All States ~ Multiple Taxes: FTA Annual Meeting Covers Cloud Computing, Uniformity Developments and Audit Tensions

The Federation of Tax Administrators (FTA) held its annual meeting in Omaha, Nebraska, June 13-15, 2011, with nearly half the state tax agencies represented by new directors or commissioners. The FTA itself welcomed its new Executive Director, Gale Garriott, the outgoing director of the Arizona Department of Revenue. (TAXDAY, 2011/05/25, S.1) Nebraska Gov. Dave Heineman welcomed participants with the admonition that the federal government can learn from the states how to balance a budget.

MTC Developments

Joe Huddleston, Executive Director of the Multistate Tax Commission (MTC), discussed developments at his organization. He rejected criticism that the MTC’s development of model statutes is “a Sisyphean task.” Huddleston said that many states have adopted MTC model statutes, either in whole or part, to solve problems in their state. The number of complex problems “left at the top of the hill” through the development of model solutions has been impressive, he added. The MTC’s audit program usually audits for 7-15 states at a time and is “incredibly successful,” according to Huddleston. More important than the immediate revenue brought in by the MTC’s National Nexus program, he said, are the thousands of new registrations that will result in future revenue flows. The MTC also continues to support the states in multistate litigation and policy research. Huddleston alerted the audience to a trend of business taxpayers seeking state tax solutions from the federal government. He mentioned in particular the Digital Goods and Services Tax Fairness Act of 2011, which has been introduced in both houses of Congress. (TAXDAY, 2011/05/20, S.1) Huddleston compared it to the Internet Tax Freedom Act. He concluded with a warning that the states’ challenge over the next few years is to maintain their status as the proper forum for resolving state tax issues.

In a subsequent presentation, Todd Lard, Council On State Taxation (COST), responded to some of Huddleston’s comments. Lard said that taxpayers seek federal preemption to address particular “abuses” where state tax uniformity is unlikely. Outside of the Uniform Commercial Code (UCC) and some other specific areas, he said there are few examples of true uniformity in state statutes. MTC general counsel Shirley Sicilian replied that states use their tax codes, unlike the UCC, as policy vehicles. Therefore, complete uniformity is always a challenge, and not necessarily even desirable for either states or taxpayers. The goal, she said, should be a reasonable amount of uniformity. Sicilian also noted that the MTC is nearing completion of its work on a model notice and reporting statute modeled on existing Colorado law. (TAXDAY, 2011/06/07, S.1) The MTC’s uniformity committee may now take up the development of a model statute modeled on the New York “click-through nexus” law, she added.

Streamlined Sales Tax Developments

Uniformity in state laws achieved through the Streamlined Sales Tax (SST) initiative has helped her company reduce its class action and audit risks, according to Deborah Bierbaum of AT&T. Many important working relationships have been developed through the SST effort, she said, and non-participating states can learn best practices from how the SST process has been handled. Bierbaum added that one of the initiative’s greatest challenges is maintaining interest after more than 10 years of work. Russ Brubaker, Washington Department of Revenue, agreed that strong working relationships have developed among state representatives and taxpayers participating in the SST effort. Rich Prem,, added that he found the open dialogue in the effort beneficial.

The members of the SST panel, which also included Utah state Rep. Wayne Harper and SST Executive Director Scott Peterson, agreed that the states probably have the votes to pass remote-sales collection legislation in the U.S. Senate if they can assemble sufficient cosponsors to have the SST bill introduced. (TAXDAY, 2011/05/23, S.2) Senators fear being labelled “tax mongers” by groups like Americans for Tax Reform if they sponsor the bill, panelists said. Peterson said the principal prospective sponsors, Sens. Richard Durbin, D-Ill., and Mike Enzi, R-Wyo., want to have four original cosponsors from each party. He said they have lined up four Democrats and three Republicans and are looking for one more Republican cosponsor. He declined a request from the audience to identify the prospective cosponsors. The following day, Peterson announced that he had received word the federal SST bill could be introduced on June 23.

Cloud Computing

In one of two sessions devoted to the concept of cloud computing, Jeff Friedman of the Sutherland law firm commented that he once thought the SST initiative would address some of the taxation issues around new technologies, but that did not occur. He said it is time to move away from historical categories based on outmoded concepts such as canned versus custom software, which he called a “cracked foundation.” However, Friedman warned that, while nonsensical results can arise from trying to force transactions into outmoded categories, the development of more relevant definitions can lead to more transactions being taxed. He offered recent developments in Washington State as an example of how this can happen.

Jill Nielsen and Reid Okimoto, both of KPMG, described three service models for cloud computing: Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). For the most part, these models are not addressed in state statutes, Nielsen said, and states are “all over the place” in how they treat them for tax purposes. For sales tax, states may treat them, for example, as an unenumerated (and, therefore, nontaxable) service, as a taxable service, or as a license to use or lease tangible personal property. Sourcing is also a challenge, since there is no delivery and there are often multiple users. Nielsen said that providers of these services are looking for guidance, in writing, from states because they are meeting resistance from customers who argue these transactions are not taxable. Providers preparing to make initial public offerings or to be acquired also want to establish proper reserves. Friedman added that income tax sourcing is a challenge for these models, whether states use cost-of-performance or market-based sourcing. He agreed that taxpayers need guidance for establishing FIN 48 reserves.

Tensions in Taxpayer/State Relationships

The cloud can be used to expedite audits, according to Frank Yanover, General Electric (GE). He said that GE has created an electronic e-audit room where state auditors can access the information they need with secure passwords. His comments were made during a session on “relationship killers” between taxpayers and states. Yanover said that because of state cutbacks, audits are taking longer and auditors rarely have the power and knowledge to resolve issues that arise during the audits. Ultimate resolution lies with overworked supervisors, he said.

Jordan Goodman, Horwood, Marcus and Berk, echoed these comments. He said it now takes an inordinate amount of time to resolve audits. However, he added that the California settlement bureau and New York conciliation conferences have both been very helpful in improving the resolution of audits in those two states. Conversely, he described many inefficient procedures in other states that he said waste time and increase strife.

Jim Eads, Ryan, maintained that the adversarial nature of audits can be tempered. He emphasized the importance of integrity, civility, and empathy for the other side.

Federation of Tax Administrators Annual Meeting, Omaha, Nebraska, June 13-15, 2011


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