California: Special Session Coming in September (Tax Reform?)

On July 29, 2009, Governor Schwarzenegger issued Executive Order S-15-09 stating he will call a special session in September 2009 to consider the recommendations made by the Commission on the 21st Century Economy ("Commission") to improve California's state tax system.

The Executive Order discusses how California's tax revenues have experienced large fluctuations over the past decade making it difficult to fund the operations of the government. Therefore, the tax system needs to be updated for the new economy and the next century.

According to the Executive Order, on or before September 20, 2009, the Commission shall deliver a report to the Governor and to the Legislature with recommendations to change laws to achieve the following goals:

1. Establish 21st century tax structure that fits with state's 21st century economy;


2. Stabilize state revenues and reduce volatility;


3. Promote the long-term economic prosperity of the state and its citizens;


4. Improve California's ability to successfully compete with other states and nations for jobs and investments;


5. Reflect principles of sound tax policy including simplicity, competitiveness, efficiency, predictability, stability and ease of compliance and administration;


6. Ensure that tax structure is fair and equitable.

As reported in an earlier blog post, the Commission is considering a business net receipts tax as one of the possible tax reforms (For details, see http://leveragesalt.blogspot.com/2009/07/california-still-considering-tax-reform.html)

Click on the following link to access the Executive Order:

http://www.gov.ca.gov/executive-order/12921/

Washington Changes Taxation of "Digital Products"

Washington Governor signed and enacted House Bill 2075 (HB 2075) on May 20, 2009 which imposes sales or use tax on digital products ranging from downloaded music to streaming video beginning July 26, 2009.

HB 2075 clarifies how taxes apply to products that exist only as computer bits and bytes. Specifically, it:

1. Defines digital products as goods and services transferred electronically.
2. Includes certain exemptions for businesses and end consumers.
3. Requires sellers of digital products to electronically file their tax returns.
4. Provides amnesty to those who didn’t collect or pay sales or use tax on digital products that were taxed before July 26, 2009.

What digital products are subject to tax?

While downloaded digital goods (music and movies, etc.) have always been subject to sales or use tax, the new law applies sales or use tax to all digital products, regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc.).

Digital products subject to sales or use tax include:

1. Downloaded digital goods (music and movies, etc.)
2. Streamed and accessed digital goods
3. Digital automated services (DAS)
4. The bill also covers remote access software (e.g. application service providers), which is now subject to sales and use tax too.
5. It does not matter if the purchaser obtains a permanent or nonpermanent right of use. (See sections 301(8) and 305(1)(e) of the digital products bill).

Click on the following link to access Washington's website and learn more:

http://dor.wa.gov/Content/GetAFormOrPublication/PublicationBySubject/TaxTopics/DigitalProducts.aspx

If you have questions regarding these changes, please contact me at leveragesalt@earthlink.net.

North Carolina and the Resolution Initiative

North Carolina has secretly or informally (whatever you want to call it), established a Resolution Initiative. North Carolina has not publicly released any information on the Initiative; however, the "election to participate" form should be made available.

Several of the larger accounting firms have released publications discussing the Initiative. I have provided links to a couple of them:

http://apps.pwcmindlink.pwc.com/ssoapp/mywto/intopublic.nsf/pstomain?openpage

http://www.grantthornton.com/staticfiles/GTCom/Tax/Files/SALT%20Alerts/GrantThornton_SALTAlert_07-21-09_NC.pdf

Since you can click on the above links to get all of the details, I will only provide a high-level summary:

1. The Resolution Initiative applies to corporate income and franchise tax.
2. The NC DOR is contacting taxpayers under audit to participate.
3. Taxpayers not currently under audit may also participate.
4. Taxpayers desiring to participate must sign a participation agreement by September 15, 2009.
5. A taxpayer that opts out of the agreement after submitting the agreement to the NC DOR, will be faced with expedited assessments and final determinations.

Personal Commentary

It appears as though North Carolina is attempting to resolve technically controversial issues quickly in order to raise revenue, while providing a "carrot" (waiver of all applicable civil penalties; and waiver of all rights to assess any additional corporate tax, interest or penalties except for adjustments relating to federal corrections) to taxpayers.

What Should You Do?

Taxpayers who have some of the issues being targeted by the Initiative, should seriously consider this opportunity. However, like all opportunities, there are pros and cons which must be weighed before action is taken.

If you have any questions or would like assistance in analyzing this "opportunity," please contact me at leveragesalt@earthlink.net.

New Hampshire: Distributions from LLCs, Partnerships and Associations Now Subject to Interest and Dividends Tax

The New Hampshire Governor recently signed HB2 resulting in changes to the Interest and Dividends Tax law (RSA 77) making all distributions from Limited Liability Companies (“LLCs”), Partnerships and Associations subject to the Interest and Dividends Tax to the same extent that distributions from Corporations are subject to the tax.

To provide clarification regarding the changes imposed by the HB2 legislation, New Hampshire published Technical Information Release (TIR 2009-008) on July 16, 2009.

The technical information release states the following:

1. Distributions from LLCs, partnerships and associations will only be subject to the Interest and Dividends Tax to the same extent that distributions to corporate shareholders are taxable as dividends.
2. A distribution that is a return of capital is not subject to taxation.
3. In order to determine whether a distribution is a return of capital, the entity must first determine its accumulated profits.
4. Accumulated profits is determined for LLCs, partnerships, associations and S corporations in a manner that is equivalent to a calculation made by a C Corporation of its earnings and profits under the Internal Revenue Code of 1986, as amended.
5. The compensation deduction as provided in RSA 77-A:4,III shall be considered a reduction in revenue of an LLC or partnership in the same way that compensation paid by a corporation is a reduction in “earnings and profits.” As a consequence, the value of personal services of a partner or member of an LLC to the partnership or LLC is not subject to taxation.
6. Liquidating distributions are not subject to taxation.

Impact on LLCs, Partnerships and Associations

LLCs, partnerships and associations that have non-transferable shares and were, under prior law, required to file and pay the Interest and Dividends Tax will no longer be required to file returns or pay the tax. Rather, the members, partners, and owners will pay the Interest and Dividends tax on the distributions from these entities.

Effective Date

The changes are effective for calendar year/tax years beginning on or after January 1, 2009. All distributions made during the year are subject to the tax based on the calculation of earnings and profits for the entire tax year.

If you have any questions regarding this law change and how it impacts your business, please contact me at leveragesalt@earthlink.net.

Click on the following link to access the Technical Information Release:

http://www.nh.gov/revenue/laws/documents/2009_008.pdf

Illinois Increases Replacement Tax on Partnerships

With the signing of SB 1912 on 7/15/09, Illinois has amended the computation of the replacement tax for partnerships which appears to be a 'revenue raiser' for the state.

On page 156 of the bill (SB 1912), the legislation repeals the addback of any guaranteed payments deducted for federal income tax purposes for tax years ending on or after December 31, 2009:

The amount of deductions allowed to the
partnership pursuant to Section 707 (c) of the Internal
Revenue Code in calculating its taxable income;
provided that no addition shall be required under this
subparagraph (C) for taxable years ending on or after
December 31, 2009, for deductions allowed for
guaranteed payments to an individual partner for
personal services by that partner;

On page 165 of the bill (SB 1912), the legislation repeals the subtraction for personal service income or a reasonable allowance for compensation paid or accrued for services rendered by partners to the partnership for tax years ending on or after December 31, 2009:

For taxable years ending before December 31,
2009, Any income of the partnership which constitutes
personal service income as defined in Section 1348 (b)
(1) of the Internal Revenue Code (as in effect December
31, 1981) or a reasonable allowance for compensation
paid or accrued for services rendered by partners to
the partnership, whichever is greater;

What Does This Mean?

For tax years ending on or after December 31, 2009, partnerships will only be allowed to deduct guaranteed payments for services rendered by partners, and will not be allowed to deduct "reasonable compensation." Hence, partnerships will most likely pay more tax.

If you operate a partnership that pays compensation on performance or some other measure that is not 'predictable' at the beginning of the year, this change may affect you the most.

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

Click on the following to access the entire 273 page bill:

http://www.ilga.gov/legislation/publicacts/96/PDF/096-0045.pdf

For all future updates regarding this legislation, go to ILLINOIS.

Michigan: Tax Compliance Bureau Ignores Revenue Act, Makes Own Laws

The Michigan Department of Treasury policy on use tax audits is to ignore the statute of limitations provisions of the Revenue Act when no use tax is paid, according to Ed Kisscorni, a CPA at Echelbarger, Himebaugh, Tamm & Co., P.C. in Grand Rapids, Michigan. In a recent post on his blog, he discusses Michigan's policy and its impact on taxpayers.

Excerpts from Ed's blog post:

"The Michigan Department of Treasury (Treasury) policy on use tax audits is to ignore the statute of limitations provisions of the Revenue Act when no use tax is paid. If the taxpayer has never been registered for either the sales tax or the complimentary use tax they will be audited for up to a 10 year look back period. The auditor must have sufficient evidence that the use tax is due and owing to the state for periods beyond 4 years."

Michigan's Internal Policy Definition for a Non-Filer for Use Tax

According to Ed:

The "treasury asserts the 10 year audit period for use tax non-filers. A non-filer for use tax means: (a.) The taxpayer is registered for withholding only; (b.) The taxpayer is registered for single business tax only; (c.) The taxpayer is registered for withholding and single business tax only, or (d.) The taxpayer is not registered. Treasury does not recognize the filing of the combined Sales-Use-Withholding return as filing of a use tax return unless a use tax is paid. The audit period will be limited to 4 years if the taxpayer is registered for sales tax. Although the Revenue Act states the statute of limitations for non-filers extends to the inception of the tax, Treasury is limiting the look back period to 10 years."

Common Understanding by Taxpayers

Again, according to Ed:

"Many taxpayers believe the mere filing of the combined SALES-USE-WITHHOLDING return satisfies the statutory requirement to establish that a "return was filed". Reading the statute [MCL 205.27a(2)] seems to support their contention that the law does not require "registration" as a prerequisite to start the running of the statute of limitation period. See Section 27a, Paragraph 2 of the Revenue Act printed below.Treasury has stated that the Legal and Hearings Division of the Department of Treasury support the audit activity of the Tax Compliance Bureau. That means at Informal Conference, the 10 year audit has been upheld. I know of no litigation outside of the Department of Treasury on this issue."

(Actual) Michigan Statute

MCL 205.27a(2):
A deficiency, interest, or penalty shall not be assessed after the expiration of 4 years after the date set for the filing of the required return or after the date the return was filed, whichever is later. The taxpayer shall not claim a refund of any amount paid to the department after the expiration of 4 years after the date set for the filing of the original return. A person who has failed to file a return is liable for all taxes due for the entire period for which the person would be subject to the taxes. If a person subject to tax fraudulently conceals any liability for the tax or a part of the tax, or fails to notify the department of any alteration in or modification of federal tax liability, the department, within 2 years after discovery of the fraud or the failure to notify, shall assess the tax with penalties and interest as provided by this act, computed from the date on which the tax liability originally accrued. The tax, penalties, and interest are due and payable after notice and hearing as provided by this act.

My Opinion

How can the legal and hearings division support the audit activity, when the position is in direct opposition to the statute or Revenue Act? This appears as though the audit division is making law. If Michigan wants a 10 year look back or if they want to require registration for the statute to start, then they need to change the statute first.

If you have any questions or have experienced this treatment by Michigan, please comment or contact me at leveragesalt@earthlink.net.

Click on the following link to access Ed's blog post:

http://michiganstateandlocaltax.com/2009/07/24/ten-year-use-tax-audits.aspx

The "Amazon Law": Should All States Adopt it?

Michael Mazerov has written an article on "The Center on Budget Policy and Priorities" website entitled, "New York’s “Amazon Law”: An Important Tool for Collecting Taxes Owed on Internet Purchases."

Click on the following link to access the article:

http://www.cbpp.org/cms/index.cfm?fa=view&id=2876

Synopsis of Article

The article states or argues that all states should consider imposing the "Amazon Law" similar to New York to require remote online sellers to collect sales tax from their purchasers. The article states that failure to tax internet sales is harmful and inequitable, and allowing states to tax internet sales would help states close a significant part of the internet sales gap.

My Observations

I agree with the article, in that the taxes on remote sales are currently legally taxable and collectible. It just so happens, that they are currently taxable and collectible from the purchaser, not the remote seller. Therefore, every business and individual that makes a taxable purchase from a remote or online seller, is required to report the sale and pay "use tax" to the state in which the purchaser lives or is using the item purchased.

Since "use tax" compliance is difficult to enforce, enacting or adopting of an "Amazon Law" allows states to obtain the tax from the seller instead of the purchaser; thereby, supposedly increasing compliance and state revenues.

The article discusses how large remote sellers/retailers already collect sales tax in most states (due to other factors); therefore, compliance would not be burdensome for them. My question is, what about all of the smaller businesses or middle-market businesses that sell over the internet? These business most likely do not already collect sales tax in most states; therefore, the increased compliance may be burdensome for them?

Conclusion

Overall, the article makes interesting points in support of the "Amazon law;" however, at this time, I'm still not sure the law is constitutional, and its implementation or enactment may be more burdensome than expected.

What do you think? Please comment on this post or e-mail me at leveragesalt@earthlink.net with your opinions.

Are You an S Corporation in California? Really?

Case:

Golden West Health Plan, Inc. v. Franchise Tax Board of the State of California, (court of appeal, second appellate district, division seven, B205246, Los Angeles County Super. Ct. No. BC353849)

Click on the following link to access the case:

http://www.courtinfo.ca.gov/opinions/nonpub/B205246.PDF

Analysis and Application to You

Taxpayer filed an election with the IRS to be treated as an S corporation for federal income tax purposes in 1989. Taxpayer received notice in November, 1989 that its election was effective; despite the fact it had failed to file required consents of all shareholders and shareholder spouses.

In 2002, in preparation for a sale of its stock, the taxpayer discovered the lack of consents and sought relief. The IRS granted relief in April, 2003 and deemed the election valid as of its date of initial filing in 1989.

In December 2003, the taxpayer applied for a Chief Counsel Ruling from the Franchise Tax Board as to its status for California tax purposes; the opinion, indicated that the corporation had a valid S election as of January 1, 1997, and expressed no opinion as to status for prior years.

Why does this matter?

If the taxpayer did not have a valid S corporation election in California for 10 years prior to the 2003 sale, the taxpayer would be subject to an additional California gains tax on the sale of its assets in June 2003. The taxpayer filed a tax return for 2003, paid the additional tax of $699,045 and timely sought a refund.

Result

The matter was taken to court. The trial court ruled in the taxpayer’s favor. However, California appealed and the appeals court of the second appellate district, division seven, ruled in California’s favor. Meaning, the S election for California purposes was ruled to only be retroactive to 1997. Therefore, the taxpayer still had to pay the additional tax of $699,045.

Basis for Result

1. Internal Revenue Code (IRC) was amended in 1996 to treat late filed S corporation elections as timely (treating the election as valid as of the original date of the election).
   
2. California generally follows federal statutes in implementing California’s tax provisions; however, the IRC is revised on an ongoing basis. As a result, changes in federal law do not automatically apply, but must be reviewed by the California legislature and adopted.
   
3. California did adopt the IRC 1996 amendments, but specifically stated the relief for California purposes, only applied to taxable years beginning on or after January 1, 1997.

Takeaways

1. If you are an S corporation operating in California, review your election filings and ensure that all consents were obtained.
2. If all consents were not obtained, you could apply for relief with the IRS and California. (The resulting effective date of the election may not be the same).
3. Do not assume a state follows the IRC. Each state has rules they follow regarding “conformity” to the IRC (i.e., adopting and effective dates, etc.).
4. When the IRC and a state’s statutes do not agree, the state’s statutes most likely will “trump” the IRC for state purposes; however, as with all matters, do not assume anything. The appellate court in this case reviewed the legislative intent of California’s statute to conclude California’s relief should only be retroactive to January 1, 1997.

If you have any questions regarding how to apply for relief or determine a state's conformity with the IRC, please contact me at leveragesalt@earthlink.net.

Louisiana Tax Amnesty Program Set to Begin Sept 1st!

Louisiana has established the 2009 Louisiana Tax Amnesty Program to run from September 1 through October 31.

Click on the following link to access Louisiana's Press Release:

http://www.rev.state.la.us/sections/publications/viewrelease.aspx?id=264

According to the press release, the Louisiana Tax Delinquency Amnesty Act of 2009 allows taxpayers to settle account balances, overdue audit assessments, and certain tax disputes with no penalties and only half of the interest on what they owe.

The 2009 Louisiana Tax Amnesty Program applies to resident and non-resident individuals, and in-state and multi-state businesses.

The amnesty can be applied to:

1. All taxes administered and collected by LDR, except for motor fuel taxes;
2. Taxes that became due on or after July 1, 2001 and before January 1, 2009;
3. Taxes due prior to January 1, 2009 for which LDR has issued a billing notice or demand for payment on or after July 1, 2001 and before May 31, 2009;
4. Taxes for which the taxpayer and LDR have entered into an agreement to suspend the running of prescription until December 31, 2009;
5. Taxes due on or before July 1, 2001 but were ineligible for an earlier amnesty program due to civil litigation.

A taxpayer qualifies for amnesty:

1. If they failed to file a tax return or report;
2. If they failed to report all income or all tax, interest and penalties that were due;
3. If they claimed incorrect credits or deductions;
4. If they misrepresented or omitted any tax due;
5. If they are under audit or in administrative or judicial litigation.

For more information and a list of frequently-asked questions, visit the Louisiana Tax Amnesty Program page at http://www.revenue.louisiana.gov/.

Click on the following link to access the Louisiana Bill (HB 720):

http://legis.state.la.us/billdata/streamdocument.asp?did=668802

If you have any questions regarding Louisiana's Amnesty program, please contact me at leveragesalt@earthlink.net.

California Still Considering Tax Reform: Net Receipts Tax?

The California Commission on the 21st Century Economy (http://www.cotce.ca.gov/) met on July 16, 2009 and discussed several "tax packages" or potential changes to the state's tax laws.

Click on the following to access the presentation from the July 16, 2009 meeting:

http://www.cotce.ca.gov/meetings/2009/7-16/testimony/documents/STAFF_PRESENTATION_7-16-09.pdf

The following is a high-level summary of the "tax packages" discussed:

Tax Structure Package 1:

1. Uniform personal income tax rate of 6%
2. Standard deduction of $15,000 single/$30,000 joint
3. Itemized deductions for mortgage interest, property tax, charitable contributions, phased out at higher income levels
4. Eliminate corporation tax
5. Eliminate state sales tax
6. Impose NET RECEIPTS TAX

Click on the following link to view a tentative summary of California's proposed Business Net Receipts Tax (BNRT):

http://www.cotce.ca.gov/documents/correspondence/documents/STAFF%20MEMO%20-%20TAX%20PACKAGES%20&%20BNRT%20-%207.14%20-%202%20OF%203.pdf

Tax Structure Package 2:

1. Personal income tax: two rates: 3.75% up to $25,000 single/$50,000 joint, 7% at higher income levels
2. Standard deduction of $15,000 single / $30,000 joint
3. Itemized deductions for mortgage interest, property tax, charitable contributions, phased out at higher income levels
4. Reduce corporation tax rate to 7%
5. Impose new Fuels tax

A package of recommendations is scheduled to be delivered to Governor Schwarzenegger and the Legislature by July 31, 2009.

Are Michigan Auditors Ignoring Statute of Limitations?

Are Michigan auditors ignoring the statute of limitations? Shouldn't filing a return start the statute of limitations even if the taxpayer never registered for the tax?

EXAMPLE:

MI combines its sales, use, and withholding taxes onto a single form (Form 160).

A taxpayer files the form since the first month they have had employees; therefore a return for sales, use and withholding taxes has been filed monthly for the last 15 years.

Upon audit, the auditors go back 15 years since the taxpayer did not REGISTER for sales and use tax with the State, even though they have filed returns.

REQUEST FOR FEEDBACK

Based on Michigan statutes, this appears to be wrong.

What do you think? Any one else have a similar experience?

Please comment on this post or e-mail me at leveragesalt@earthlink.net.

Oregon Enacts Amnesty Program

The Governor of Oregon has signed legislation (SB 880) establishing an Amnesty Program for taxpayers and tax periods described below.

Amnesty Period

According to SB 880, the tax amnesty program runs from October 1, 2009 to November 19,2009.

Eligible Tax Years

The tax amnesty program applies to tax years, reporting periods and estates for which the department could issue a notice of deficiency under ORS 305.265 or 314.410, as amended and in effect on September 27, 2009.

Eligible Taxpayers

A taxpayer who meets all of the following requirements may participate in the tax amnesty program:

The taxpayer must have been required to:

1. File a tax return under ORS chapter 314, 316, 317 or 318f or a tax year that begins before January 1, 2008;
2. Pay personal income tax imposed under ORS chapter 316 for a tax year or reporting period that begins before January 1, 2008;
3. Pay tax imposed under ORS chapter 317 or 318 for a tax year or reporting period that begins before January 1, 2008;
4. File a return under ORS chapter 118 and pay any required tax, if the return was due prior to January 1, 2008; or
5. Pay any tax imposed on net earnings from self-employment pursuant to ORS 267.385, if required to do so prior to January 1,2008;

The taxpayer files a completed amnesty application with the department, signed under penalty of perjury, to participate in the tax amnesty program; and within 60 days after the conclusion of the tax amnesty program, the taxpayer does all of the following:

1. Files a completed tax return or report for all tax years or reporting periods for which the taxpayer had not previously done so;
2. Files a completed amended tax return or report for all tax years or reporting periods for which the taxpayer under reported or underpaid the tax liability of the taxpayer; and
3. Pays in full the taxes due, and 50 percent of the interest due, for all tax years or reporting periods or applies for an installment payment agreement that applies to the taxes and interest due for all tax years or reporting periods for which taxes remain unpaid.

Benefits of Amnesty

For any taxpayer who fully complies with the tax amnesty program, the Department of Revenue will waive all applicable penalties (including criminal penalties), and waive 50 percent of any interest otherwise due.

Installment Agreement Failure

If the department has entered into an installment payment agreement with the taxpayer, the failure of the taxpayer to fully comply with the terms of the installment payment agreement renders the waiver of penalties void.

Penalty for Not Taking Advantage of Amnesty Program

Taxpayers who failed to take advantage of the amnesty program and filed an original or amended return that failed to report or under reported tax liability, will become subject to a penalty equal to 25 percent of the total amount of unpaid tax that is otherwise due in addition to the amount of the outstanding tax liability.

Click on the following link to access the bill (SB 880):

http://www.leg.state.or.us/09reg/measures/sb0800.dir/sb0880.en.html

If you have any questions regarding the Oregon amnesty program, please contact me for a free consultation at leveragesalt@earthlink.net.

Delaware Establishes Voluntary Compliance Initiative

Delaware established a Voluntary Compliance Initiative when the Governor signed HB 268 on July 1, 2009.

"Initiative Period"

The Voluntary Compliance Initiative is for eligible taxes administered by the Division of Revenue for a period running from September 1, 2009 through October 30, 2009.

Eligible Tax Periods / Penalty and Interest Waived

Any taxpayer who has a current outstanding liability for tax periods before January 1, 2009 and makes payment during the Initiative period or enters into a payment plan and makes payment before June 30, 2010 will have penalty and interest for late filing the return waived.

Any non filer who files returns will have any tax, penalty and interest for non filed returns for any period prior to January 1, 2004 waived.

Click on the following link to access the bill (HB 268):

http://legis.delaware.gov/LIS/LIS145.NSF/vwLegislation/HB+268?Opendocument

If you have any questions regarding the Voluntary Compliance Initiative, please contact me for a free consultation at leveragesalt@earthlink.net.

New York City: Tax Law Changes Enacted!

New York City has enacted several tax law changes as follows:

1. Sales tax rate goes from 4% to 4.5% as of August 1, 2009 (AB 8866)
2. Combined reporting enacted (AB 8867)
3. Phase-in of single-sales factor (AB 8867)
4. Increase in maximum amount that can be owed under the alternative general corporation tax measured by business and investment capital from $350,000 to $1 million, for tax years beginning after 2008 (AB 8867)
5. Allows banks to have a net operating loss (NOL) deduction for losses incurred in tax years after 2008 (may be carried forward, not back) (AB 8867)
6. Revises fixed dollar minimum tax for tax years after 2008 (tax amount ranges from $25 to $5,000 depending on New York City Receipts) (AB 8867)
7. Commencing in 2009, the credit that is applied to reduce an unincorporated business tax will apply if the annual tax total amount is less than $5,400; the credit will completely offset an annual unincorporated business tax that does not exceed $3,400 (AB 8615)
8. Unincorporated Business Tax filing requirements are simplified and requirements related to paying estimated unincorporated business taxes are modified (AB8615)
9. Voluntary Disclosure and Compliance Program is established (AB 8867)

There are other miscellaneous changes as well, please see the bills for details.

Click on the following links to access the bills:

AB 8866: http://assembly.state.ny.us/leg/?bn=A08866

AB 8867: http://assembly.state.ny.us/leg/?bn=A08867

AB 8615: http://assembly.state.ny.us/leg/?bn=A08615

If you have any questions regarding how these changes affect your business or your clients, please contact me at leveragesalt@earthlink.net.

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?

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).

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.

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?

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.

Vacation Next Few Days, and Thank You!

I will be on vacation the next few days, so I am not planning on writing any NEW blog posts. However, I thought I would re-post some earlier posts that you may have missed (that are not TIME sensitive).

I want to thank you for visiting, and I hope you are learning valuable information regarding state and local taxes.

As always, if you need any assistance, please contact me at leveragesalt@earthlink.net. Initial consultation is free, and I work on a fixed-fee basis. Therefore, there are no surprises regarding your expectations and the fee you pay.

Thanks again.

Best Regards,

Brian Strahle, Your State and Local Tax Partner

Don’t Put the Cart Before the Horse: (State Tax Savings vs. Economic Substance and Business Purpose)

CASE: HMN Financial, Inc. and Affiliates v. Commissioner of Revenue, Minnesota; docket No. 7911-R; May 27, 2009 (State of Minnesota County of Ramsey Tax Court)

Summary of Case

This case involved, as the Court stated:

“a sophisticated tax avoidance plan involving a captive real estate investment trust (REIT), a holding company and the transfer of loans and loan proceeds in a circular pattern through the taxpayer’s entities.”

The taxpayer argued that it met the requirements of a foreign operating company (FOC) under Minnesota statutes; therefore, it must be afforded the favorable tax treatment the statute allows. The taxpayer argued the state has no authority to set its transactions aside as a sham because the taxpayer met the definitions of an FOC.

The state maintained that one cannot simply look to the status of a taxpayer to determine whether deductions will be allowed or disallowed; one must look at the transactions to determine whether deductions will be allowed.

The state argued, and the Tax Court agreed, the only true purpose of the taxpayer’s transactions was to avoid Minnesota taxes. Thus, because the state has the authority to disregard sham transactions, the transactions must be disallowed.

Summary of Conclusions Stated in Support of Courts Finding:

1. Accounting firm marketed same plan to other businesses.
2. Accounting firm stressed state tax savings in its materials.
3. Accountants knew the taxpayer needed a business purpose other than tax savings.
4. Accountants provided taxpayer with several sample business purposes.
5. Taxpayer did not follow through on achieving any non-tax business purpose.
6. Non-tax business purposes did not have economic substance, risk, or effect.
7. There was no increase in income, no lessening of expenses, no business, other than the avoidance of taxes.
8. Only business purpose achieved was state tax savings.

So What?

This is not the first time a state and/or court has disallowed a transaction because it determined the transaction lacked economic substance or business purpose (and it won't be the last time).
Therefore, when conducting any type of state tax planning (especially complex restructuring), make sure the “horse is in front of the cart.” Meaning, figure out what your business goals and objectives are, and then figure out what state tax planning can be done to minimize the state tax ramifications of achieving those business goals.

If you have any questions regarding state tax planning your business has implemented in the past or is thinking of pursuing in the future, please contact me.

California Update on IOUs ("Registered Warrants")

Expecting a refund from California? Don't wait up.

According to the California Franchise Tax Board( http://www.ftb.ca.gov/), effective July 2, 2009, all personal and business tax refunds, including direct deposit, will be issued as paper registered warrants.

According to the Controller's website, the cash deficit is expected to grow to a projected $3.7 billion in August, and $6.5 billion in September, if the legislature doesn't act soon.

For more information, click on the following link to access the California Controller's website discussing the issuance of IOUs ("registered warrants"):

http://www.sco.ca.gov/eo_news_registeredwarrants.html

Hawaii Governor Vetoes Online Tax Bill ("Nexus Presumption" Bill)

The Governor of Hawaii vetoed the "nexus presumption" bill (HB 1405) on July 1st.

Click on the following link to access the Governor's News Release:

http://hawaii.gov/gov/news/releases/2009-news-releases/governor-lingle-vetoes-online-tax-bill

The Governor's News Release talks about the adverse affects the legislation would have on Hawaii residents and businesses. It also discusses how Amazon.com and Overstock.com have sent out notifications that they are severing their "affiliate" relationships with Hawaii.

Bill May Violate Hawaii's Constitution

In addition to the Governor's economic concerns, the News Release also states:

The Attorney General found that HB 1405 HD2 SD2 CD1 may be legally defective in that it may violate Article III, Section 14 of the Hawaii State Constitution. This Article provides that each law shall embrace only one subject which shall be expressed in its title. The scope of HB 1405 may be broader than its title indicates and thus the legislation may not meet the constitutional test.

Legislature Could Override Veto

The News Release also states:

The Legislature can convene on July 15, 2009 to determine if they will sustain or override the Governor’s actions on any measures she vetoes between July 1, 2009 and July 15, 2009. On June 30, 2009 the Governor issued a list of 65 bills passed during the 2009 Legislative session that she is reviewing for potential veto action. This is one of those bills.

Summary

The "nexus presumption" bill has been vetoed and is not in effect. However, the Legislature could override the veto.

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

Happy Independence Day 2009!

May you not only remember the past, but enjoy the present independence we have, and why we have it.

"Keep moving forward," and "Finish Strong."

Rhode Island Governor Signs "Amazon" Nexus Provision into Law

This is an update to the many posts regarding the "Amazon" nexus provision being spread throughout the country like a virus.

This week, the Governor of Rhode Island signed the budget bill (HB 5983) which made several changes to Rhode Island's tax laws. One of those changes, the "Amazon" nexus provision.

The "Amazon" provision is effective June 30, 2009, and establishes a rebuttable presumption that a seller has nexus in Rhode Island if the seller is soliciting business in the state through an agent, if the seller enters into an agreement with a state resident under which the resident for a commission or other consideration, refers potential customers to the seller through a website link or otherwise.

The presumption applies if the sales by the resident through the agreement exceed $5,000 in a year.

The presumption can be overcome by proof that the resident did not engage in any solicitation on behalf of the seller.

So What?

If you are an online retailer who allows other parties (related or unrelated) in Rhode Island to solicit business on your behalf in any way, or via a web site link, please contact me at leveragesalt@earthlink.net to discuss the impact of this law on your business.

Overstock.com Reinstates Affiliate Program in California!

The Los Angeles Times reports that Overstock.com has reinstated its affiliate program in California. The reinstatement comes less than one day after Overstock.com pulled its affiliate advertisers in California.

The move by Overstock.com is a product of Gov. Arnold Schwarzenegger vetoing legislation that would have required online retailers that operate advertising contracts with third-party websites to collect sales taxes.

Click on the following link to access the Los Angeles Times Article:

http://latimesblogs.latimes.com/shopping_blog/2009/07/overstockcom-pulls-affiliate-ad-program-in-california-other-states.html

The California proposed legislation is similar to legislation or proposed legislation in New York, Rhode Island, North Carolina and Hawaii.

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

What's Your "Nexus"?

In other words, in what states does your business or your clients have a taxable presence? What activities is your business conducting across the country? Has the activities your business conducts across the country changed?

State tax laws regarding nexus continue to change either through legislation or interpretation by the courts; therefore, it is very important for you to gain an understanding of nexus, and to determine what states your company has a filing obligation or tax liability exposure.

NOTE: Steps can be taken to mitigate this exposure.

What is “Nexus"?

Nexus, in simple terms, is having a taxable connection or presence with a state.

Why Should I Care?

If you are a corporation, pass-through entity (i.e., LLC, partnership S corporation), nexus will determine what states the entity is required to file returns and pay tax. If you are a partner, member of an LLC, or a shareholder of an S corporation, the nexus determination affecting the entity within which you own an interest, will determine what states you file in as an individual (in addition to your state of residency).

What is the Problem?

As you might expect, there are different nexus thresholds for different types of taxes (i.e., income tax, sales/use tax, gross receipts taxes, etc.). As with just about every state tax issue, there is also a lack of uniformity among the states regarding nexus which creates complexity and confusion.

“Old School Nexus”

“Old School Nexus” as I like to call it, is physical presence nexus. In other words, a company would only have nexus in a state if the company had a physical presence in the state. This appears to have become “old school” now, since states are considering companies with the following activities to have nexus in their state:

1. Using independent contractors, affiliates or others in a state.
2. Having a web-link to your site on an affiliate or unrelated party’s website in a state.
3. Having customers who hold your company’s credit cards in a state.
4. Licensing intangibles to related or unrelated parties in a state.
5. Having sales in a state over a certain threshold.
6. Having payroll in a state over a certain threshold.
7. Having a certain percentage of your total sales, property and payroll in a state.

These are just a few examples. There are many more (trust me).

The “New Nexus”

The “New Nexus” (vs. “Old School Nexus”) is apparently for the “New Economy.” In other words, the “New Nexus” does not require having a physical presence in a state.

For example, selling items over the internet can create “Amazon nexus" (as discussed in a previous post), and “exploiting the market in a state” by expending effort (without a physical presence) to generate income from customers in a state can create “economic nexus.”

As a side note, “Amazon nexus” applies to sales and use tax, and “economic nexus” appears to apply to income taxes, gross receipts taxes and business activity taxes.

NOTE: not all states apply the “new nexus” rules, but many are proposing legislation or strongly considering adopting the “new nexus” rules.

What Does This Mean For You?

States are experiencing a deep financial budget crisis and therefore, have been changing their laws and proposing legislation to balance their budgets, resulting in higher taxes or new taxes in some cases. In addition, more and more states are looking to tax out-of-state companies with the slightest presence in-state, as economic nexus and Amazon nexus become more acceptable or challenged without success.

As a result, I highly recommend businesses operating across the U.S. either physically or online, consult a state and local tax professional who can help you walk through the analysis and determine if you have nexus in certain states; or determine if any changes can be made to the way you do business to eliminate nexus.

Please contact me at leveragesalt@earthlink.net to help you find your "nexus solution."