therefore, if you are considering taking advantage of North Carolina's program or another state's program, please contact me at leveragesalt@earthlink.net to discuss.