November 9, 2009
Minutes
On November 9, 2009, a delegation from Tax Executives Institute met with members of the Board of Trustees of the Federation of Tax Administrators. The following minutes were prepared by Tax Executives Institute and have not been formally approved by the FTA. The agenda for the meeting was published in the November-December 2009 issue of The Tax Executive.
Jim Eads, Executive Director of the Federation of Tax Administrators, welcomed the members of the delegation from Tax Executives Institute. On behalf of TEI, Paul O’Connor, the Institute’s Senior Vice President, expressed TEI’s thanks to the FTA for taking the time to review the agenda and to speak with TEI members regarding the items on that agenda. The FTA and TEI delegations are set forth below.
FTA Delegation
Cindi Holmstrom, Washington Department of Revenue, President
Patrick Carter, Delaware Division of Revenue, Secretary
Linda Tanton, Maryland Office of the Comptroller, Immediate Past President
Navjeet Bal, Massachusetts Department of Revenue
Cynthia Bridges, Louisiana Department of Revenue
Stephen Cordi, District of Columbia Office of Tax and Revenue
Cory Fong, North Dakota Department of Revenue
Bart Graham, Georgia Department of Revenue
Brian Hamer, Illinois Department of Revenue
Roxanne Huber, Colorado Department of Revenue
Roger Irvin, Wisconsin Department of Revenue
Jerry Johnson, Oklahoma Tax Commission (attended via telephone)
Rod Marrelli, Utah State Tax Commission
Chris Morris, West Virginia Department of Revenue
Nancy Prosser, Texas Office of the Comptroller
Joan Wagnon, Kansas Department of Revenue
Jim Eads, FTA Executive Director
Helen Hecht, FTA Tax Counsel
Veranda Smith, FTA Government Affairs Associate
TEI Delegation
Paul O’Connor, Millipore Corporation, TEI Senior Vice President
Lynn B. Jordan, Performance Food Group Company, TEI Executive Committee
Howard Grindle, NetworkSolutions, Inc., Vice Chair, TEI State and Local Tax Committee
Ralph P. Corasaniti, Swisher International Group, Inc., TEI State and Local Tax Committee
Donald P. McCarthy, Comcast Corporation, TEI State and Local Tax Committee
Jeffery P. Rasmussen, TEI Tax Counsel
Daniel B. De Jong, TEI Tax Counsel
Opening Comments
Mr. Eads thanked the TEI delegation for the detailed agenda submitted in advance of the meeting and welcomed the reestablishment of communications between TEI and the FTA. The members of the FTA’s Board of Trustees in attendance introduced themselves and identified the respective state departments of revenue in which they serve.
After the members of TEI’s delegation introduced themselves, Mr. O’Connor provided a description of the Institute noting its diverse membership of nearly 7,000 inhouse tax professionals who represent more than 3,200 of the leading corporations in the United States, Canada, Europe, and Asia. Mr. O’Connor also expressed TEI’s desire to enhance its interaction with the FTA with the expectation that conversations between the two organizations would continue after this meeting.
Effect of the Economic Downturn on State Budgets and Revenue Department Resources
A. Notices
Mr. Grindle described growing difficulties in resolving routine state notices. He provided an example of a corporate group having multiple legal entities filing income tax returns in a single state where a payment submitted for one entity is applied to the account of a related entity. In that situation, the state’s computer system often generates a notice identifying the taxpayer’s account as delinquent before a state department of revenue employee has had a chance to review the account. Previously, taxpayers resolved these issues over the phone. Mr. Grindle said TEI members were experiencing increased difficulty in resolving this type of issue quickly and efficiently. Mr. Grindle posited that staffing reductions at state departments of revenue may have affected call centers. He asked how TEI and the FTA could work together to develop more efficient methods for addressing issues created by routine computer-generated notices.
Ms. Jordan described actions taken by the Internal Revenue Service to improve call center responsiveness such as specifying in notices periods of time when additional resources would be assigned to call centers to answer questions. In her experience, when she called the IRS during the identified times, she was able to reach a live person. Mr. Morris stated that he understood taxpayer frustration and thought further discussion was a good idea. Mr. Graham urged TEI chapters to work with their local departments of revenue on administrative issues such as the notices.
Mr. Eads noted that the budget challenges caused by the sputtering economy make hiring additional state employees nearly impossible. Mr. O’Connor noted that TEI has lobbied Congress for additional IRS resources and indicated that TEI would consider doing the same at the state level. Mr. Hamer expressed his interest in having TEI assist in requesting additional funding for state departments of revenue and encouraged TEI to be active in that area. Mr. Morris noted, for example, that West Virginia taxpayer groups had provided assistance with budget requests for that state’s Department of Revenue in recent legislative sessions.
Ms. Huber said that many states are implementing new computer systems, and system conversion issues may exacerbate the number of troublesome notices. She added that feedback from TEI members on notices (through individual chapters or otherwise) would be very helpful. Mr. Irvin stated that the move toward electronic filing could free up state employees, allowing greater resources to be devoted to call centers. Currently, approximately 75 percent of Wisconsin’s returns are filed electronically. He invited feedback on the contents of notices generated by the Wisconsin department’s computer system. Mr. Morris agreed and added that the West Virginia department also desired feedback suggesting improvement to notices to help the wider taxpayer community.
Mr. McCarthy added that conversions of corporate entities to disregarded single member limited liability companies (LLCs) had generated significant numbers of notices for his company. He expected this trend to continue given the desire of companies to unlock net operating loss carryforwards. Issues created by corporate conversions include legacy federal employer identification numbers and sales tax-related issues (i.e., the entity is disregarded for state income tax, but remains a separate taxpayer for sales tax).
B. Regulatory Guidance and Ruling Requests
Mr. McCarthy described the increase in state legislative activity in the tax area, noting that new statutory language may be difficult to apply without the assistance of regulatory guidance. Financial reporting requirements under U.S. generally accepted accounting principles (i.e., FAS 109/FIN 48) amplify the effect of the uncertainty because businesses must report the effects of a tax law change in the same quarter in which the new law is enacted. Lack of adequate guidance also affects tax laws that have been in place for some time. For example, states employing mandatory combined reporting vary in their approach to the concept of instant unity. Mr. McCarthy noted, for example, that California has adopted the concept of instant unity whereby a newly acquired business is presumed to be unitary with the acquiring business on the date of acquisition, whereas Colorado does not employ the instant unity concept. Of significant concern, however, is that many states do not provide any guidance on the issue, making state tax compliance and financial reporting difficult. Mr. Grindle said state revenue authorities should be sensitive to the financial reporting obligations of taxpayers and the related need for guidance. He acknowledged that devoting personnel to drafting new guidance would understandably put pressure on already resource-strapped state departments of revenue.
Mr. De Jong said that the Institute’s recent comment letter on Wisconsin’s proposed combined reporting regulations was an example of how the Institute works to refine regulatory guidance. Ms. Bal reminded the group that revenue departments often find themselves in a difficult situation when drafting regulations on complicated law changes; they must balance the desire for expeditious, succinct guidance with the need for comprehensive rules. In Massachusetts, for example, the legislature passed a mandatory combined reporting law and the Department of Revenue drafted nearly 80 pages of regulations to clarify the application of the complicated law. Taxpayers, however, complained about the length of those regulations.
Ms. Huber expressed her desire to work with taxpayers in implementing significant potential changes to Colorado’s sales and use tax law that would reduce the exemptions applicable to many transactions. Ms. Prosser also indicated her openness to discussing the ways in which taxpayers access state-provided information on new laws. In 2007, after Texas replaced its previous franchise tax base with the so-called margin tax, she said, the Texas Comptroller hosted numerous web conferences and in-person discussions to educate taxpayers about the change. She was curious how well those efforts were received by the public since the Comptroller invested significant time and effort in getting out as much guidance as possible. Mr. Grindle said that states should consider the approach used by the Michigan Department of Treasury which posted answers to frequently asked questions on its website after the state moved from its Single Business Tax to the Michigan Business Tax.
Mr. O’Connor urged the states to be lenient in asserting penalties where the law is unclear and where the states have not issued guidance to aid taxpayers in reporting their tax liabilities. Mr. McCarthy stated that rulings were one way states could address the lack of statutory or regulatory guidance on certain issues. These documents can provide the wider taxpayer community with guidance in an otherwise unexplained area of the law.
International Issues Affecting State Taxes
A. Treaties and Nexus
Mr. O’Connor introduced the issue of treaties and nexus by noting that good tax policy includes simplification to the extent possible and, further, that the use of a common starting point for calculating state taxable income (e.g., federal taxable income) advances the goal. Currently, many states tax foreign corporations doing business in the United States differently from domestic corporations. For example, a foreign corporation exempt from federal income tax under a tax treaty may still have a state tax liability since federal tax treaties do not technically apply to state taxes. Sophisticated foreign businesses consider these inconsistencies when making investment decisions, and states that have a broader income tax base than the federal government will likely be avoided by those foreign investors.
Mr. Eads noted that the current economic climate makes it difficult for states to consider measures that would reduce state revenues. He did, however, express his willingness to discuss this issue in the future. Mr. Hamer stated that Illinois largely piggybacks on the federal rules, but that sometimes the state cannot conform to federal changes because of the fiscal impact that would entail. For example, conforming to the various federal bonus depreciation provisions enacted this decade would have precipitated a significant drop in Illinois tax receipts that the state could not absorb. These revenue-related concerns caused the state to decouple from those provisions. He did, however, note his general preference to follow the federal treatment of items.
Mr. O’Connor suggested that simplification might be too elusive a goal given recent experience. He noted that the purpose of including this issue in today’s agenda was to plant the seed for future discussions. He also recognized the states’ concern that making any changes resulting in a reduction of tax receipts would be impractical in today’s environment, but encouraged the states to take into account the views of foreign investors looking to operate in the United States.
The discussion then moved to increasing the level of communication between TEI’s local chapters and their state departments of revenue. Mr. Hamer said he would invite a discussion with the Chicago Chapter, suggesting that ideally the chapter should provide an agenda for the meeting in advance. Ms. Holmstrom described a very collegial relationship between the Seattle Chapter and the Washington Department of Revenue. She noted that they regularly discussed significant law and regulatory changes with chapter members and found those discussions to be very valuable.
B. Public Law No. 86-272
Mr. Grindle began the discussion of Public Law No. 86-272 by explaining the differences between the treatment of foreign and interstate commerce under that federal law. He mentioned a 1996 letter by the Multistate Tax Commission on the application of P.L. 86-272 to foreign commerce. The letter stated that the majority of MTC members would not differentiate between foreign and interstate commerce when analyzing whether a corporation’s activities in the state exceeded those protected from creating nexus under the federal law. Mr. De Jong added that the MTC’s statement was more than 13 years old and it would be helpful to know whether the states represented by the FTA’s Board had changed their views or whether there had been any developments in this area and state taxation of foreign commerce generally.
Mr. Fong suggested that TEI reach out to the MTC since that organization prepared the original letter documenting state interpretations of P.L. 86-272. Mr. Cordi, who serves as the MTC’s current president, agreed to inquire whether there has been, or should be, activity at the MTC on this issue.
Uniformity of State Tax Laws
A. General
Mr. Corasaniti discussed the benefits of uniformity in the context of state administrative procedures. As an example, he mentioned working toward a uniform statute addressing the filing of state amended returns required upon the conclusion of an audit by the Internal Revenue Service. Mr. Eads suggested that TEI could work together with the FTA on this issue, urging TEI to follow up with FTA Tax Counsel Helen Hecht. Ms. Holmstrom cautioned that the implementation of any uniform rule could be difficult because many states are implementing new software systems and the uniqueness of each state tax system might make a uniform method difficult to apply.
B. Mobile Workforce Legislation and UDITPA Revision
Ms. Jordan referred to the FTA’s historical preference for state (as opposed to congressional) solutions to multistate tax issues. She mentioned FTA Resolution 2009-6 in which the organization formalized its opposition to enactment of a federal Mobile Workforce law. The FTA has worked with the MTC on a draft uniform state law governing income tax withholding requirements of employers with workers traveling to different states. Mr. Eads said he will testify in December before the National Conference of State Legislatures on the topic. Mr. Fong echoed Mr. Eads’s statements and urged TEI to work with the MTC on this issue. Mr. Johnson said that uniform (or model) state laws need to move from proposals to enacted legislation in order to be viewed as a viable solution to uniformity issues.
Ms. Jordan discussed recent attempts to revise the Uniform Division of Income for Tax Purposes Act (UDITPA) by the National Conference of Commissioners on Uniform State Laws and now by the MTC. She asked about the FTA’s involvement in the project. Ms. Holmstrom asked for TEI’s opinion on the efficacy of that project. Mr. De Jong noted that many businesses remain skeptical of attempts to revise UDITPA in light of the uncertainty about whether the states would adopt a revised uniform law instead of picking and choosing those sections of an updated UDITPA that benefit in-state businesses at the expense of out-of-state businesses. For example, some states have adopted single sales factor apportionment formulas to make those states more attractive to in-state businesses.
Conclusion
Mr. Carter said that the states welcome good ideas for improving state tax administration. States often benchmark with one another, adopting or adapting practices that work well in other jurisdictions. He invited TEI to make those suggestions as well. He also suggested that TEI work with local chambers of commerce in the various states to expand its advocacy efforts, especially with the state legislatures.
Mr. Eads thanked the TEI delegation for the thoughtful agenda and the reinvigoration of communication between the FTA and TEI. Mr. O’Connor thanked the FTA Board for their time and willingness to discuss issues important to the business community.