Texas Tax Amnesty

Is Fresh Start the Best Start?

By Michael J. Fleming

State tax amnesties are few and far between, so when Texas Comptroller Susan Combs announced an amnesty for the state of Texas on March, taxpayers had cause for celebration. Amnesties are usually beneficial for the state as well as for many taxpayers. In general, the states offer amnesties with the hope they will get a quick revenue boost to fill their coffers immediately, as well as add new or more reliable revenue streams from the new or newly compliant taxpayers. Most states kick off their amnesty programs with a lot of fanfare to generate interest and offer a limited window of time to create a sense of increased urgency. Texas is no different. Texas’ program began on Tuesday, June 12, and will run through, Friday August 17; slightly longer than two months. To help build excitement, the state named the amnesty program “Project Fresh Start.”

Before we get caught up in the building excitement and expanding sense of urgency, let’s ask the question, “ Is Fresh Start the Best Start?” The answer, as is so often the case when it comes to sales tax, is: It depends! It depends on your particular set of circumstances. A voluntary disclosure program (VDA) is often called an “ongoing amnesty” program, which is an appropriate phrase to describe a program very similar to a state amnesty program in some ways, and different in others. The differences in the programs combined with your circumstances determine if a VDA is a better choice for you. Let’s examine both programs to help you decide what the best plan is for your fresh start.

True Amnesties?

Whether we are talking about amnesties or VDAs, note that neither is a full pardon or “true amnesty.” In both cases, you still have to pay the back taxes. Amnesties typically only waive penalties and all or part of the interest owed on the back taxes. True amnesties do exist, though.

The Streamlined Sales and Use Tax Agreement allows for the waiving of all payment of back sales taxes, penalty, and interest. From the time a state becomes an associate member until 12 months after it becomes a full member, participating states must offer a true sales tax amnesty. Ohio, Tennessee, and Utah currently offer amnesty as associate members, and Georgia will continue to offer amnesty as a full member until July 31, 2012. These amnesties do not expire until 12 months after the states become full members. However, utilizing these amnesties is very complicated. Before using this program, we suggest you learn more about it, as it has some drawbacks. A good place to start is with an article by Andrew Johnson, founding partner of Peisner Johnson & Company, “Are You For or Against Amnesty?”

The Rationale Behind the Programs

States are looking for ways to close budget gaps and increase revenue, so offering amnesty may seem counter-intuitive because they forgo penalties and interest revenues. You may be thinking, “If it sounds too good to be true, then it probably is.” However, with state amnesty programs that adage is wrong. To understand why this is wrong we should realize that states expend a good deal of effort and money tracking down and auditing non-registered and non-compliant companies. By encouraging companies to step forward voluntarily, this allows states to redirect their efforts in other directions. When a company comes forward, the state receives an immediate lump-sum cash infusion consisting of numerous years of back taxes and perhaps some interest. Revenues from VDAs or amnesty programs is basically a windfall. Not only does the state receive a lump sum payment of back taxes owed, but it now has a taxpayer that will likely continue to pay taxes on a going-forward basis.

Texas Voluntary Disclosure Program

One of the most advantageous features of a VDA to a taxpayer is the limited look-back feature. If a company has not been registered, then there is no statute of limitations. In theory, in an audit, a state could go back to the first day the company began to do business in that state. In practice, most states go back only seven to 10 years. VDA agreements are attractive to taxpayers because the states agree to limit the look-back period, typically to three or four years. Each state is different. Texas has a look-back period of four years.

The second greatest feature of a VDA is the waiving of penalty and possibly some interest. While just about all the states waive 100 percent of the penalty, only a handful waive any interest. Texas is unique in that it waives 100 percent of the penalty and 100 percent of the interest. This feature more than makes up for the slightly longer look-back period of four years.

One of the major drawbacks of a VDA program is that most states will not enter into a voluntary disclosure agreement if they have already contacted you. A handful of states -- like Michigan -- will, but the majority will not. Texas falls into the majority and generally will not allow you to enter into a VDA once they have contacted you. Companies that have already registered in most states, including Texas, are ineligible for a voluntary disclosure agreement. VDAs have several other benefits and drawbacks, but for the purposes of our Fresh Start comparison, we will concentrate on these. If you would like to learn more about VDAs or amnesties, read “You Missed the Tax Amnesty Express”

Texas Fresh Start Amnesty Program

The biggest reason we generally prefer VDAs over amnesties, as mentioned in a previous tax amnesty article, is because many amnesties don’t allow for a limited look back period. Texas offers no look-back protection. If you have not registered in the state previously, then the state will require you to file and pay taxes for either how long you have been doing business in Texas, or seven to eight years, whichever is lesser and depending on tax type. Waiver of penalty and interest are the same. The Fresh start program waives 100 percent of the penalty and 100 percent of the interest.

The greatest advantage the Fresh Start program offers over the VDA is that it is more flexible for existing taxpayers. Texas VDA excludes registered companies for the tax in question, but the Fresh Start amnesty program may allow you to participate. The exceptions are: You cannot have already reported the tax on a return, be under audit, be identified for an audit, or have signed a settlement or VDA agreement.

The Fresh Start amnesty program covers all state and local taxes and fees administered by the Comptroller's office, with the exception of Public Utility Commission gross receipts assessments, and is available for those periods where the filings were due prior to April 1, 2012.

Conclusion

Could a VDA be a better start when considering a fresh start in Texas? Although the answer depends on your circumstances as discussed, in most -- but not all -- scenarios, we believe that a VDA program will be the better choice.

If you have exposure, now is the time to step forward. In many states, we have seen a concerted effort to step up discovery and enforcement activities in the periods following an amnesty. Texas has a very large department of auditors and is aggressive in assessing interest and penalties, which can add up very quickly. I recently spoke with Daniel Holcomb, a former state auditor with almost 30 years of service in the Texas Comptroller’s office and now a CPA with Peisner Johnson, and he said, “Amnesties come very infrequently, so between the VDA and the Fresh Start, we currently have some great options and incentives for companies to become compliant.” I couldn’t agree more.

Peisner Johnson, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, you may email Michael Fleming or call him at 972-277-4820.

New chart: Sales Tax VDAs by State

Voluntary disclosure agreements are a useful way to mitigate past liabilities while becoming compliant for sales tax purposes. Nearly every state offers a VDA program for sales tax, and if you qualify and take advantage, it could save quite the headache. One of the challenges is that VDA programs vary widely by state, and keeping up with the changes and variations between the states is a handful.

In the state of Texas for example, a VDA will waive all penalties and interest associated with any back taxes you may owe, and they will limit themselves to a four-year look-back period. Hawaii, however, will waive penalties but will require a 10-year look-back period and no interest waiver.

Oklahoma offers a VDA program with a three-year look-back, and the department will also grant a full penalty waiver and will reduce the interest by half. Compare that with the state of Iowa, whose look-back period is dependent on the amount of time your business has been operating in the state and can be up to five years, while offering a penalty waiver with no interest waiver.

In addition to what they offer, states vary in their requirements to qualify for a VDA. The state of California for example, will only enter into a VDA with a taxpayer if they have not been contacted by the state or any of its offices, and the taxpayer cannot be under audit.

Contrast this position with Maine’s VDA, where taxpayers who have been contacted by the state are not automatically disqualified from the program unless they are under a criminal investigation.

Because of the variations between states, tracking down this information would be incredibly time consuming. To save you from the hassle we have composed a chart detailing the differences between the state VDA programs. This is not meant to be exhaustive, but it can give you some helpful information on how best to proceed in your situation. If you would like a copy of the chart, just click here and let us know.

Peisner Johnson & Company Turns 20

Twenty years ago today, Jerry Peisner and Andy Johnson formed Peisner Johnson & Company with a clear mission: Solve clients’ state tax problems. 

As the newest member of the PJCo team, I’d like to wish Jerry, Andy, and the rest of the team a happy 20th anniversary! Congratulations, Team, and here’s to many more years of continued excellence!

Certificates of Authority to Transact Business: Do I Really Need to Ask for “Permission” To Do Business?

By Michael J. Fleming

A number of states ask about Certificates of Authority on their sales and use tax registration forms and/or during their voluntary disclosure agreement (VDA) programs. While the potential need for a Certificate of Authority is certainly not new, it appears that some states have taken a more aggressive stance in ascertaining who should be registered and then holding firm on compliance in their efforts to identify additional revenues. As a result, we are seeing an increased number of questions about the topic. A frequent question that arises in one form or another is, “Do I really need to ask for ‘permission’ to do business?” The short answer, at least according to the states, is yes. However, the short answer may not be the right answer for you. Before addressing how you get to the “right” answer, let’s review some of the basic concepts underlying a Certificate of Authority. What is it? What is the process to procure it? What is the basic theory behind it? What are the potential ramifications of electing not to secure it? And, what are the costs associated with obtaining and maintaining a certificate? Then, with a better understanding of certificates, we’ll return to our central question. 

What is a Certificate of Authority?
A Certificate of Authority to Transact Business is the proof that a state has granted you the authority to transact business within its borders. The process of asking for permission is usually called “foreign corporation qualification” or “foreign corporation registration.” It is called foreign corporation qualification because you are considered a domestic corporation in the state in which you are incorporated, and a foreign corporation everywhere else. Contrary to the somewhat common misconception, it has nothing to do with being from another country. The governmental agency that regulates the process is usually the Secretary of State. It is important to note that while we are mainly addressing corporations in this article, most states have the same requirements for the other types of business entities as well.

The process to obtain a certificate.
The process to obtain a Certificate of Authority is slightly different in every state. The majority of states require that you get a Certificate of Good Standing (COGS) or its equivalent from your state of incorporation. The certificates may or may not have to be certified depending on the state. Some states require certified copies of the Articles of Incorporation instead of the COGS.

Another requirement is checking for name availability. In other words, you need to find out if the name of your corporation as registered in your home state is available in the target state. If your name is not available, you will have to use an assumed name that is available. You will also need to find a registered agent. Each state has different rules on the guidelines for registered agents. A registered agent is your official representative in a state for purposes of receiving service of process and any official Secretary of State correspondence.

Once you have designated a registered agent, you will need to fill out your application and submit it to the state with the COGS and the application fee. State fees vary, but usually average around $100. There are companies that can assist with this process including Peisner Johnson & Company.

The theory behind Certificates of Authority.
The rationale the states have put forth for the requirement to obtain authority to do business is the need to protect domestic organizations from unfair competition. They also want to place domestic and foreign organizations on equal footing. The states’ ability to do so is apparently well settled and dates back to the 1869 U.S. Supreme Court Case of Paul v. Virginia, 75 U.S. 7 Wall. 168. In this case, the court found that “corporations are not citizens ... They are creatures of local law, and have not even an absolute right of recognition in other States, but depend for that and for the enforcement of their contracts upon the assent of those States, which may be given accordingly on such terms as they please.” It is specifically important to take notice of the language of the statement that refers to the enforcement of contracts.

The potential ramifications of electing not to obtain the Certificate of Authority.
The potential ramifications of electing not to obtain the Certificate of Authority vary by state, and each state usually has multiple ramifications. Perhaps the most serious ramification relates to a company’s ability to use the courts in that state to enforce their contracts, and the other ramification relates to potential assessments of fines and penalties. Many states will say that without their particular Certificate of Authority, you are prohibited from using the state court system. Some states go a step further and say that contracts you have entered into are invalid and unenforceable. Most states also have civil fines and or penalties, and a few have criminal fines and penalties. Some states cap the dollar amounts of these, but a large number do not. We have seen some fines and penalties add up to the $50,000 - $75,000 range. This can be a serious issue.

The downside of obtaining a Certificate of Authority.
After hearing the negatives of not getting a certificate, you may ask if there are any downsides of compliance, and the answer is yes. The most obvious downside of obtaining certificates is the costs associated with doing so and their maintenance. Once you have your Certificate of Authority, you will need to renew it annually in most cases. The renewal process usually consists of filing an annual report and paying a fee.

Also, the holding of a certificate in and of itself could be a nexus creating event in some states and could subject you to other taxes; most notably income and franchise taxes.

Do I really need to ask for “permission” to do business?
Again, the short answer to the permission to do business question, at least according to the states, is yes. The long answer, however, takes into consideration that each state defines “doing business” -- or as some call it, “transacting business” -- differently. The problem is that those definitions sound more like, “I’ll know it when I see it,” rather than a true definition. To the best of my knowledge, no state publishes a list of activities that are considered doing business for purposes of requiring a Certificate of Authority. Some states have a very limited list of activities that are not considered doing business. Most often, the only guidance that most states will give you is that you should consult with your attorney about your activities and whether they constitute doing business in the state.

In summation, the answer to the question is: it depends. If a state determines that your activities fit their interpretation of doing business, then their answer would be yes. We do not intend to take on the role of your attorney, nor can we state whether or not your activities definitely cross the threshold. But we do believe, given the downsides of failing to obtain a Certificate of Authority when when one was required, that a conservative approach may be desirable. Many clients of ours after considering the possible downsides, decided to err on the side of caution and tend to get registered in their larger states. But, by all means, do feel free to check with your attorney.

Peisner Johnson, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, you may email Michael Fleming or call him at 972-277-4820.