State Tax Audit Assessments: Who Has Burden of Proof?

Two recent court cases in Indiana, and one in South Carolina make you pause and ask - who has the burden of proof?

The Indiana Tax Court ruled in AE Outfitters Retail Co. v. Indiana Department of State Revenue (No. 49T10610126TA66, October 2011) and in Rent-A-Center East, Inc. v. Indiana Department of State Revenue (952 N.E. 2d 387) that Indiana could not force a taxpayer to file a combined return until it has determined that other, less drastic departures from "standard" separate return and apportionment methodologies will not provide an equitable allocation and apportionment of a taxpayer's income.

In both of the Indiana cases listed above, the taxpayer filed a separate return as required by Indiana law.  Upon audit, Indiana attempted to force the taxpayer to file a combined return.  The taxpayers protested and ended up in Indiana's Tax Court.  The Tax Court in both cases stated the burden of proof that the standard separate return and apportionment is invalid rests on the party that is deviating from the standard method.  Hence, the burden of proof was ruled to be on the state of Indiana. 

The state of Indiana has appealed the Rent-A-Center East, Inc. case to the Indiana Supreme Court.

In South Carolina, the Administrative Law Court recently ruled in Carmax Auto Superstores West Coast, Inc. vs. South Carolina Department of Revenue (Ct. of Appeals, Case No. 09-ALJ-17-0160-CC), that the alternative method proposed and assessed by South Carolina was reasonable.  In this case, the taxpayer filed its original return using the standard apportionment formula.  Upon audit, South Carolina deviated from the standard apportionment formula.  The Court said the taxpayer had the burden of proof to show that South Carolina's alternative method was not reasonable or that the standard method was reasonable. 

This case is currently in South Carolina's Court of Appeals.  Oral arguments in the Court of Appeals focused on who had the burden of proof. 

Normally, when a taxpayer receives an audit assessment, the taxpayer has the burden to challenge it.  However, the burden of proof can also relate to specific issues.  For example, in the case of whether an affiliated group of companies is unitary, generally, the taxpayer is presumed to be unitary and the burden of proof is on the taxpayer.  In regards to business vs. nonbusiness income, generally, all income is presumed to be business income.  The burden rests on the taxpayer to prove that income is nonbusiness income.

Now, in regards to alternative apportionment, most state statutes say the burden of proof to prove that distortion exists rests with the party that requests to deviate from the standard apportionment formula. 

What do you think?  What will happen in Indiana's Supreme Court and South Carolina's Court of Appeals?  How does this impact your company's or client's filing positions?  When can a taxpayer request alternative apportionment or combined reporting?  Is combined reporting an alternative apportionment option? Must the state consider ALL other reasonable options before forcing a taxpayer to file a combined return?

Are You Brave?

I was reading Seth Godin's blog post, "Time Doesn't Scale," and was thinking about it's application to the public accounting world.

It seems to me that we think "time does scale." We seem to think that if we can just bill more hours, we will have more revenue. However, in reality, we must at some point be brave. We must create more value for a client that allows us to make more money in less time.

We must truly become knowledge workers and NOT assembly line workers.  I mean, what did you go to college for?

Read the post and let me know what you think.

What State Tax Issues Would You Like Me to Address?

I have been writing this blog for over three years now, and often wonder what you (the readers) think.  What topic or issue is most important to you? What Leverage | SALT blog post did you like the most?

What issues would you like me to address in the future?

Perhaps its not a state tax issue, but a state tax profession issue?  Practice development?  Building relationships with clients?  What it's like to work in public accounting or industry?  Big 4 firm consulting versus middle market firm consulting?  Working with Fortune 500 companies or middle-market companies?

What does our industry need to do to better communicate with each other, and with all of the parties we deal with (i.e., governments, clients, consultants, SALT organizations, universities, etc.)?

Is Giving the New Marketing?

I came across a blog post by Jay Shepherd (with links to Hugh MacLeod), and it made me think about the SALT consulting world.

What do clients (companies large and small) want? How do they want to be reached? What free gifts can consultants provide? What gifts can consultants provide and still get paid for the services they provide?

I believe this has been a continual dilemma in our industry for years. Consultants often give away ideas, only later to see the client implement the idea themselves or worse, use another firm to implement the idea.

I have worked in industry and public accounting, and have been on both sides of the fence.

What do you think is a good gift? What is fair? What do, or should consultants really get paid to do?

Can Non-Tax Court Cases Impact State Tax Nexus?

Over at the Bloomberg BNA State Tax Blog, a recent post entitled, "State Tax Snapshot: The Most Important Nexus Cases You’ve Never Heard Of," covered some court cases that you may not be aware of. 

The blog post discusses non-tax court cases that may be applied to state tax nexus situations, and determining if and when a company has nexus with a state. 

I'm not sure that many companies or SALT professionals have thought of applying non-tax court cases when trying to make nexus determinations. 

If your company or your clients deal with nexus situations, the blog post and the cases may be worth reading.

Welcome to SALT CRASHERS! (Home Depot and DIY Meets State and Local Tax)

"You can do it.  We can help."  "More saving. More doing."  These are slogans of the Home Depot home improvement company, but I think they may apply to the state tax consulting industry as well.

"DIY" or "Do It Yourself" has become a popular home improvement network (I think a spin-off of HGTV).  Shows such as, House Crashers, Yard Crashers, etc. come to your house and re-do your yard or house, but you do alot of the work while they direct and support you with a lot of additional workers, etc.  It is a coordinated team effort.  Does this approach sound similar to how you use outside consultants? 

I know some companies may hire outside consultants and totally hand-it off to them to do.  They don't have the expertise in-house and/or don't have the time to spend on the issue.  That is why they are hiring outside consultants. 

Other companies are more "Do It Your-selfers" or "DIYs."  They like to do things themselves and use consultants as an add-on or supplement on an as-needed basis.  However, if you have ever watched Yard Crashers or House Crashers, you may notice that having these outside experts come to the house shaves projects and YEARS off the homeowner's to-do list.  Meaning, the homeowner may have never completed the project without the help of these outside experts.  The homeowner also may have never thought of the ideas (i.e., landscaping plan, remodeling plan, the placement, the fixtures, etc.) for their house or yard.

Therefore, when asking yourself, what kind of person or company am I?  Am I a DIY or do I want to hand-it off?  Also ask yourself, what could I be missing?  Are there ideas and expertise that I could utilize to not only save my company money, but create a more tax-efficient structure? 

Trust me.  I am a DIY.  I like doing things myself.  However, even I have had to learn that I don't always know everything (shocker, I know).  Others can help with their ideas and expertise. 

Just remember, you can always do some things yourself, you just don't have to go it ALL alone.

Truly, in the SALT world, "you can do it," and "we can help" do seem to apply.  SALT consultants can provide "more saving and more doing." 

What kind of company are you? 

How do you prefer to work with outside consultants, and why?

Missouri Says Internet Sales Picked Up At Store Are Taxable

According to a recent letter ruling, a national retailer’s sales of merchandise on its website that are picked up at its brick and mortar stores in Missouri are subject to Missouri sales tax.

The ruling states that ownership of and title to the merchandise transfers at the brick and mortar location in Missouri and all of the taxpayer’s sales of merchandise are subject to sales tax. The taxpayer’s sales of merchandise are subject to the local sales tax in effect at the location of the brick and mortar store where the customer picks up the merchandise because that is the location where the sale is consummated.

Letter Ruling No. LR 6985, Missouri Department of Revenue, December 9, 2011, released February 2012

Kansas Addresses Sales Taxation of Cloud Computing

According to a recent Kansas Department of Revenue Opinion Letter, charges imposed by an application service provider (ASP) on subscribers for "software as a service" (SaaS) for the use of software hosted on the ASP’s remote servers were NOT taxable for sales tax purposes.

The software was accessed via the Internet. No software was downloaded or delivered to the customer and no title to the software passed to the customers.

Opinion Letter No. O-2012-001, Kansas Department of Revenue, February 6, 2012

Internet Advertising Revenue: What State Gets It?

Internet advertising - everyone is doing it.

What do I mean?  Well, it has become commonplace for certain types of companies to allow other companies to post "ad impressions" or advertisements on their websites.  By allowing these other companies to advertise on their site, they are creating "advertising revenue." 

THE QUESTION

When a company has Internet advertising revenue, the company needs to figure out what state the revenue should be sourced to for apportionment purposes.  (NOTE:  The sourcing question would come after the company has determined what states it has a taxable presence or nexus in.)

THE PROBLEM

The old rules related to sourcing advertising revenue dealt with advertisements in magazines or newspapers.  The Internet takes sourcing advertising revenue to a whole new (complicated) level.  In addition, most states have NOT addressed this issue.  The few that have, have reached different conclusions. Hence, possible sourcing solutions may include:

1. Source to the state of the viewer of the advertisement (most difficult to do)
2. Source to the state of the advertiser (headquarters or multiple locations?)
3. Source to the state where the server upon which the website is hosted is located
4. Source to where the services are performed (which are connected to posting the advertisement)
5. Source to where the benefit of the advertising services is received (generally the headquarters of the advertiser; could be multiple locations)

So What?

If your company or client is receiving advertising revenue from allowing third parties to advertise on its website, your company or client may want to review how it is sourcing that revenue for state income tax purposes before an auditor does.

SALT and Structure: Keep It Simple Sxxxxx????

I was talking to a CFO the other day, and it made me think of the following:

Does your company or client operate its business within a simple organizational or entity structure?  Does it operate all of its business activities through one entity or several entities? 

Whether or not your company or client should operate its business through one entity or several entities depends on several factors, such as:

1. Does the company have more than one business line, product or service?
2. Does the company manufacture products and provide services as well?
3. Is the company profitable in general?  Are certain business lines profitable and others are losing money?
4. Does the company sell wholesale and retail? 
5. Does the company sell its products and/or services over the Internet?
6. Does the company have operations in foreign countries?
7. Does the company have valuable trademarks, patents, copyrights, or other intangibles?
8. Does the company want to decentralize or centralize certain functions such as, accounting, legal, tax, purchasing, etc.? 
9. Should the company have separate entities for legal reasons?  Liability reasons?
10. Does the company want to streamline its supply-chain, obtain economies of scale?

The list could go on and on.  Each case is different, but the goal should be the same - create and utilize a legal and organizational structure that helps the company achieve its business, legal and financial objectives.

Tax purposes or ramifications, whether it is federal tax, international tax, and of course, state and local tax, should attempt to be in alignment with the company's business, legal and financial objectives. 

Therefore, when it comes for a company to decide as to if they should keep a relatively simple structure or create multiple entities, the "keep it simple stupid" mantra may or may not come into play.  The key is to complete the cost/benefit analysis of doing so.  This means weighing the business, legal and financial objectives.  It also means evaluating the tax ramifications.

Therefore, it may not always be in your company's or client's best interest to, "keep it simple." 

What do you think?