Lila Robbins on Why You Might Want to Hire Your Own Sales Tax Manager

It May Be Time To Hire A Multistate Tax Expert
by Lila Robbins, CPA

Are You Ready for More Aggressive Audits?

With the economy on the skids, every state is feeling the financial crunch. Consumers are spending less, resulting in less sales tax revenue to the states. Getting new laws passed to raise taxes, or create new ones, on already over taxed consumers, who are also voters, is not a popular idea. Many states have decided against new taxes, and have instead opted to more aggressively pursue taxes that are due, but have not been remitted.

Some states have decided to beef up their audit programs to audit more taxpayers, better train auditors in auditing techniques that are more aggressive, hire additional auditors, and compromise tax less, not only in the audit process, but also in the informal and formal protest stages of the audit.

The single largest source of revenue for most states is sales tax. Because it is a consumer-based tax, many taxpayers prefer it and believe it is the most fair. If you don’t have money to buy anything, then you don’t pay it. It only makes sense for states to look at sales tax first for additional revenue in these lean times.

Expect Audit Activity to Increase

Specifically, more sales and use tax audits and more aggressive techniques and auditors who will be tougher to deal with and less likely to compromise tax.

When you receive that letter in the mail, informing you that your company has been selected for a sales and use tax audit, you then have to decide if you are going to attempt to manage the audit yourself or hire a consultant to do it for you. Aside from the obvious reasons to use a consultant, there are a myriad of reasons that are not so obvious.

Tax Knowledge and Tools

Sales and use tax laws are complicated. State tax laws, rules, regulations, court cases, tax rates, state issued opinions, interpretations and technical bulletins are moving targets, constantly changing, and differ from state to state. Just keeping up with the current tax rates and taxable items in each jurisdiction can be a full time job. It usually requires a subscription to a tax service to stay current or research prior law for the audit period.

Technical Expertise

Every state uses sampling in conducting their sales and use tax audits. Many times statistical sampling is used. If you are not well versed in statistical sampling audit techniques and methodologies, selection of the audit sample and the development and application of error ratios, choosing to learn through an audit can be expensive training.

Stress Test

It is the auditor’s job to find tax revenue that the taxpayer should have remitted, but did not. It is the tax manager’s job is to save the company as much revenue as possible. Like it or not, this is an adversarial relationship. Dealing with people in an adversarial situation can be extremely stressful. Many tax managers try to simply avoid dealing with the auditor. The auditor is plopped in a room full of records and left to his own devices. This can be another costly mistake. It is better to have ongoing, friendly, open dialogue back and forth with the auditor.

Company Knowledge

Tax managers are expected to have knowledge of internal accounting processes, procedures, programming and responsible personnel. When an auditor asks a tax manager a question, either in writing or verbally, the answer must be correct. If it is not and it is later discovered by the auditor that he was provided with wrong or bad information, he may lose trust that the tax manager is credible. When this happens, the auditor tends not to believe anything the tax manager says, thinks the company is hiding tax revenue and sees illegal activity under every rock. It is much better to say you don’t know the answer to a question than to provide the auditor with an answer that you think he wants to hear. It is easy for a consultant to tell an auditor that the question will have to be researched because the consultant is not an employee of the company and is not expected to know details of internal accounting procedures and practices off the top of his head.

Time and Space

These are the two obvious reasons to use a consultant. Many times, using a consulting firm not only frees up staff time to work on other projects, but can also prevent an audit visit. When space is limited, it can be difficult to find an empty office or conference room for the auditor to use for a week at a time. The consultant can arrange to meet with the auditor at the consultant’s office, freeing up not only time, but space as well.

Necessary Records

Many times an auditor’s request for records is a photocopy of a form records request prepared by someone else years ago. If electronic records have not been provided to the auditor, then the auditor will use records that the company has available. To support the details in the audit samples, auditors generally request copies of invoices. To prove non-taxable sales, resale and exemption certificates are requested. Some states will accept other records to prove exemption or resale. Knowing what records will be sufficient to satisfy an auditor that the transaction selected in the sample was correctly not taxed, varies not only from state to state, but also from auditor to auditor. Many times a consultant can be successful in substantiating that the sale in question was not taxable through presentation of other records that the auditor did not request or even think of asking to see.

I am not a tax auditor and I don’t even play one on TV!

Just like the crime scene investigation shows on television, we all fancy ourselves in the position of good guy crime solver. We watch a television show or two and think; I could do that job. The reality is that it requires a specific set of knowledge, experience and tools to be successful at crime solving, sales tax audit defense too. Are you ready with the necessary resources to protect your company from more aggressive sales and use tax audits? If not, you may want to hire your own expert.

Sales/Use Tax Traps in a Merger

Recently a client asked us to comment on their proposed merger plans. Mergers are always happening, so I thought it would be worth your while for us to comment on this to our friends and clients at large.

The basic facts were that, for various reasons, our client planned to simplify their corporate structure. The old structure consisted of a number of limited partnerships, limited liability companies, corporations and even a US branch of a foreign corporation. They planned to get down to just a few legal entities in the US by contributing member interests in the LLCs and merging several corporations out of existence. The question for us to comment on revolved around what would be the sales/use tax impact of such a transaction.

Many states have specific provisions that treat whether assets transferred as a result of a merger are subject to additional sales tax at the time of the transaction. Keep in mind that tax has likely already been paid on these assets when they were originally purchased. Our intuitive reaction is that tax should not be due on these assets again. However, we all know that intuitiveness is not always a good predictor of taxability of a transaction right? In the case of a merger, though, it can be said that most states generally would not tax those assets again. BUT, caution should be exercised in this scenario. Some states leave the question unanswered while others specifically tax at least certain types of assets transferred in a merger.

For example, some states have specific rules on motor vehicles that tax is due on a transfer to another legal entity. Louisiana is one such state. Texas is another state that taxes motor vehicle transfers in most cases, except in the case where the transfer is due to a "statutory merger".

If a state does not have specific statutory or regulatory guidance on assets transferred in a merger, then they may have issued informal guidance through letter rulings. Or, it may be in your best interest to seek a letter ruling in the case where significant dollars are at stake.

Mergers is one way to transfer assets, but another angle to consider is to structure a transaction as an "occasional" or "bulk" sale in order to avoid paying tax twice on the same asset. Many states have exemptions for bulk sales. Usually the seller cannot be a retailer (although some states allow retailers to have exempt bulk sales if they do not sell this type of item in the regular course of business). And usually, to be exempt, the seller must be selling all or substantially all of the assets.

Some states flat out do not exempt occasional sales -- Colorado, Oklahoma and Wyoming come to mind. The states that do exempt them all have their own particular rules, so this is an area that needs to be researched carefully according to the particular facts and circumstances. The taxes incurred or avoided in these scenarios is usually significant so it pays to be careful here. Sometimes this occasional exemption helps out in an audit if you are being assessed tax on a large equipment purchase, you should review the specific facts of the transaction and see if the purchase might have been exempt as an occasional sale. Maybe you bought the item from a company who was liquidating their assets. It may sound far fetched, but we have actually used this idea several times over the years to the substantial benefit of our clients. Maybe it will help you.

Wish you had a chart showing which states tax occasional or bulk sales? We can help. We have a handy chart that we can share on this with you. If you would like a copy for your own information, please let us know and we'll send it to you at no charge.

What Did The Mayan Calendar Say About State Taxes in 2012?

There's no indication that Nostradamus or the Mayans predicted anything state tax wise for 2009 , but we can make predictions based on how the economy is going.

Trouble in CA

We all know that California is in deep fiscal trouble. Back in July, 2009, CA was unable to meet its bills for the second time this year and the state started issuing IOUs. In fact, as reported by CNNMoney.com at the time, some 28,750 IOUs worth $53.3 million were to have been issued initially, mainly for personal income tax refunds. CNN said this at the time: "The state's fiscal condition is disastrous. Officials passed a budget in February, but declining tax revenues have opened up a $26 billion deficit."

California is in trouble, no doubt. But according to a study by the Pew Center on the States, so are 9 other states. It's interesting to look at what states are named and to consider what impact this will have on state taxes.

9 Other States in Trouble

As the Pew Center reports: "California’s financial problems are in a league of their own. But the same pressures that drove the Golden State toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country."

This examination by the Pew Center on the States looks closely at nine states, in addition to California, that are particularly affected by the recession.

All of California’s neighbors–Arizona, Nevada and Oregon–and fellow Sun Belt state Florida were severely hit by the bursting housing bubble, landing them on Pew’s list of states facing fiscal difficulties similar to California’s. A Midwestern cluster of states comprising Illinois, Michigan and Wisconsin emerged, too, as did the Northeastern states of New Jersey and Rhode Island.

According to the Pew report, other states -- including Colorado, Georgia, Kentucky, New York and Hawaii -- were not far behind.

States Face Other Huge Problems

Almost at the same time, the Center on Budget and Policy Priorities chimed in also forecasting that States that face a serious fiscal problem could be forced to institute additional deep budget cuts and tax increases in 2010. Obviously, the recession is going to affect income tax receipts and decreased purchases are going to lead to lesser sales tax receipts. But as states plan their budgets for fiscal year 2011 which begins in July for most states, they have to take into account another reduction as they make their plans. According to the Center, "the federal assistance that states received for their Medicaid programs under this year’s economic recovery legislation is scheduled to end with a “cliff” on December 31, 2010, and the assistance states received for education and other services also will be largely exhausted by then. Although that date is more than a year away, the problem is coming to a head now."

In contrast to the federal government, nearly all states have a statutory mandate to balance their budgets. They can't operate in a deficit. They must cut costs or raise revenue or both. Cutting services seems to be nearly impossible politically for state governments. Raising taxes is almost as difficult, but not impossible. It's easier to expand the tax base than it is to raise the tax rate.

Our Predictions

You don't have to be Nostradamus or understand the Mayan calendar to predict that taxes are going up.

Here's our specific predictions for the income tax. We expect that most states will not increase the marginal rates, but they will change the brackets. As a result, more people and companies will be paying income taxes that were before.Texas is not one of the 10 states in "fiscal peril" but it is a good example. It used to be in Texas that there was no corporate income tax and it was fairly easy to avoid the franchise tax. Now there is a new franchise tax and it taxes every form of business. It's a very onerous taxing scheme that only now is starting to hit people. The rate is very low this is true, and most small businesses do not pay any tax, but now that the structure is in place, it's easy to change the thresholds.

Also, income tax audits will increase. It's difficult to raise rates or change thresholds, but if the auditors can find more revenue, that's a win for legislators. More revenue and the state revenues take all the heat. In Texas, they hired 155 new auditors to focus on their new franchise tax. And the inside word is that in fact all 600 or so Texas auditors will be trained in auditing the franchise tax. This tax is so complicated that, if anything, companies are underpaying. Look for a huge ramp up in audit activity, not only in Texas but everywhere and especially in these 10 states.

In the sales tax, we fully expect to see an expansion of the base. Look for more services to be taxed. There is still significant opportunity in many states to tax many more services. Also, it is possible that states will make an attempt to increase the rates. At 7 and 8%, lawmakers might think they have some room to raise rates. They'd have to make a big case to do it, but we wouldn't be surprised to see rates increase in some states.

We also fully expect states to increase their sales tax audit activity. This is a proven revenue driver. So it makes sense to hire more auditors.

Nexus will be Big

And what is the best situation of all for auditors? They find lots of money from companies not based in their state. Especially from companies not previously registered. So expect a tremendous effort to find companies from other states doing business in the auditors' states. Printers will be burning up producing all the nexus questionnaires.

The world may not be ending in 2012, but rough times are ahead when it comes to state income and sales and use taxes.

"Window of Opportunity" (Amnesty) Announced in Louisiana

It seems like these amnesties come up a lot, but in reality they don't. For example, Louisiana hasn't had an amnesty program since 2001. If you have activity in Louisiana and possible sales/use tax or income tax exposure, consider taking advantage of this opportunity. 

In fact, Louisiana is calling their amnesty program a "Window of Opportunity".  It applies to all taxes administered by the LA DOR (except motor fuel taxes). It applies to taxes that became due as of July 1, 2001, and before Jan. 1 of this year (money owed since the last tax amnesty program); taxes due prior to Jan. 1 for which the agency has issued a notice or demand for payment between July 1, 2001, and May 31 of this year; and taxes due as of July 1, 2001.

The benefits are that the DOR will waive 50% of the interest due and 100% of the penalties.

Go to this link for more details or contact us for specific questions.

So What States Have Active Amnesties in Place?

I thought it would be good to give a rundown of which states are offering amnesty programs right now and give some details from CCH on each of the programs. Many of these expire in June. Arizona's expires on June 1. Better hurry! Some of them have significant caveats associated so let the tax manager beware.

Here's the list (click on the link for additional details):

MA -- Expires 6/30/09

MD -- Expires 10/30/09

CT -- Expires 6/25/09

NJ -- Expires 6/15/09

AZ -- Expires 6/1/09

Are You an Offensive Linemen or a Quarterback?

How Do You Measure Performance?

When we talk to tax professionals in corporate America about metrics they use in measuring performance, the number of the various types of tax returns they file is usually high on the list of measurables. They usually talk about the number of people in the tax department and how they have it staffed in terms of the level of specialization. This is completely understandable. Tax people have a huge job. All these returns have to get in on time and accurately or penalties and interest is the result.

Are You an Offensive Lineman?

I think the analogy of Offensive Linemen to Tax Managers is pretty good. Offensive linemen have a certain job to do. If they do their job well, you almost never hear their name called. They usually don't get the credit they deserve when things are going well. But if they move before the ball is snapped, or let a pass rusher get to the quarterback for a sack or get called for holding and nullify a nice play, boy do they get the negative attention.

I think a lot of tax people like it that way for the most part. As long as they're getting their jobs done and aren't getting flagged for penalties, everything goes pretty smoothly and they enjoy a lot of autonomy. Another aspect I think most tax people would acknowledge about their jobs is that, because of the nature of taxes and the burden of compliance, they are somewhat insulated from ups and downs in the economy. Taxes don't go away even though the overall business climate might be down, so (traditionally) they avoid (at least some of) the layoff pressure.

Maybe You're the Quarterback

Okay, that's probably stretching the analogy! But have things changed for tax people these days? It's a down economy, I know that's no revelation, but has it changed the tax departments role? It seems that just getting the job done and avoiding penalties isn't enough any more. It seems like there's more pressure than ever on tax people in the corporate tax departments everywhere. Upper management is looking to their tax professionals to somehow produce more than just tax returns. They're asking their tax people to pull a rabbit out of the hat and produce some savings or refunds. Almost like they're being asked to constantly rejustify their existence by doing more than tax returns.

If you're not feeling that direct pressure from upper management, maybe it's self-imposed. Maybe you are feeling it yourself as you watch your company go through some hard times. Maybe if you could identify some savings opportunities, the company could benefit and maybe some jobs would be saved.

We're getting a lot of queries from our clients to help them identify areas where they can do just that.

What Credits and Savings Are Available?

Well, we've been talking a lot about this lately. The fact is, we subscribe to every tax research and news service we know of. We have access to a potential gold mine of information that could benefit our subscribers. We're going to try to help you identify opportunities. In fact, we're going help you at no charge, just go to this link for more details.

There's all kinds of incentives out there for business in just about every state and in many local jurisdictions. In fact, according to CCH, there are over 8,000 distinct state and federal tax incentive zones that can generate hiring tax credits ranging from $500 to $12,000 per employee, equipment credits of 10% or more, favorable financing and/or partial to full exemption on tax gains upon disposition.

These tax breaks can amount to tens of thousands to millions of dollars. They can fully shelter the annual tax obligations of certain businesses, and if a business owner has failed to claim these benefits in past years, it is often possible to obtain tax refunds for 3 years or more by documenting the credits via amended returns.

There are sales and use tax credits, rebates and exemptions, property, income and franchise tax credits available. There are also hiring credits and investment credits available. And it's more than just state and local tax savings. We can also identify federal incentives and non-tax incentives as well. Do you know about the opportunities that exist in Federal Empowerment Zones, Indian Tribal Lands, Renewal Communities and Gulf Opportunity Zones? What about what the opportunities are in the states. There are some states that are "pre-qualification states" and "non-pre-qualification states" meaning in some cases you have to have applied for a benefit before you qualify in some states, whereas in others, no prequalification is required. Do you know if your locations qualify for "Municipal Redevelopment Area" benefits?

It turns out that only 10% to 50% of these benefits are ever claimed.

Some Examples

A regional restaurant chain received $500,000 in hiring credits and $80,000 in sales tax refunds on equipment.

A national telecom company looking for a new call center site found an enterprise zone that saved them $300,000 per year.

A national processor saved over $1,000,000 in a single location that happened to be located in a renewal zone.

We Can Help

We have a no-cost way for you to take advantage of your relationship with us. Just go to this link for more details.

What the Texas Legislature Hath Wrought

What the Texas Legislature Hath Wrought

 

We have been saying all along that we thought that Texas legislators didn't really understand what they were voting for when they enacted this new "margin tax" in Texas. Texas has alway been "business friendly". It's a major factor businesses consider when deciding to relocate to this fair state. But the special committee headed by John Sharp that conceived of this tax apparently suffered from California envy. Now Texas has the most onerous corporate income tax in the Union. The legislators who voted for this thing are already hearing it from the Taxpaxers and you can bet the noise will get louder and louder. The Comptroller's Office is charged with implementing this stinker and they seem to making a huge effort to educate the public. The office of Texas Comptroller is an elected position. How would you like to be the Comptroller responsible for implementing the worst tax ever passed by the State of Texas? Susan Combs is just the messenger, but she's getting an earful. She could turn into a hero, if she becomes the public champion of the "Let's Repeal this Tax" committee. Then the legislature would be under a huge amount of pressure. We'll see how this all develops.

 

Taxation is not usually headline news, but this tax is drawing a lot of press. Here's some news from around the state.

 

First out of the gate is an article by Kate Alexander of the AUSTIN AMERICAN-STATESMAN on Friday, May 16, 2008. Demands for changes to Texas' new business tax grew louder Thursday from small-business owners who say they will be unfairly burdened. (See this link.)

 

Speaking at an event to launch the Texas Business Tax Coalition, electrical contractor Keith Bell said the tax bill for his Dallas-area firm will skyrocket from about $3,900 to $50,000 under the so-called margin tax, which is due for the first time in June.

 

"I cannot believe that if the legislators knew that the inequities and the unintended consequences were going to occur ... that they would have voted for it," said Bell, who leads the government affairs committee for the Independent Electrical Contractors of Texas, a trade association.

 

But now that "the devil has been exposed in the details," Bell said, the Legislature needs to act.

 

For most qualifying businesses, the tax is 1 percent of their total revenue minus one of three options: the cost of goods sold, employee compensation or 30 percent of total revenue. Adopted in 2006, the tax applies to about 200,000 more businesses than the franchise tax it replaced.

 

State Reps are Hearing It 

 

State Rep. Jim Keffer, chairman of the House Ways and Means Committee, said legislators are sensitive to the concerns about the tax and are open to addressing any problems once more is known about the tax impact.

 

"Our goal is always to keep Texas business-friendly," said Keffer, an Eastland Republican. "We will work hard to make sure that no industry is overtaxed and overburdened."

 

"It is a mess," said Sen. Dan Patrick, R-Houston, who was not in the state Senate in 2006 when the margin tax was adopted.

 

The tax is convoluted and confusing, and it punishes many small businesses, Patrick said.

State Rep. Debbie Riddle, R-Tomball, opposed the tax in 2006 and said it continues to be a mistake.

 

"We need to nuke the tax, we need to repeal the tax, we need to drive a stake through the heart of the margin tax," said Riddle, who attended the coalition event Thursday.

 

The Governor is Hearing It

 

Gov. Rick Perry has said the Legislature should revisit the business tax if it brings in more revenue than anticipated or if there are unintended consequences, spokeswoman Allison Castle said.

 

 

 

Check out this Article in the Dallas Business Journal by Dave Moore. 

 

 

"It's the only tax of its kind in the United States, and perhaps the world... "

This isn't the type of headline the Comptroller is hoping for.

 

According to Dave Moore: Beyond the tax measure's complexity, business owners are hoping to squelch what they claim is the law's punitive nature.

 

"It's not a fairly levied tax," said Pete Snider, president of Mesquite-based Alco Glass Inc., which does high-rise commercial and residential glass replacement." It penalizes a businesses when they're not in a profitable mode. It disregards your net revenue."

 

Snider, for example, reported a loss of $18,000 in 2007, but he calculates he'll owe Texas $6,000 in margin taxes, because the margin tax applies to his cost of material, not his relatively thin profit. Snider said he'll have to take a loan out to cover the tax bill.

 

So Who Came Up With this Tax?

 

Dave Moore names names: Efforts to contact the leading author of the tax, John Sharp, were unsuccessful. Sharp was chairman of the Texas Tax Reform Commission that formulated the margin tax; he was Texas' comptroller in the 1990s.

 

Rich Parsons, press secretary of Lt. Gov. David Dewhurst, said it's likely Dewhurst will wait until after the tax is collected before he decides if it should undergo further reform. As lieutenant governor, Dewhurst sets the legislative agenda for the Texas Senate.

 

The El Paso Times Weighs In 

The El Paso Times had this article in the May 12 edition. It was a report about a recent visit by Texas Comptroller Susan Combs to El Paso at the invitation of the Greater El Paso Chamber of Commerce, who apparently gave her an earful. She noted that the first year of the tax "is really tough" and that she would furnish the Legislature with as much information as possible about the tax's effects. That includes some business being hurt.

 

They make a good point about attracting business to Texas: "Also, a destructive franchise-tax structure would be a huge deterrent to businesses thinking about coming to Texas. We need to be thinking about ways to attract business, not drive it away ... So far, Texas is in better economic shape (knock on wood) than most of the rest of the country. We need to keep it that way, and a devastating franchise tax isn't a good way to do that." Ouch.

 

 

  

The Service Industry May Be Hardest Hit

 

Leslie Wimmer of the Fort Worth Business Press had this quote from Cyndy Kimberling, owner of Kimberling, McFarland and Associates accounting firm. "I know of several of our clients who could be put out of business because the new franchise tax is based on gross receipts rather than bottom line profits," Kimberling said. "It is really going to hurt some of our clients."

The service industry may be hardest hit, she said.

 

"The ones who are really suffering are going to be your service businesses such as trucking companies," Kimberling said. "They have a lot of expenses such as fuel and truck maintenance. The new franchise tax does not consider these expenses as cost of goods sold so they do not get to deduct them from their gross receipts."

 

 

 

"I think you're going to see some people get voted out of office because of this..." This was a statement of a business owner quoted in an article in the Dallas Morning News by Terrence Stutz.

 

Among the disenchanted taxpayers is Dallas businessman Andy Ellard, owner of a machine shop with 28 employees. Mr. Ellard said the size of his tax bill doesn't match up with the pledges of state lawmakers. "We were promised a number of things, and none of them happened," said Mr. Ellard. He estimated that he would pay about $8,900 under the new business franchise tax, more than double the $4,200 he paid last year.

 

"There are going to be some mad business owners [on June 16], and I think you're going to see some people get voted out of office because of this," he said.

 

"Businesses are just waking up to this," said Will Newton of the National Federation of Independent Business, which has become one of the biggest critics of the new tax. "Texas used to be good for business, but this new tax is making us one of the most anti-business states in the country."

 

To top it off, Mr. Newton said, "It's the most confusing, complicated system of taxation ever devised. Just the cost of compliance [preparing tax returns] has been devastating for some of our members."

 

"This tax is going to cost jobs in the long run," he said. "If you want to make sure the Texas economy tanks, just enact a tax that hits small businesses hard."

 

 

"The way I see it, it's like kicking a guy when he's down," Mr. Snider said, referring to the slowing economy in Texas.