Teeter-Totters, Musical Chairs and Tug of Wars: The World of Multistate Income Taxes

Over the past week I have been preparing to deliver a state income tax presentation in Richmond, Virginia and Norfolk, Virginia on May 23th and May 24th.  My agenda includes:

1. Major legislative developments
2. Nexus
3. Combined reporting
4. Discretionary authority
5. Tax base
6. Allocation and apportionment
7. Miscellaneous developments

As I have prepared the material, a few main thoughts stick in my mind:

1. State income taxes remain to be deceptively simple and endlessly complicated
2. The 6 most used words in the state income tax consulting world are:  "generally" and "it depends on the state"
3. In the world of state income tax, there are many battles in the never ending war; meaning, you win some, you lose some (i.e., tug of war, musical chairs)
4. The states are focused on increasing taxes on "out-of-state" taxpayers
5. Economic presence is enough to create nexus in some states
6. Combined reporting continues to be popular
7. Market-based sourcing of sales other than sales of tangible property continues to spread like wildfire
8. The burden of proof regarding changing apportionment methods, forcing combined returns, and ultimately, tax assessments switches between the taxpayer and the state like a "teeter-totter"
9. The add-back of intangible expenses paid to related parties is still scrutinized, but exceptions may apply
10. Single-sales factor apportionment will soon be the only apportionment method??
11. State amnesty programs still exist, but may not be better than a good old Voluntary Disclosure Program

What do you think of when you think of multistate income taxes? 
(I know, I am assuming that you think about multistate income taxes)

The Road to Success is Paved with "The Right Things"

Are you working "hard on the right things?" 

I read this post on Seth Godin's blog, and I immediately related to it.  I have thought about this issue constantly (it seems) since I began my career many years ago.  Every day I try to figure out what are the most important things for me to accomplish.

It reminds me of the 80/20 rule, where 80% of your results come from 20% of your effort.  Or in public accounting terms, 80% of your firm's revenue, generally comes from 20% of your clients. 

At your job, what are "the right things?"  What should you be getting done that you aren't?  What are you working on that isn't producing results? 

In this day and age, when the world seems to be moving faster and faster, we can't do everything and be effective and fulfilled.  Hence, we must choose.  We must choose to do some things and not others. 

I started a new position last year with a new firm and faced many changes and challenges.  But perhaps the biggest challenge was ambiguity (or the lack of a clear path to success).  Over the past year, it has been a feeling-out process to figure out what works or what may work.  Also, figuring out what to focus on and what not to focus on.  I have learned alot, but it will be a continual learning process and I must remain flexible.  Hence, I am afraid that the challenge of figuring out "the right things" may continue. 

With that said, I think the road to finding "the right things" is to keep it simple.  Don't get overwhelmed by "the noise" (as some like to say).  Filter the noise, put your feet on the ground, focus on things that you can control (not the things you can't) and go for it. 

Do the work.  Find a way.

Bright-Line Tests: Friend or Foe?

Bright-lines, boundaries, something to clearly tell you if something is right or wrong, allowed or disallowed, legal or illegal.  Sounds like a great thing, right?  Well, in most cases, yes.  I think most of us would agree.

However, in the context of the tax world, or more specifically, the state tax world, I think bright-line tests are the root of good AND evil.  We often say in the state tax world that we want more clarity, more uniformity among the states so compliance will be easier.  However, when states usually provide bright-line tests, there are winners and losers (depending on what side of the bright-line you fall on).  Hence, whether a bright-line test is good or evil seems to rest in the eye of the beholder. 

Examples of bright-line tests may include: 

1. economic nexus standards or (factor presence nexus)
2. intercompany expense addback statutes
3. sales tax exemptions
4. credits and incentives
5. apportionment definitions
6. apportionment sourcing rules for sales

Examples of items that involve a lack of clarity or bright-line test:

1. nexus determinations (can be clear or unclear, depending on the situation)
2. business vs. nonbusiness income
3. whether a group of companies is unitary
4. a state's discretionary authority to force companies to file a combined return
5. a state's or taxpayer's proposal to utilize an alternative apportionment method

What do you think? 

Do you like bright-line tests in the state tax world?  Can you think of some more examples?  Will state tax complexity ever be cured by bright-line tests?  Are there really any bright-line tests except for factor presence nexus standards?

Will Timesheets Ever Die?

A recent post on the CPA Trendlines blog has caused quite a stir.  What do you think about timesheets?  Love them, hate them?

Here's my two cents:

Timesheets, pricing, billing, utilization – seems like a vicious cycle that isn’t accurate in the end anyway.

I like the “keep it simple stupid” approach to life. Lets have strong relationships with our clients, provide innovative solutions to our clients’ needs, and manage our employees effectively. A timesheet does not tell me how valuable an employee is. I think a timesheet is a “crutch” for poor management that usually (if not always) measures the wrong things.

I am a creative person that loves tax consulting. I am not one that loves the production, “assembly line” mindset of most public accounting firms. I want to be an innovator that’s focused on providing clients with valuable solutions.

My question is – when will larger firms get rid of timesheets? Will they ever do it?

Check out the CPA Trendlines article for more.

Happy Mothers Day!

Happy Mothers Day! 

I hope you make your Mother or wife, etc. feel extra special today.  Focus on the things that really matter in life.  Give them your attention, your focus (mental and physical).  Appreciate the good things in life. 

If your Mother is no longer with us, then remember the goods things.  Be thankful for the times you had.  Remember her in a positive way, honor her with your life. 

Make it a great day!  It's up to you.

Tax Restructuring in Virginia: Everybody Wins??

According to a media statement released by Michael Thompson on April 27, 2012, the Thomas Jefferson Institute for Public Policy has been working on a major new Tax Restructuring proposal for Virginia. The results of more than 18 months of work by two sets of highly respected economists show that the state income taxes on the poorest citizens in our state can be eliminated if so desired. And depending on how the tax restructuring is accomplished, this study shows that as much as a 10% tax cut can be provided to everyone remaining on the tax rolls. In addition, substantial economic growth can be generated, tens of thousands of additional jobs created and the same level of tax income can be available to state and local governments.

According to the media statement, the new study shows that the unpopular gross receipts tax on business (known as the Business Professional Occupation Licensing tax known as BPOL), the Machine and Tool Tax and the Merchants Capital tax can be eliminated while, in one scenario from the tax model, the bottom two tax brackets could be eliminated and everyone else would pay about 7.5% less state income tax. In another scenario, the bottom tax bracket was eliminated and everyone else’s taxes were reduced by 10%.

At this point, I am not sure if this proposal will get much traction with the Virginia legislature and Governor.  However, I think the proposal is worth reviewing. 

Generally, with any restructuring there are winners and losers (as there is under the current system).  The question is:  which side are you on?  How painful is the change?  How beneficial is the change?  Is it worth the effort?  What are the real economic side effects?  What is the chain reaction or collateral damage?  Is it better or worse than the current system?

Read it for yourself and let me know what you think.  For all of the details, go to Tax Restructuring can Benefit Every Virginian.

Are You a "Smart" Tax Professional?

Technology - got to love it.  With all of the "smart" technology, it (whatever "it" is), can tell you what you need or when something needs attention before you can.  It can tell you when something is wrong when you don't even know something is wrong.  It can also help you prevent problems from happening by telling you when something needs maintenance.

Have you seen the recent Infiniti car commercial where a kid and his toy gets behind a car when it is backing out of the driveway.  The person driving doesn't see the kid or the toy, but the car does.  The car applies the brakes on its own.  That is a "smart" car.

My question is - are we "smart" tax professionals? Can we identify things that are wrong before others do? Can we prevent problems from occurring by identifying issues early?

What problem or prevention (risk management) system does your company have in place?  What do you rely on to be "smart" (personally or professionally)?


Don't be dumb, be "smart."