What Are Your State and Local Tax "Blind Spots"?

WHAT IS A BLIND SPOT?

According to Wikipedia, a blind spot, also known as a scotoma, is an obscuration of the visual field. A particular blind spot known as the blindspot, or physiological blind spot, or punctum caecum in medical literature, is the place in the visual field that corresponds to the lack of light-detecting photoreceptor cells on the optic disc of the retina where the optic nerve passes through it.[1] Since there are no cells to detect light on the optic disc, a part of the field of vision is not perceived. The brain fills in with surrounding detail and with information from the other eye, so the blind spot is not normally perceived.

Now, that wasn't exactly what I think of when I think of a blind spot.  I usually think of a blind spot when I am driving my car.

In that context, Wikipedia says a blind spot in a vehicle is an area around the vehicle that cannot be directly observed by the driver while at the controls, under existing circumstances.[1] Blind spots exist in a wide range of vehicles: cars, trucks, motorboats and aircraft.

As one is driving an automobile, blind spots are the areas of the road that cannot be seen while looking forward or through either the rear-view or side mirrors. The most common are the rear quarter blind spots, areas towards the rear of the vehicle on both sides. Vehicles in the adjacent lanes of the road that fall into these blind spots may not be visible using only the car's mirrors. Rear quarter blind spots can be:

• checked by turning one's head briefly (risking rear-end collisions),
• eliminated by reducing overlap between side and rear-view mirrors, or
• reduced by installing mirrors with larger fields-of-view.

STATE AND LOCAL TAX BLIND SPOTS

Now, what does this have to do with state and local taxes? 

Well, I believe most, if not all, businesses have state and local tax blind spots.  These blind spots may include:

• nexus (taxable presence) in states in which the business is not filing income tax returns or collecting sales tax
• using the incorrect apportionment formula, including the wrong items or amounts in apportionment factors or using the wrong method to apportion different types of income (tangible, intangible, service, etc.)
• including the wrong entities in a combined or consolidated state income tax return due to incorrect unitary group analysis
• classifying business income as nonbusiness income (or vice versa)
• misapplying P.L. 86-272 protection (i.e., business is not operating within limits of protection or business is applying P.L. 86-272 protection to the wrong type of tax)
• misapplying sales and use tax exemptions
• not self-assessing and remitting use tax on purchases of taxable items
• assuming the business is selling is a nontaxable service, when it is actually selling tangible property
• assuming the business is selling intangible property, when it is actually selling tangible property
• not adding back related-party expenses on the business' state income tax return when required
• adding back related-party expenses on the business' state income tax return when NOT required
• when acquiring or merging entities, failing to perform state and local tax due diligence to uncover liabilities and determine a tax-efficient way to combine the entities (before and after the acquisition/merger)
• failing to comply with state bulk-sale notification requirements
• filing a separate return when a combined group return should be filed
• allowing a FIN 48 reserve for state uncertain tax positions to grow year after year without attempting to reduce uncertainty

And the list goes on and on and on.

YOUR BUSINESS / YOUR STATE AND LOCAL TAX BLIND SPOTS

In regards to YOUR business' state and local tax "blind spots," it usually depends on the stage your business is in and the size of your business.

As your business grows and changes, it is vital that your business examines its state and local tax "blind spots" before a "wreck" (audit assessment, nexus questionnaire, etc.) occurs.

Do you know what your state and local tax "blind spots" are?

Michigan Extends Deadline for Disregarded Entities!! (again)

On Oct. 3, 2011, the Department of Treasury (Department) issued a revised notice regarding the Michigan Business Tax (MBT) filing obligations of business entities that are treated as disregarded entities for federal income tax purposes as a result of the decision in Kmart Michigan Property Services.

According to the notice, business entities that are disregarded for federal income tax purposes (such as single member limited liability companies (SMLLCs) and qualified Subchapter S subsidiaries (QSubs), among others), must now either file a separate MBT return or file as part of a unitary business group, if the unitary requirements are met. This requirement applies to all open tax years under the MBT, which took effect Jan. 1, 2008.

New Deadline - December 31, 2011 (NOT October 31, 2011)

The revised notice extends the due date for filing delinquent and amended returns pursuant to this notice to Dec. 31, 2011 (formerly Oct. 31, 2011).

Sales Tax Compliance Outsourcing: Does Anyone Get it Right??

Over the past several years, based on my experience, more and more companies seem to be in need of hiring a firm to provide sales tax compliance outsourcing services.  However, I have also heard more and more companies complain about their sales tax compliance outsourcing service provider.  Does anyone get it right?

If you are currently using someone to provide sales tax compliance outsourcing services to your company, what does your provider do right? 

What does your provider do wrong?

What do you think can be done to correct the situation?

What are you looking for in your sales tax compliance outsourcing provider?

Virginia Employers with Teleworkers: Action Required by October 31st!

If your company plans on launching or expanding a telecommuting program in 2012 in Virginia, then your company needs to file an application with Virginia by October 31st. The form due by October 31st, is only an estimate of telework expenses expected to be incurred in 2012.

The credit applies to C corporations and pass-through entities. A formal telework agreement with the employee must be signed after July 1, 2012.

Overview
In 2011, Governor Bob McDonnell and the Virginia General Assembly approved new tax credit legislation aimed at encouraging private sector telework. Telework, defined as a work arrangement where an employee is allowed to perform normal work duties at a location other than their central work location, is an effective congestion management strategy to remove cars from the highways and has been shown to improve employee productivity, retention and satisfaction.

Virginia employers hoping to claim tax credits for the costs of launching or expanding employee telecommuting programs in 2012 need to file estimates of those expenses with the Virginia Department of Taxation by Oct. 31.

Under Telework!VA, a new income tax credit is available to Virginia companies starting up or expanding employee telecommuting programs in 2012 and 2013. The Telework Expenses Tax Credit allows eligible firms to recover expenses of up to $1,200 per employee and up to a $50,000 per-company cap for telework expenses incurred during taxable years 2012 and 2013 for items such as computers, modems, high-speed internet connections, telecommunications, and more.

For more info, go to Telework!VA

Misclassified Employees in Minnesota?? Act NOW!

Employers who have discovered improper classification of one or more employees as independent contractors now have a limited-time opportunity to correct the misclassification with reduced consequences for Minnesota withholding tax.

The Minnesota Department of Revenue’s pilot program will closely follow the qualification and application process of the Voluntary Classification Settlement Program recently announced by the Internal Revenue Service. The Minnesota Department of Revenue’s worker classification voluntary compliance initiative will be available through December 16, 2011.

For all of the information, go to Minnesota Worker Classification Initiative.

North Carolina Releases Two Notices Regarding Combined Reporting Legislation

North Carolina has released two notices to provide guidance regarding the new combined filing legislation taking effect January 1, 2012 and how it impacts taxpayers with existing agreements with North Carolina and the procedures for corporations without an existing agreement to request a review of their intercompany transactions.

Notice # 1

Session Law 2011-411, effective for tax years beginning on or after January 1, 2012, provides that, if the Secretary has reason to believe that a corporation’s State net income is not accurately reported on a separate return filed by the corporation because of intercompany transactions, the Secretary and the corporation may mutually agree to an alternative filing methodology that accurately reports the corporation’s State net income under a voluntary redetermination.

The Department has received inquiries from corporations with existing agreements as to how the legislation affects their existing agreements and the procedures to obtain a voluntary redetermination. The Department has also received inquiries from corporations and tax professionals as to how a corporation that did not participate in the Resolution Initiative can determine whether its intercompany transactions will be adjusted or whether the corporation will be required to file a combined income tax return with its affiliates.

The Notice sets out the effect of the legislation on existing agreements and the procedures for a corporation that does not have an agreement to initiate a review of its intercompany transactions by the Department.

Notice # 2

On June 30, 2011, Governor Perdue signed into law Session Law 2011-390 (House Bill 619) passed by the General Assembly. This law repeals the Secretary’s existing statutory authority in G.S. 105-130.6, 105-130.15 and 105-130.16 to adjust a corporation’s net income or require a combined return. As originally enacted, the repeal of existing statutory authority was effective January 1, 2012. On September 15, 2011, Governor Perdue signed into law Session Law 2011-411 (Senate Bill 580) passed by the General Assembly. This law revises the effective date of the repeal of the Secretary’s existing statutory authority to now be effective for tax years beginning on or after January 1, 2012.

The repealed statutory provisions have been replaced with a new statute, G.S. 105-130.5A, which authorizes the Secretary to adjust the net income of a corporation or to require a corporation to file a combined return. The new statute remains effective for tax years beginning on or after January 1, 2012.

See the Notice for more info.

Virginia Offers Opportunity for Manufacturers (with a Catch)

During the 2009 Session, the Virginia General Assembly passed legislation (HB 2437) that modifies the corporate apportionment formula by allowing manufacturing companies to use a single factor apportionment based on sales to determine their Virginia taxable income. The modification is phased-in as follows:

• for taxable years beginning on or after July 1, 2011, but before July 1, 2013, qualifying corporations may elect to use a triple-weighted sales factor;
• for taxable years beginning on or after July 1, 2013, but before July 1, 2014, qualifying corporations may elect to use a quadruple-weighted sales factor; 
• for taxable years beginning on or after July 1, 2014, and thereafter, qualifying corporations may elect to use the single sales factor method to apportion Virginia taxable income.

What's The Catch?

Well, there are a few.

First, once a corporation elects to use this method, it may not change for three taxable years.

Second, the legislation also applies certain employment and wage requirements. A taxpayer making this election is required to certify that the average weekly wages of its full-time employees was greater than the lower of the state or local average weekly wages for the taxpayer’s industry.

In addition, corporations must maintain a base year level of employment in the Commonwealth for the first three taxable years after electing to use a single factor apportionment based on sales. If a corporation does not satisfy these criteria, Virginia will assess the corporation the difference between taxes calculated under the standard apportionment in which sales are double-weighted and sales-only apportionment, and a ten percent penalty would be assessed; and interest would accrue.

Guidelines In-Process

The Department of Taxation is developing guidelines to carry out the provisions of this legislation, including rules regarding a method for determining the number of full-time employees of a manufacturing company in cases such as a merger, acquisition, spin-off, or other change in corporate structure.

Go to Virginia's website to review HB2437, the Workplan and Draft Guidelines.

Public Comments Requested

Virginia is accepting public comments on the Draft Guidelines through December 5, 2011.

Questions??

• Can your business take advantage of this apportionment election?
• Should your business take advantage of this apportionment election?
• Should your business submit comments on the draft guidelines?
• If your company makes the apportionment election, will it meet the employment requirements for the next three years?

Contact me for assistance in answering these questions for your company.

Incentives and Penalties: Which Do You Prefer?

Tax policy is a great thing.  Whether it is federal or state tax policy, the question remains - how does a government stimulate an economy and balance its budget at the same time?  Does it raise taxes and impose penalties to create jobs, attract business and grow the economy?  Or, does it incentivize businesses to hire people by creating tax credits, etc. for expansion?  What would make a company grow more?

Now, I don't claim to be an economist, but I look at it this way.  If you have children, how do you get them to behave well?  Do you constantly impose strict rules and impose harsh penalties for non-compliance?  Or do you create positive incentives for good behavior?  Obviously, you would like to not have to do either, and just have children behave well based on principles and values.  But, when we are talking about an economy and tax policy, a government seems to have to do one or the other. 

Which do you prefer?  Incentives or penalties? 

What would stimulate the economy more?

Is Your Partnership Interest Creating Nexus for You??

When you or your company holds a partnership interest in a partnership, that interest can create nexus (a taxable presence) in a state for you or your company.  Even if that is your only connection with the state.  Other details that come into play are - what type of partnership is it?  A general or limited partnership?  An investment partnership?  What type of partner are you?  A general or limited partner?  Does your company have any other connections with the state besides holding the partnership interest?

Generally speaking, in most states, holding a general partnership interest in a general partnership will give you (as the general partner) nexus in the state, even if that is your only connection with the state.  On the flip side, generally speaking, in most states, holding a limited partnership interest in a limited partnership may NOT give you (as a limited partner) nexus in the state, if that is your only connection with the state.  (When dealing with this issue, please consult a qualified state tax professional and the state's specific statutes, cases, and rulings for guidance.)

Question:  If your company is currently protected from having nexus in a state due to P.L. 86-272, but your company also owns a limited partnership interest in a limited partnership, does your company have nexus in that state? 

Answer:  Obviously, it depends on the state and it's specific statutes. However, I have found a state that says holding a limited partnership interest creates nexus for the limited partner. So, if we accept that, then the partner has nexus.  However, when the partner files its state return, should it be required to include its own in-state gross receipts (that were protected by P.L. 86-272) in the numerator of the apportionment factor along with its share of the partnership's in-state gross receipts? 

It isn't clear that they should be.  I think an argument can be made to exclude the partner's own in-state gross receipts from the numerator, but will the state agree?  We'll see. 

NOTE

Obviously, the argument and position I am describing depends on the facts of each case and the statutes of each state.  Therefore, the above description and scenario may NOT apply to your company's situation.  Please consult a qualified state tax professional before taking a position.

I just wanted to throw this issue and possible solution out for discussion.

Let me know what you think.