October 4th, 2012 by Andy Johnson
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.
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?”
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.
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”
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.
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.
Back in April, we wrote about Ohio Department of Taxation’s (ODT) use tax collection program.
They called their program the Use Tax Education Program. When the government uses the word “education” in a tax collection program title, you better hold on to your wallet! Their interest is not so much in education as it is in income repatriation.
But then almost as soon as the ODT announced their education program it was suspended because the legislature had the temerity to pass their own amnesty bill. The amnesty program would be effective October 1, 2011 so the ODT had to scramble to figure out the details.
The ODT has now announced the details (well some of them) via their website. Keep in mind that what the Legislature giveth, the regulator taketh (or at least attempteth to take) away, so it’s important to review the details of this program. But it does look to be relatively generous.
Keep this in mind too: This amnesty is for use tax on purchases. And it does actually waive some use tax on purchases made before January 1, 2009 that would otherwise be due. But what about sales tax on sales you make? There’s another program for that. Ohio also participates as an associate member of the SSTP and as such is obliged to offer an even MORE generous amnesty program that could waive all the tax you should have collected in OH if you qualify. More on that below after we discuss this new use tax amnesty program.
The following is from the the ODT website with PJCo commentary as noted.
ST 2011-01 – CONSUMER’S USE TAX AMNESTY PROGRAM – ISSUED SEPTEMBER 2011
The consumer’s use tax amnesty provisions of H.B. 153 (see uncodified section 757.42) provide an excellent opportunity for taxpayers to satisfy their past consumer’s use tax liability. The amnesty program begins October 1, 2011 and ends May 1, 2013.
PJCo: This is an unusually good opportunity as amnesties go (see our article “Are You For or Against Amnesty?”. Because if OH were to find you first, they go back 7 years and assess not only the tax but penalty and interest
WHAT CONSUMER’S USE TAX PERIODS SHOULD BE INCLUDED IN MY AMNESTY APPLICATION?
Consumer’s use tax due on purchases made on or after January 1, 2009 should be included in your amnesty application. However, if you have been issued an assessment for consumer’s use tax due for any period, you are not eligible for amnesty. You can apply for consumer’s use tax amnesty only once during the program.
PJCo: Eligibility is key here. You don’t want to apply for amnesty and then realize you’re not eligible. The ODT says you may still be eligible for the VDA program but it is unclear if you would be eligible if you applied for amnesty and then learned you weren’t eligible.
WHAT IF I DON’T QUALIFY FOR CONSUMER’S USE TAX AMNESTY?
Taxpayers who do not qualify for consumer’s use tax amnesty may still qualify for ODT’s Voluntary Disclosure Program. For more information on voluntary disclosure, please visit ODT’s Web site at http://tax.ohio.gov/channels/other/voluntary_disclosure.stm. However, if you qualify for consumer’s use tax amnesty, you are not eligible for voluntary disclosure for consumer’s use tax.
PJCo: This does not clear things up entirely.
WHAT ARE THE ADVANTAGES OF AMNESTY?
The Tax Commissioner will waive all unasessed use tax liability due for any periods prior to January 1, 2009. Consumer’s use tax paid under amnesty is not subject to interest or civil or criminal penalties. However, if you are registered for Ohio use tax as of June 1, 2011, you will be required to pay interest on any under-reported or unreported consumer’s use tax.
PJCo: They will waive all “unasessed” use tax liability for periods before 2009. That makes this amnesty pretty generous relatively speaking. Most amnesty programs do not offer to waive tax, just penalty and/or interest.
AM I REQUIRED TO PAY TAX FOR PAST PERIODS?
Yes. You must make a nonrefundable payment of all consumer’s use tax due on purchases made on or after January 1, 2009 through the last day of the month preceding the month in which you request amnesty. You will also be required to register for consumer’s use tax and may be required to file returns on an ongoing basis. Even if you are not required to file use tax returns on a regular basis, you still must report and pay consumer’s use tax on your annual personal income tax return (e.g., Schedule C filers), Form IT1040, or via a Use Tax Voluntary Payment Form VP-Use. Both forms are available on ODT’s Web site.
IS THE INFORMATION I SUBMIT UNDER AMNESTY SUBJECT TO REVIEW?
The Tax Commissioner reserves the right to review the documentation provided under amnesty and any other records that support the amnesty submission in order to confirm that the amount of the amnesty payment accurately reflects your consumer’s use tax liability.
WHAT HAPPENS IF I APPLY FOR AMNESTY BUT DON’T QUALIFY?
If you apply for amnesty but ODT determines that you don’t qualify because of a prior consumer’s use tax assessment or prior consumer’s use tax amnesty submission, ODT will issue an assessment for the balance of your consumer’s use tax liability, plus interest. Any payment submitted with your application will be applied to your consumer’s use tax liability. A payment plan is not available to consumers who do not qualify for amnesty.
PJCo: Moral to the story: don’t apply if you’re not eligible.
IS THERE A PAYMENT PLAN AVAILABLE?
A no-interest payment plan is available to businesses that were not registered for consumer’s use tax as of June 1, 2011. In order to qualify for a payment plan, the amount of consumer’s use tax due under amnesty must exceed $1,000. The length of the payment plan will be determined by the total consumer’s use tax liability and the payment period cannot exceed 7 years (84 months). Further, a minimum payment of $1,000 per month is required. If you request a payment plan:
1. At least one corporate officer, LLC member, general partner or other guarantor (“Guarantor”) must agree to the terms of the payment plan on behalf of the business and agree to accept personal liability for the entire debt; and
2. One additional Guarantor must agree to accept personal liability for the entire debt.
Guarantors signing the payment plan agreement must provide his or her social security number on the payment plan agreement. Further, the business must waive the statute of limitations for assessment of the consumer’s use tax due under the payment plan. The first month’s payment must be remitted at the time you submit your amnesty application.
PJCo: These payment plan terms are pretty reasonable EXCEPT for those 2 onerous conditions. An officer and someone else must agree to accept personal liability?? How many companies are going to be opting for the payment plan?
This plan helps you if you have use tax liabilities. The SSTP Amnesty plan could help you if you have sales tax liability.
OH SALES TAX AMNESTY VIA THE SSTP
OH is an associate member of the Streamlined Sales Tax Project (SSTP) and as such must offer full amnesty for all past due sales taxes, penalties and interest for any company that wishes to register through the SSTP. The amnesty period must be offered until 1 year after the state becomes a full member of the SSTP. It is important to note that the amnesty is for uncollected taxes only and does not include taxes collected but not remitted. Registering through the SSTP has some significant drawbacks and there is enough significant risk that you should only proceed with extreme caution or with someone familiar with the process. One of the biggest drawbacks is that you must register with all the members of the SSTP. There are currently 21 full members and 3 associate members. So, potentially, you would reap some benefits in OH, but you’d be immediately registered in these other states where there is no amnesty offered. On the plus side though is that the other 2 associate members are also offering full amnesties. Those states are TN and UT. Also, GA is a new full member of the SSTP so they must also offer full amnesty for the first 12 months after they became a full member (which was August 1, 2011). Therefore, if your liability is great enough in any one of these 4 states it may make sense to take advantage of this opportunity. Some of our clients have literally saved millions with this approach. All of this must be handled very carefully, or the tax impact could be very detrimental. There are many factors to address, but the bottom line is there are ways to minimize the damage and take advantage of the opportunities.
You might be able to get part of the tax WAIVED along with the penalty and interest
We’ve been beating the drum on the amnesty in Washington for some time. We don’t like to beat the drum too long and loud, but in this case, we feel compelled to call your attention to the opportunity, lest you miss out.
The State is NOT Meeting Their Projections
In December of 2010, during Senate hearings of the Washington State Tax Amnesty (SB 6892), the WA Department of Revenue Interim Director, Tremaine Smith, testified that the proposed Amnesty program was projected to generate $28.3 million. The Amnesty which subsequently passed, began on February 1, 2011 and continues through April 18, 2011, may not meet it’s projections. According to a Tri-City Herald article published 3/24/2011, “5,000 businesses in Washington have taken advantage of a new tax amnesty program and paid more than $12.6 million into the state”. Using those numbers our calculations show that more 70% of the time had elapsed yet less than 45% of the revenue had been generated.
On Tuesday, March 29 the featured speaker at our Hot Topics in Washington State Tax Webinar, Gerald Swanson, told us that, “the DOR is anxious to show results… eager to cut deals… and settle old disputes.” Gerald went on to tell us that since WA does not have a history of offering amnesty programs they are eager to make this one work. As such, if you move quickly (there are roughly only two weeks left) not only could you have your entire penalty and interest waived but maybe a portion of the underlying tax as well.
We first mentioned the Washington Tax Amnesty Program in our previous article, “An Amnesty Worth it’s SALT”. In it we mentioned that although we usually prefer VDAs over amnesties (reasons detailed in You Missed the Tax Amnesty Express) the WA Amnesty was a pretty good amnesty. The amnesty covers the state business and occupation (B&O) tax, state public utility tax and both state and local sales and use taxes. It has a limited look back period of 4 years plus the current. There are also waivers of all penalty and interest. It was a good program to begin with, but with the potential for a tax reduction it is now a great program.
Don’t Ask, Won’t Receive
It is important to note that not everyone who asks for a tax waiver will receive one. We strongly suggest that if you wish to have the tax waived you work with a third party who can negotiate on your behalf. When choosing your third party make sure they have special experience in this type of work. How you frame your situation is extremely important. We can help. Gerald Swanson has helped many clients already and just last week had one tax base waiver of over 70%. There are no guarantees your tax will be reduced, but we can guarantee one thing: if you don’t ask, and ask the right people in the right way, you most certainly will not get any tax waived.
While many companies are prime candidates for this amnesty program, companies selling into the state of WA from other states are the best candidates. Because of last summer’s nexus rules changes, that eliminated the need for physical presence for “service companies” in regards to the B&O, many companies are now subject to a new tax they were or are not aware of. Other companies, while checking their operations to make sure they were not affected by the new rules, suddenly realized they have always had nexus and just never realized it. This is the perfect time for all companies to examine their operations to ensure you don’t have liabilities you are not aware of. The worst time to learn about a problem is in an audit. Contact us if you need help determining if you have issues. There is still time to evaluate your situation and meet the April 18th filing deadline.
You may participate in the WA Amnesty directly by following the directions at the DOR webpage or you may contact us for help. However you decide to proceed, do so quickly as you only have about 2 weeks to get it done. We can help with as little as 72 hours.
News and Views on the Alphabet Soup of MI Taxes
On February 17, 2011, as part of his 2012-2013 budget, Michigan Governor, Rick Snyder announced his proposal for the elimination of the Michigan Business Tax (MBT) and for the replacement of it with a flat Corporate Income Tax (CIT) of 6%. While not surprising (it was part of his campaign platform) it is unsettling. You see, the MBT was passed in 2007 but it didn’t replace the Single Business Tax (SBT) until January 1, 2008. Tax professionals are already tasked with knowing both the SBT and MBT. They must retain a working knowledge of the SBT as the audit periods are still open and they obviously must contend with the complexities of the current MBT. Now they must grapple with the reality that they may have another tax to plan for. In theory, you could have a tax professional defending an SBT audit, filing MBT returns and at the same time be involved with tax planning for the CIT. Talk about a heavy workload and it’s not far fetched at all. While we cannot say for sure that the Governor’s CIT will pass, it does seem probable. And there seems to be growing support for the elimination of the MBT. If the MBT is eliminated it will have to be replaced by something. In the meantime, working with the SBT, MBT and it’s component parts the BIT and MGRT will be taxing enough.
What is the Michigan Business Tax (MBT)?
Although referred to as a single tax, the MBT is actually four taxes in one. The taxes that make up the MBT are a Business Income Tax (BIT), a Modified Gross Receipts Tax (MGRT), a Gross Premiums Tax and a Franchise Tax. The MBT is imposed on all taxpayers with business activity in MI; it is not limited to corporations. Most taxpayers pay both the BIT and the MGRT but not the other two. Insurance companies and financial institutions usually do not pay the BIT or MGRT and pay the other two taxes instead. Since most taxpayers are only concerned with the BIT and the MGRT let’s take a closer look at those.
The BIT is assessed on business activity that occurs in MI. The tax base starts with federal taxable income or the equivalent and has specific statutory additions and subtractions. The adjusted income is apportioned to MI based on the proportion of MI sales to total sales. The tax rate equals 4.95%.
The MGRT is the taxpayer’s gross receipts less “purchases from other firms”. “Purchases from other firms” may include but are not limited to purchased inventory, capital expenditures and some materials and supplies. The modified gross receipts are apportioned to MI based on the proportion of MI sales to total sales. The tax rate equals .08%.
The MBT also contains multiple credits, exemptions, reductions, unitary filing requirements and surcharges that require too much detailing to go into here.
What are the Michigan Nexus Standards for the MBT?
There are actually 3 nexus standards under the MBT. For the MGRT there are two alternative methods and the BIT has its own method. For the MGRT, RAB 2008-4 states, “a person has nexus with the state if that person has physical presence in the state for more than one day during the tax year. Alternatively, a person has nexus with the state if the person actively solicits sales in this state and has Michigan gross receipts of $350,000 or more.” In addition RAB 2008-4 states that the BIT is “levied on taxpayers with Michigan business activity… unless prohibited by … PL 86-272” It is important to note that although PL 86-272 may protect a taxpayer from the BIT portion of the MBT, those activities still subject them to the MGRT portion of the MBT.
MI has defined both “physical presence” and “actively solicits” in relation to the MBT. Needless to say they are very broad far reaching definitions.
In general we usually prefer Voluntary Disclosure Agreements (VDAs) over amnesties. For reasons why, please refer to my previous article, “You Missed the Tax Amnesty Express: Don’t Worry. You are probably better off with a VDA anyway!” However each state amnesty is unique and should be compared with the state’s VDA program in relation to your specific set of circumstances. Make no mistake though, if you have an outstanding liability, you ought to strongly consider one or the other and act before the state finds you. The final details of the program have not yet been released but we know that the program will run from March 15, 2011 through June 30, 2011. The following taxes will be covered:
We recommend you keep an eye on MI if you have business interests there and keep abreast of announcements regarding their amnesty program. If you have exposure and need help in determining your best course of action, please let us know.
In summary Michigan’s MBT is one of the most unique and complex taxes that any state levies. The multiple layers and intricacies are compounded by the fact that not only is it evolving but you still have to know the SBT and will probably soon be planning for a new tax. If you need help sorting it out we stand ready to be a resource for you. Let us know how we can help.
A look at the B & O, Economic Nexus, Elimination of Physical Presence and Amnesty
In the current economic environment, states have a tightrope to walk between balancing the need to increase revenues with the need to save and create jobs. The state of Washington probably thinks it has found a creative way to do both.
Prior to June 1, 2010 many of WA’s in-state companies that provided services were at a competitive disadvantage to out of state companies. In instituting an economic nexus standard in addition to changing the apportionment method for certain companies to “single factor receipts apportionment” WA has leveled the playing field. In fact, many WA companies with out of state sales will see their taxes go down, some substantially.
On the other hand, out-of-state companies who have never worried about the B & O before will now be subject to the WA tax, even if they don’t have a physical presence. Common sense tells us that WA will look at ways to not only make up for the tax relief they have provided their domestic companies, but also to bring in the additional revenues all states are looking for. Increased enforcement of both the B & O and the sales and use tax are two of the most logical ways to do this. Out-of-state companies who are not paying the B & O seem to be likely (and lucrative) targets. The current amnesty program is a useful tool that many taxpayers may or may not take advantage of for a multitude of reasons.
However, if you currently provide a service in WA or receive a royalty out of WA and are not paying the B & O, this may be your best opportunity to become compliant as well as avoid all the penalties and interest.
Before we take a look at amnesty, let’s explore the B & O, economic nexus and the ramifications of single factor receipts (sales) apportionment.
What is the B & O?
B & O is short for business and occupation tax. Washington does not have an income tax and instead uses the B & O which is a gross receipts tax. A gross receipts tax is different from an income tax in that it is not levied on profits but instead on the total revenue of all goods and services. Since we are talking about gross income there are no deductions from the B&O tax for labor, materials, taxes, or other costs of doing business. The tax rate is different depending on the classification of your business.
What is Washington’s Economic Nexus?
Washington’s economic nexus, which became effective on June 1, 2010, is applicable only to income that would be taxable under one of the “apportionable” classifications. In addition to the “catch-all” category of “Service and Other Activities”, WA is now including the following:
If your income attributable to WA is derived from one of these apportionable classifications the need for a physical presence is eliminated and you are subject to the economic nexus thresholds. The thresholds, based on a calendar year, for businesses outside of WA are:
If you meet any one of the above minimum thresholds, then according to WA, you have economic nexus; no physical presence is needed. As such, you would be required to register your business with the Washington State Department of Revenue and report and pay Washington B&O tax.
What is apportionment and why is the change to a single factor receipts (sales) method important?
Apportionment can be defined as the method by which a taxpayer divides its income among the states in which they have established nexus due to their specific business operations within each state. It is expressed as a ratio and is often referred to as a formula. Historically, WA has used a cost apportionment formula; however in 2000 they added a three factor apportionment formula for financial institutions. The single factor receipts apportionment formula will replace both of those existing formulas.
To keep things simple we will forgo how the ratios are structured and instead concentrate on the benefits. The biggest benefit of the change by far is the ability of in-state companies to attribute apportionable income to the state where the benefit is received rather then where the costs were incurred. This is a tremendous opportunity for in-state service providers. Some of our clients have been able to reduce their tax burden in excess of 50%. If you are in a service business with customers outside WA, we suggest you reexamine how you are calculating your B & O obligations.
Right now there is a lot of confusion as to what you can exclude from your formula due to some awkward wording on the WA DOR website. Many CPAs have contacted us for guidance in how to best position their clients. Based on what we see, many taxpayers are still not correctly applying the new method, thereby overpaying their taxes and creating an ever growing refund opportunity. If you would like us to review your process or would like see if you have a potential refund let us know.
IS the WA amnesty a good deal?
In general we usually prefer Voluntary Disclosure Agreements (VDAs) over amnesty programs. Our reasons are outlined in our previous article, “You Missed the Tax Amnesty Express Don’t Worry. You are probably better off with a VDA anyway!” However, as Tax amnesties go this is a worthy program. It began on February 1, 2011 and runs through April 30, 2011. Don’t let that April 30th date confuse you though. That is the date by which all taxes must be paid. The real cutoff date is April 18, 2011 which is the date by which you must submit an application and file all outstanding or amended returns.
The amnesty is good for the following taxes:
The amnesty program waives penalties and interest as well as limits the look back period to 4 years plus the current. However, in order to take advantage of the amnesty, you must waive your right to a refund or an appeal of any taxes paid under the amnesty. This is an amnesty program that may be worth your time and effort, however it may or may not be in your best interests. We suggest you examine all the alternatives and weigh them against your particular set of circumstances. If you would like help with this process let us know. The most important item to remember is that if you have exposure, act now. States make it a practice to substantially step up enforcement actions after an amnesty and they are usually not in a forgiving mood. Add this to the fact that they already needed to make up the revenue lost on the breaks being given to domestic service companies and the numbers start to stack up against you.
In summary, there are a great many changes happening in Washington. Depending on your circumstances they may have positive implications or negative implications. The bottom line is if you are selling in or into Washington, or have clients doing either, you need to keep abreast of what’s going on. I don’t know if the breaks for the domestic service companies will create more jobs, but I do know that the changes will keep accounting professionals of all types very busy.
Don’t Worry. You are probably better off with a VDA anyway!
Tax Amnesty programs wax and wane in popularity depending on economic conditions. Recently with the depressed economy, Amnesty Programs seem to be all the rage. State and local jurisdictions have been announcing them at a rapid pace with some jurisdictions, like the city of Philadelphia offering one for the first time in 19 years and the state of WA offering the program apparently for the first time ever. The programs usually have short windows of opportunity and require quick action in order to take advantage of the benefits. Many states increase the sense of urgency by threatening increased enforcement actions once the amnesty period ends. A prime example is Pennsylvania, who’s Revenue Secretary, C. Daniel Hassell said, “Before Tax Amnesty ended, we promised to step up enforcement efforts against anyone who did not take advantage … Now we’re delivering on a second promise, to hold corporate officers personally accountable for taxes their businesses owe.” It is statements like this that have caused many taxpayers who were not able to meet amnesty deadlines to worry that the states will soon be knocking at their door. If you are one of these taxpayers your worries may be over. You may be able to complete a Voluntary Disclosure Agreement (VDA) and actually be better off than if you filed for amnesty.
There are many similarities between VDAs and Amnesty Programs, however before we begin to compare and contrast the programs, let’s explore why a state (local jurisdiction can be substituted for state from this point forward) would offer programs like these. After all, if the states are looking for ways to increase revenues, why give taxpayers a financial break? At first glance it may not make sense, but after reviewing some of the reasoning you’ll hopefully see why it makes perfect sense. Here are three points.
1. Best use of limited resources. State tax departments, just like company tax departments, are being asked to do more with less. Tax officials, who are being tasked with bringing more revenue into state coffers, have to choose where to devote their time and enforcement efforts. If companies step forward on their own, the time and resources that would have been spent finding those companies can now be targeted elsewhere. Simply put, they now have more time and resources to devote to you.
2. New found cash. When a company voluntarily steps forward the state receives a lump-sum cash infusion consisting of numerous years of back taxes and some interest and/or penalty. This money flowing in through VDAs or rushing in through Amnesty is basically a windfall to the state.
3. New streams of cash going forward. Not only does the state receive a lump sum for the back years when a company becomes compliant and pays the money it owes, but it now has a taxpayer that will likely continue to pay taxes on a going-forward basis.
Hopefully these points have shed some light on why a state would offer programs like these. Now the question is why companies would want to participate in these programs. Well, in order to convince companies to participate, the states offer enticements. Those enticements can include a waiving or reduction of the penalties and or interest as well as possibly limiting the look-back period. These enticements can add up to big money often totaling into the tens or hundreds of thousands and even millions of dollars. Taking advantage of these programs can sometimes make the difference between the life and death of a company. By becoming compliant there is also the possible added benefit of escaping the possibility of civil and or criminal prosecution.
Now that we know these programs are a win for the states as well as the taxpayer, you may be asking; what’s the difference between the two programs and which one is best for me. In order to answer this question let’s quickly look at the general characteristics of both VDAs and Amnesty programs. I say general characteristics because each state has its own twist on each of these programs and to cover the details of each program in each state would be too much to cover in one article. (If you have specific questions about individual state programs please contact me.)
The first thing to realize when talking about state tax amnesty programs is that they are generally not true amnesties. I say “true amnesties” because you don’t get out of the tax completely. They require you to at least pay back taxes. Some states offer a limited look-back period but the majority require all outstanding periods to be paid. In short, the look-back period is usually not limited. In addition to back taxes you may be required to pay either some interest and/or penalty. Some states will waive the entire penalty. Others will waive the penalty and a percentage of interest and a few the entire penalty and interest. Whatever the mixture turns out to be in a given state, you will be paying something in virtually all instances. (There is one exception for true amnesties, covering the states of Georgia, Ohio, Utah and Tennessee, where a seller’s uncollected sales tax, penalty and interest are all waived. However this is a complicated situation that can be explained in more detail by contacting me or by reviewing the article written by Andrew Johnson, founding partner of Peisner Johnson & Company, entitled “Are You For or Against Amnesty?”
In addition to saving money, an amnesty program is a great vehicle to become compliant and is a step towards the possible avoidance of possible civil or criminal prosecution. Amnesty programs usually cover a wide range of taxes, are generally well publicized and run for specific period of time. The specific period of time is short, ranging from 30 days to 6 months, with the majority trending toward the lower end of the range. Amnesty programs are not offered on a regular basis or with any frequency. They are usually available only to participants who are not currently reporting or those with outstanding liabilities that have not been identified by the taxing agency. Participants are often required to waive their rights to an appeal or a refund of any monies paid under the amnesty. Sometimes, there can be harsh penalties for any taxes that could have been paid under the amnesty but were not. Amnesty is public and usually leaves a company open to greater scrutiny by other states. Amnesty is almost always followed with periods of increased enforcement against those who have not taken advantage of the amnesty.
Voluntary Disclosure Agreement (VDA) Programs
As mentioned earlier VDA programs are similar to amnesty programs. You can think of VDA programs as a sort of on-going amnesty. Both programs usually allow for at least the waiver of penalties and sometimes some or all of the interest. The differences between the two lie in the additional benefits and flexibility offered by VDAs. Let’s compare and contrast.
One of the great differences between the two programs is that most VDA programs offer a limited look back period. The look back period is usually 3-4 years. However there are a few states, with Hawaii being an example, with look back periods as long as 10 years. The importance of a limited look back period is paramount. If you have never registered in a state, then there is no statute of limitations on how far back a state can pursue you. If you have been doing business in a state for 20 years, then, at least theoretically, if not in actuality, a state has the right to pursue you for those 20 years. In actuality, states do routinely go back 7 years. Add up those back taxes, interest, and penalties and the numbers mount quickly. Additionally many states share this type of information when they find delinquent taxpayers in these situations; so you may soon find yourself being pursued by multiple states and your problems compounding.
This is usually an apocalyptic scenario for a company because, like amnesty programs, VDA’s are usually available only to participants who are not currently reporting or those with outstanding liabilities that have not been identified by the taxing agency. (If you find yourself in such a dire situation, it would be in your best interest to call me immediately.) In order to prevent this type of scenario from happening most states allow for VDA’s to be initiated by third parties on an anonymous basis. A taxpayer’s name is not disclosed until an agreement on the terms of the VDA is reached. A successful VDA strategy takes this into consideration and provides for a multi-state approach wherever a taxpayer has nexus but is not filing.
Another instance where the anonymous feature of a VDA comes in handy is in the potential avoidance of possible civil or criminal prosecution. In many instances the waiver of civil or criminal prosecution is addressed in the VDA agreement prior to the taxpayer’s identity being disclosed. Both programs are vehicles to bring a company into compliance.
Most states offer VDA programs covering a wide variety of taxes. Although not highly publicized, the programs are ongoing and can be taken advantage of at any time, unlike amnesty programs which have short windows of opportunity and are offered at long, irregular intervals. This is an added benefit when dealing with multi-state issues. VDA’s also do not usually require the waiving of rights to an appeal or refund and usually do not have provisions for harsh penalties.
The following is a brief listing of the pros and cons of VDA Programs.
If we compare the charts of the pros and cons of both amnesty programs and VDAs you will find that the VDA programs come out ahead in having both more pros and fewer cons. It is important to remember though that we have been talking in generalities. While we believe that in many instances the VDA is the better choice, each situation should be examined on an individual basis and all possible solutions should be explored to determine the best possible outcome. Sometimes the solution may require a third approach as is the case with New Mexico. New Mexico’s amnesty program expired last year and, as of now, they have no VDA program. Prior to their amnesty program beginning and after its expiration we have been very successful negotiating with the state to help companies solve their tax issues. Or maybe your best solution requires a multi-pronged approach.
Above all else, I believe there are eight important points to take away from this article.
1. Know which states offer amnesty programs. There are a large number of states who have recently completed general amnesty programs or in the case of Washington and Michigan will soon be completing them. (WA runs from 2/1/11-4/18/2011 and MI runs from 5/15/2011-6/30/2011.)
2. Expect increased audit activity. Keep in mind that all states are stepping up enforcement actions but states that have completed amnesties can be expected to be especially aggressive; as evidenced by the Pennsylvania Revenue Secretary’s comment about stepping up enforcement actions as well as actually coming after corporate officers.
3. Be proactive. Do not let the states find you first. As you can see from the comparison the one negative that both programs have in common is that neither is usually available once the state has found you. Look into the possibility you may have exposure.
4. Don’t be complacent. Just because you believe you don’t have issues does not make it true. Of the myriad horror stories I hear, many could have been prevented by performing routine checkups. Review your operations. Has anything changed about where or how you do business, perform services or deliver your products? Keep abreast of changing nexus definitions or interpretations. Maybe your business has stayed the same but the state has changed their nexus interpretations. Educate yourself.
5. Don’t assume that your employees or CPAs can stay on top of every little nexus change for you. While some of them may be on top of these issues, it is usually not necessarily “top-of-mind”. They have daily tasks and duties that keep them busy. For many CPAs, federal taxes are the main concern, and well they should be. CPAs are usually very much on top of what’s happening in their own states, but every state is different, and many simply don’t have the resources required to stay on top of the multitude of ever changing multi-state tax issues.
6. Don’t just “get registered.” Never try to just register in a state where you believe you may have the potential for exposure. You can open yourself up to a whole host of negatives and will probably not be able to take advantage of either a VDA or amnesty.
7. Don’t forget about Canada. Canada does not appear to be as aggressive as some states in the US, but you may still have potential issues there. Revenue Canada as well as the non-member provinces all offer VDA programs. (We can help.)
8. Don’t be afraid to ask for help or to ask questions. No matter what your position, be it the boss, employee, or advisor to the company, the question you ask may save everyone a whole lot of trouble. The question may be internal or it may go to one of the handful of specialized firms throughout the country.
Please feel to contact me with any concerns or questions you may have. Many times we can answer your question or put you at ease with a quick answer. If not, then we can let you know how we would approach a solution. In addition, we also offer free webinars that provide for CPE credit. One of our most popular is about Nexus and covers VDAs. I would be happy to provide you with our upcoming schedule.
There are currently so many differences in the state VDA and Amnesty programs it is hard to cover them in detail in a single article like this. It was my intention to provide you with as much general information as I could. If you have any questions or would like additional information, including a list of states that have completed general Amnesty programs, please contact us.
Tax Amnesty Usually Means No Penalty — Big Deal! You Still Owe the Tax!
What if I told you: You Can Get Out of the Whole Tax?
It seems like there’s constantly a tax amnesty being offered by some state somewhere. Amnesties can be a sweet deal, that is if you have the money to pay. That’s right, you’ll probably still have to pay the tax. Almost always when a state offers “amnesty” what they’re really offering is to waive the penalties (but not usually all or even some of the interest). Most companies are a little surprised to find this out until they realize what leverage the states really have. They have ways of finding you and in our experience it’s not usually IF they find you but WHEN. When they do find you and determine that you had nexus in their state but weren’t registered and filing tax returns with them, they will bring the hammer down.
And a hammer is a good metaphor because not only do they assess the tax against you but they add the penalties and interest which can really add up. Figure up to 50 to 60% in addition to the tax. But WAIT, there’s more! In addition to the taxes and interest and penalties, they can also go back to day one.
But what about the statute of limitations? There is a statute of limitations in each of the states, but a little known fact is that if you had a filing requirement in a state but weren’t filing there, then the statute of limitations doesn’t protect you. They can go back to day one on you. That’s a fact that may be hard to swallow, but we’ve seen it too many times with our clients to sugarcoat it.
They Could Go Back to Day One, But…
States have their own policies on how far back they’ll go regardless of when you started business, so in all likelihood, if you’ve had nexus since 1984, they’re not going back that far, but many states will go back 7 or even 10 years. Many companies tell us if a state or states found them and went that far back, the business would be bankrupted.
Now, lest you think this article is all bad news, we do have some excellent news to report. And I don’t mean that you might be able to get some penalty waived in some state (which in the shape most states are in these days, a waiver of penalties is actually not that bad a deal). What I do mean is there are 4 states where you can get out of the tax altogether, right now. And those states are…
If you have some potential liabilities in these four states, then you need to read this article. You might save millions like a client of ours just recently did. BUT, you also need to know there’s a huge caveat. That’s right, there’s a big catch on this one.
It’s All About the SSTP
The Streamlined Sales Tax Project (the “SSTP) is an effort by a coalition of states designed to “simplify” the tax compliance burden in the participating states. If you go to www.StreamlinedSalesTax.org, you’ll see that they try to cast themselves in the most favorable light possible as if they are totally on the side of business. The reality is that this whole project has one goal and one goal only in my mind, and that is to convince the US Congress to pass a federal law forcing all businesses to collect tax in every state of the union. The states have been stymied in their efforts to impose tax collection duties on any and all companies who dare to sell to their citizens by a series of US Supreme Court (“SC”) cases. The SC has repeatedly ruled that companies must have a more than the “slightest physical presence” in a state before the DOR can work their magic.
Faced with that check on their taxing power, the states decided to take action. So, back in 1999 they formed a group. In Quill, the SC signaled that Congress, if they so choose, has the exclusive power to force sellers to collect sales tax everywhere they sold. The SC found that no constitutional barrier existed to prohibit congress from taking such action. The other protection that companies were leaning on was the Equal Protection clause, but the SC pretty much dismissed that argument in Quill. The SSTP group was formed on the basis that Congress had the power to pass the law and the SC would not overturn it. So, someone needed to lobby Congress. But the lobbying had to be based on an argument that the states had implemented changes in how difficult it is for companies to comply with so many different taxes.
Therefore, the SSTP is attempting, desperately, to get uniform legislation in enough states to where these states have enough leverage to go to Congress and ask them to act. Whether this will ever actually come to fruition, is anyone’s guess. They’ve been working on it since 1999 and we’re not there yet.
We’re not necessarily against the SSTP. Actually, we take a neutral position on this whole thing because it hurts some sellers and helps other sellers. The one thing we don’t think it will ever do, in spite of the promises, is “simplify” the compliance with sales/use tax laws. That’s the promise of almost all tax code revisions and history shows that with tax code change comes increased complexity not less. When you hear state government authorities trumpet “tax code simplification”, grab your wallet!
One thing is for sure, we keep a close eye on developments and we look for opportunities in which our clients can benefit from changes that are implemented.
There is a huge benefit available to some taxpayers who might owe taxes in one of the above-named states and have no corresponding liability in the other SSTP states. These four states are offering not only waiver of penalty and not only waiver of interest but a waiver to sellers of the ACTUAL TAXES that should have been collected by that seller in all prior periods. Our clients have saved literally millions of dollars as a result of the amnesty offered in these states.
There are significant drawbacks. Let me say here and now, that this article is not meant to give a comprehensive list of all of the drawbacks — I’ll just highlight a few. There’s significant risk to registering with the SSTP and you must exercise extreme caution. I’ll mention the few we’re most concerned about for purposes of this article below.
Registering with the SSTP states mean you register with all of them and you have to collect and remit tax in all of them for at least 36 months following registration even if you don’t have a physical presence in any of them. There are currently 20 “full member” states and 4 “associate member” states.
The current list of full-member states is: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West Virginia, Wisconsin and Wyoming.
The amnesty is only open for the 4 associate member states. Ohio, Utah, Tennessee and Georgia. There is currently NO AMNESTY in the other 20 states. If you have big potential liabilities in GA and elsewhere then you could get whipsawed pretty bad; and
This amnesty applies only to sellers who have neglected to collect sales/use tax on sales of taxable items in the referenced states. There is NO AMNESTY for tax that you collected but haven’t remitted. There is NO AMNESTY for tax you did not pay on taxable purchases either.
Having Said All That
We don’t just pound on the negatives here. We don’t get paid to just sound the alarm. We get paid to figure out solutions. We do have an approach that could save your bacon if you face a situation where you had nexus in many SSTP states and sold taxable items without collecting tax. True, the amnesty is only offered in those 4 states, but in the right circumstances, we may be able to really help you.
Every company is different. If you do business in any of the SSTP states and you have nexus but are not registered, then we need to talk, ASAP.