Have A Happy New Year!

Well, it's the last day of 2010.  A day in which we look back and look forward.  A time of reflection and goal-setting.  A time when we evaluate where we are, what we accomplished and what we want to accomplish.  A time of setting resolutions and beginning the work of achieving them.  What are you thinking about?  What did you accomplish in 2010?  What will you achieve in 2011?

In regards to state taxation, what comes to mind?  What happened in 2010?  What can we expect in 2011?  More of the same?  I don't have all of the answers, but these are the things I am thinking about and look forward to sharing with you during 2011.

I want to thank each of you for visiting my blog and contacting me over the past 2 years.  I have been blogging since January 2009, and have enjoyed the journey.  I have not only found this to be a valuable outlet personally, but it has allowed me to connect with many business and tax professionals across the country.  I have really enjoyed it.  I look forward to 2011 and pray a safe and Happy New Year for each of you!

May 2011 be all you hope, and may you achieve more than you ever thought possible.  I leave you with a few quotes:

"If you are going to doubt something, doubt your limits."

"You can do more than you think you can."

"No pressure.  No diamonds."

"Keep moving forward."

"Finish strong!"

"One day at a time.  Be You.  Expect Success."

"Sometimes you just gotta go for it."

Merry Christmas!

I want to thank each of you who visit my blog and/or subscribe via e-mail for making 2010 a great year.

I wish you and your family a Merry Christmas!

2010 Changes to Minnesota Corporation Franchise Tax!

Minnesota has released information regarding the main changes impacting the Corporation Franchise Tax for 2010. 

On its site, Minnesota provides details regarding the following changes: 

• Federal changes not adopted by Minnesota
• Factor percentages have changed
• Credit for increasing research activities has expanded
• Credit for historic structure rehabilitation
• The filing due date is the same as for filing the federal return
• Electronic payments

For all of the details, see Minnesota's webpage.

Federal / State Conformity: Who Cares?

On Dec. 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act).   This bill not only extends the "Bush" tax cuts, but also extends and creates additional benefits to businesses in the area of bonus depreciation, research credit, etc.  But what does this mean for the states?

The more tax benefits the federal government extends or provides to taxpayers, generally means less tax revenue for the states, especially if the state uses federal taxable income as its starting point.  This brings up the issue of federal/state conformity. 

States do NOT automatically conform to the federal Internal Revenue Code (IRC).  Most states legislatively adopt or conform to the IRC as of a certain date.  This has to be done almost annually.

Most states use federal taxable income as their starting point.  However, this does not mean that the state adopts or conforms to every section of the IRC.  Even if a state uses federal taxable income as its starting point, that state may not adopt or conform to other provisions of the IRC.  The state may have "decoupled" or departed from the federal provisions and created its own rules.

For example, over the past decade, most states have decoupled from federal bonus depreciation.  In addition, state may have decoupled from other IRC sections that deal with net operating losses (NOLs), COD income, domestic production deduction, credits and incentives, etc. 

In each state that your business files a state income tax return, you should know whether the state uses federal taxable income as its starting point.  If it does, does that state also adopt other provisions of the Internal Revenue Code (IRC)? 

Now that the feds have finally decided what the tax rates and other rules are going to be for 2011.  Its time for the states to determine how the federal changes will affect them, and decide how to respond.  More decoupling??

Stay tuned.

Washington State Amnesty Program Enacted!

The Washington State Legislature approved an amnesty program in Substitute Senate Bill 6892 during a special session on December 11, 2010.

What is the amnesty program?
This amnesty program waives the penalty and interest for participating taxpayers on unpaid state business and occupation tax, state public utility tax, and state and local sales and use tax. The program is in effect from February 1 through April 30, 2011.

Who can participate?
The program is open to registered and unregistered businesses.

How do I participate in this program?
To participate in the program, taxpayers must:

1. File an application with the Department by April 18, 2011.
2. File all outstanding tax returns and any amended returns for which they are requesting waivers by April 18, 2011.
3. Pay all tax due by April 30, 2011. All tax due on any invoice for which the taxpayer is seeking a waiver must be paid even if the tax is not included in this program. The penalties and interest on taxes not included in this program must also be paid.
4. Pay all filing and other fees on tax warrants for which the taxpayer is seeking a waiver.
5. File and pay all tax returns on time during the amnesty period.
6. Waive the right to seek a refund or challenge the taxes on any invoice for which they seek a waiver.

Are there exclusions to this program?
Taxpayers are not eligible for this program if they:

1. Have ever been assessed a penalty by the Department for evasion or misuse of a reseller permit or a resale certificate.
2. Are in bankruptcy and payment of tax debt would violate federal bankruptcy law.
3. Have ever been prosecuted for failing to pay or collect the proper amount of any tax administered by the Department under RCW 82.32.

For  more information, go to Washington's Amnesty Program section on its website.

What is the Oklahoma BAT and Other FAQs??

The Oklahoma Tax Commission has released answers to a list of Frequently Asked Questions (FAQs) regarding its new Business Activity Tax (BAT).  In case you didn't know, the BAT is the Oklahoma Business Activity Tax imposed pursuant to SJR 61 for tax years 2010, 2011 and 2012. 

The BAT applies BAT applies to all entities regardless of form e.g., sole proprietorships, partnerships, limited liability companies, trusts and all types of corporations, doing business in Oklahoma. Corporations, associations, joint-stock companies and business trusts doing business in Oklahoma are required to pay BAT in an amount equal to their franchise tax paid for tax year 2010 or $25.00 whichever is greater. All others doing business in Oklahoma must pay $25.00.

Oklahoma BAT returns are due annually. For tax year 2010, farmers filing a federal schedule F and sole proprietors filing either a federal schedule C or C-EZ, must file BAT returns as a part of and at the same time as their Oklahoma individual income tax returns are filed in 2011.  For all other BAT filers, the return for tax year 2010 is due July 1, 2011.

For tax year 2010-2012 (franchise tax returns due in 2011 through 2013), franchise Tax returns are no longer required to be filed. Entities subject to the Oklahoma franchise tax are required to file Oklahoma BAT returns.

Go to Oklahoma's website for all of the FAQs.

Use Tax Exposure is Like Breathing??

Use tax exposure is like breathing for humans.  If you are alive you are breathing.  If your company is conducting business, it has use tax exposure.  (I apologize for the analogy, its the best I could come up with). 

Why does every business have use tax exposure? 

Every purchase a company makes may or may not be taxable.  If the purchase is taxable, then sales tax should be charged by the seller.  But, wait, that doesn't always occur.  Why not?  Well, sellers are not required to charge the purchaser sales tax unless they have nexus in the state where the sale occurs.  Therefore, if your company, as the purchaser, buys something that is taxable, and the seller doesn't charge sales tax, your company is required to self-assess use tax and remit it to the state. 

A common item of use tax exposure is Internet purchases.  Generally, Internet retailers do not have nexus in most states.  Therefore, they are not required to charge sales tax to purchasers.  However, all purchasers are required to self-assess use tax and remit it to the state, if the purchase is a taxable purchase.

In addition to Internet purchases, any taxable purchase from any vendor could create use tax exposure.

What should companies do to limit their use tax exposure?

Companies should provide adequate guidance to individuals who are responsible for reviewing invoices and purchases to determine if the purchase is taxable, and if use tax should be self-assessed.  A common tool is a sales and use tax decision matrix which is customized to a company's purchases.  The matrix would list the items that are purchased, and provide state by state authority for whether the item is taxable or not.  Therefore, when the individual responsible for reviewing invoices reviews an invoice that contains a taxable item, and no sales tax is being charged on the invoice, the individual would know that use tax needs to be self-assessed and remitted.

In addition to the matrix, or in place of the matrix, a sales and use tax software solution may make sense as well.  It just depends on the facts and size of the company.

Companies can also talk to their vendors to confirm that they should or should not be charging sales tax.  Sometimes vendors are not charging sales tax when they should be. 

On the flip-side, sometimes vendors are charging sales tax when they shouldn't be.  This could be due to exemptions, resale certificates, etc.

Minimize Exposure and Obtain Refunds?

With the states hurting for revenue and becoming more aggressive, it is recommended that your company take action to minimize your company's use tax exposure before the auditors arrive.  Who knows, not only may you minimize your use tax exposure, you may also find that you have overpaid or self-assessed use tax on items that were not taxable or on items you resold to your customers.  In that case, your company would be entitled to a refund of the use tax paid.

Minnesota Withholding Tax Problems? Solution??

The Minnesota Department of Revenue (MNDOR) has released an announcement to encourage businesses to utilize their Withholding Tax Voluntary Compliance Program.

Companies that have failed to withhold Minnesota state income tax from compensation paid to its workers or failed to remit tax withheld, may benefit from taking advantage of this program to voluntarily correct and/or pay the tax due to the state. All companies can remain anonymous while deciding whether the program is right for them. The MNDOR will not try to identify the company in any way or do any record searches. If a company elects to participate in the program, the company must apply in writing.

Benefits of Participating:

• Possible waiver of some or all penalties, depending on the specific circumstances.
• Limiting the tax due to just the look-back period. The look-back period is typically three years. If the company withheld taxes but did not remit them to the Department for periods beyond the normal look-back period, it will be extended to cover those periods. The look-back period for voluntary disclosure is generally shorter than it would be if the Department discovered the company’s noncompliance.
• The opportunity to file returns in a spreadsheet format, when applicable, instead of filing a return for each period involved.

Qualifying for Voluntary Disclosure:
To qualify for a voluntary disclosure agreement, a business must:

• Not be under current review for Minnesota withholding tax obligations by the Minnesota Department of Revenue. 
• Register for Minnesota withholding tax (if not registered). 
• Agree to file the returns or spreadsheets specified in the agreement. 
• Agree to pay the tax due plus any penalty and accrued interest specified in the agreement for the look-back period in the manner specified in the agreement. 
• At the request of the Department of Revenue, make records available for audit to verify liability and the accuracy of statements.

If a company satisfies all the requirements, the Department may then enter into a voluntary disclosure agreement with the company. The agreement will specify the look-back period and will become effective only when signed by the company or the company’s representative. If the company fulfill the terms of the agreement, the Department will not assess withholding tax, penalty, or interest for any period before the look- back period, nor will the Department apply additional penalties beyond those specified in the agreement.

Application Process:
If a company wants to know more about the Voluntary Disclosure Program, it may contact the Department anonymously. The Department will not attempt to identify the company. To remain anonymous when making the formal application, the company should engage a representative, such as a tax preparer, accountant, or attorney.

Apply by making a written request. The company’s request, or “letter of fact,” should contain the following information:

• A statement indicating whether the company has been contacted for audit by the Minnesota Department of Revenue. 
• The state in which the business is located or headquartered. 
• The number of workers whose withholding was underreported or not reported and whether Form W-2 or 1099 was issued to report the correct amount of compensation and Minnesota tax withheld. 
• An explanation as to why there is a filing obligation or an underreported tax liability and the reason the filing obligation was not previously fulfilled or the tax not determined properly. 
• An estimate of the liability for each year the taxpayer failed to file or underreported its Minnesota withholding tax. 
• A statement indicating whether the company collected the Minnesota withholding tax from the workers. 
• Contact information, including phone number and email address if one is available, of the person to whom you’d like us to respond.

The Department will keep the agreement confidential and will not disclose its terms or conditions to tax authorities of any federal, state or local governmental authority or to any person except as required by exchange of information agreements.

For more information or assistance in utilizing the Voluntary Disclosure Program, please contact me

Minnesota Accelerated Sales Tax Payments: Questions????

Minnesota passed a new law this year that went into effect for taxes due and payable after September 1, 2010 under Minnesota Statute 289A.20, Subd. 4.

At the beginning of each calendar year, starting January 2011, taxpayers who have a sales and use tax liability of $120,000 or more in the previous fiscal year will be newly mandated to accelerate their monthly payments starting with the January period.

For all of the details, check out Minnesota's website which contains frequently asked questions.

State and Local Tax Year End Planning???

As your company or clients discuss year-end planning, I want to remind you that this is a good time to address state and local tax issues and opportunities.

The following is a brief list of some ideas that might apply:

Nexus and FIN 48: At this time of year, it is a good time for companies to address their nexus position in advance of their FIN 48 analysis. Operations may also be able to be restructured in advance of 2011. If your company or client utilizes telecommuting employees or independent contractors and hasn’t addressed their nexus position in a while, this may be a good time. Also, more states have adopted economic nexus standards and “bright line” nexus standards that may come into play.

Sales and Use Tax: It is also a good time to conduct a reverse sales tax audit to identify sales and use tax refund opportunities and potential exposure. If your company or client has started to sale items over the Internet, we should talk. If your client has purchased any software, SaaS or cloud computing recently, they may want to confirm there is no sales or use tax exposure.

Income Tax: For C corporations, a reverse income tax audit could identify state income/franchise and gross receipts tax refund opportunities and potential exposure. Combined reporting and apportionment issues or opportunities may exist.

Income Tax: For flow-through entities, a reverse income tax audit may be helpful on major states such as Texas, Michigan, Washington, Pennsylvania, etc.

Credits and Incentives: If your company or clients are entering into new states, hiring new employees, building new facilities, retaining employees, "going green," involved with renewable energy, etc. this is a good time to identify and capture credit and incentive opportunities.

Transaction Due Diligence: If your company or clients are entering into any acquisitions of other companies or assets, state and local tax issues should be reviewed to determine exposure, successor liability, and nexus impact.

Residency Issues: For individual tax clients that have changed their residency to another state or are considering such a change, guidance should be provided in regards to what records they need to maintain, etc.to support their residency or domicile.

Employee Misclassification: If your company or client utilizes a high volume of independent contractors, contracts should be reviewed to mitigate exposure of those independent contractors being reclassified as employees.

If you would like assistance with any of the above, please contact me.

Uncertain Tax Positions: California Jumping On-Board!

According to California's December Tax News, if your corporation or client is filing the federal Schedule UTP (Form 1120), then they should attach it to the California Franchise or Income Tax Return. In addition, the corporation must complete Question AA on Form 100/100W. At this time, no decision has been made on whether the state will set up its own similar disclosure program.

Background

As stated in an earlier post, for taxable years beginning on or after January 1, 2010, the Internal Revenue Service requires a corporation to file the Schedule Uncertain Tax Positions (UTP) with its income tax return if the corporation:

• Files Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-L, U.S. Life Insurance Company Income Tax Return; or Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return.
• Has assets that exceed $100 million.
• Issued audited financial statements reporting all or a portion of the corporation's operations for all or a portion of the corporation's tax year.
• Has one or more tax positions that must be reported on Schedule UTP.

California will include information about this new federal requirement in the instruction booklet for the Form 100/100W.

Gross Receipts Reported for Sales Tax Purposes Match Income Tax Return?

A recent notification on Wisconsin's website states, "reconciling differences between the gross receipts reported for franchise/income tax and sales/use tax purposes is one of the most common issues addressed in a field audit."

According to the notification,

"an auditor performs this reconciliation to identify errors that may have been made in reporting sales subject to sales tax, exemptions from sales tax, etc. The gross receipts on the franchise/income tax return should equal total sales on Form ST-12. If they don't match, the auditor is required to reconcile the difference and identify reasons for the differences. Many times, the difference does not impact tax liability. However, if the difference cannot be reconciled satisfactorily, the auditor may presume that taxable sales have been underreported."

What Should You Do?

The notification states, and I agree, in order to minimize the time it takes to complete the reconciliation, it's important that sellers report all sales on Form ST-12, line 1, whether taxable or not. Nontaxable and exempt sales will be removed on lines 2 through 5 of Form ST-12. It's also important that the taxpayer inform the auditor of year-end adjusting journal entries affecting gross receipts or total sales.

Taking this step now, can reduce audit assessments and problems later.