As a CPA firm focusing on state and local taxes, we speak with many taxpayers going through audits. A recurring theme that we often hear is that the auditor, audit supervisor or even the entire state audit division are being totally unreasonable or unfair. They can’t wait to appeal their audit, because once they get in front of an “impartial third party”, they feel that they will be treated more justly and receive a different outcome. While these taxpayers are often correct that they are being treated unreasonably, they are far from correct in their belief they will receive a different outcome in appealing their audit; especially in the state of Texas.
Should You Appeal Your Assessment in Texas?
Probably, especially if you disagree with it, but before you do, understand the odds are stacked against you. In addition you should know the audit process and try to resolve any issues at the appropriate levels during the process. Do not give up in trying to work with the auditor. If need be bring in someone to work on your behalf. Here are some reasons why.
At a recent tax conference, Victor John Simonds, an Administrative Law Judge with the Texas State Office of Administrative Hearings (SOAH) shared some startling statistics. (Disclosure: He noted that the statistics he was giving were the result of his own independent investigation and not necessarily the official stats of SOAH.) The first thing he did was tell us that the number of cases appealed and referred to SOAH have shot up in the last few years.
Tax Cases Referred to SOAH Soars in Recent Years
You can draw your own conclusions on why the number of cases referred to SOAH have spiked so much in recent years. And, by the way, since these numbers were given to us in August, 2011, he estimated that the final number for 2011 might reach 500. He opted not to speculate on why the marked increase. But that doesn’t mean we can’t. One might reasonably conclude that the audit division is simply being more aggressive. One might also speculate that in more difficult economic times, companies who can’t pay an assessment are opting to delay the ultimate day of judgment by exhausting all administrative remedies. Now of course, there may be other reasons. Perhaps the word is getting out that taxpayers get better treatment at SOAH? Well if that’s the word that’s getting out it would be very misleading, as we will show below.
We’ve always recommended exhausting every option possible to resolve any and all issues without going to appeals and have been very successful in that approach. We know that the administrative appeal process is costly and not very productive. But these statistics throw a whole new and glaring light on just what the odds really are.
There are currently 3 administrative law judges on the tax team at SOAH. They are Victor John Simonds, Peter Brooks and Alvin Stoll. Judge Simonds shared with us their individual statistics when it comes to affirming cases that come before each of them. There are many ways to measure this but one way to assess your odds of success is to see what percentage of cases heard by a judge are affirmed in total (meaning the ALJ affirmed the auditor’s position and ruled against the taxpayer on every issue in the audit) and what percentage of cases are at least affirmed in part.
This team of ALJ’s is almost shockingly consistent in ruling against the taxpayer. In fully 80% of the cases, they affirm the state’s position 100% on every issue in the audit. Without considering the issues presented in these cases and how your facts would stand up against those cases and assuming your case is typical, you can expect to get 0, nada, zip, on any issue you present 8 times out of 10. Yikes!
Ok, well maybe the other 20% is more encouraging. Maybe not. In fact, as it turns out the ALJ’s not only rule in favor of the state 100% of the issues in 80% of the cases, but they also rule in favor of the state on at least one issue another 11% of the time. So overall, the ALJ’s rule against the taxpayer in 91% of the cases they hear.
Check out these statistics by the ALJ.
What Does This All Mean?
It’s impossible to draw many definitive conclusions from this limited information. Maybe 80% of all these cases are slam dunks against deadbeat taxpayers who collect tax on clearly taxable stuff and don’t remit it. But that assumes deadbeat taxpayers would be conscientious enough to file the necessary appeals and all, so it’s hard to go there.
The best lesson here, in my opinion, is that a company should do all they can to resolve audit disputes at the field level. Do your best to maintain a professional relationship with that auditor and their supervisor and manager. You should always strive to avoid audit assessments by having processes in place in advance. For example, exemption certificate management is one critical area where the state finds very low-hanging fruit and the most liberal, forgiving ALJ simply can’t overrule the auditor. Just always remember, that it’s never too early to ask us for help.
These days, when it comes to sales/use taxes, good news is hard to come by. So many states are increasing taxes and rolling back exemptions and stepping up audit enforcement. A quick perusal of the headlines provides all the proof. New York, North Carolina, California and others are taking the position that merely having otherwise unrelated people sign up as affiliates in those states means that Amazon.com (and other similarly situated companies) have nexus in those states. That’s what you call aggressive.
Meanwhile, New Jersey, Illinois, California and many other states are increasing taxes and letting exemptions expire.
News is pretty bad no matter where you look. And if we polled our subscribers on which state would be the worst for bad news, then Louisiana would surely rank high up on that list. But Louisiana, has come out with some great news for manufacturers.
Louisiana had been phasing in an exemption for certain manufacturing machinery and equipment. The exemption was to have been fully phased in by July 1, 2010. The good news is that by virtue of Act 12 of the 2nd Extraordinary Legislative Session of 2008, the last segment of the phase-in made the exclusion fully effective on July 1, 2009. The exclusions are from the state sales, use, lease, and rental tax for machinery and equipment used by eligible manufacturers in plant facilities predominantly and directly in the actual manufacturing for agricultural purposes or in the actual manufacturing of tangible personal property that is for sale to another.
The LA Department of Revenue has published an Information Bulletin (No. 09-016) with some answers to questions that might arise.
Is this Exemption Good in the Parishes as well?
The legislation authorizes political subdivisions of the state to provide these exclusions from local sales, use, lease, and rental taxes but does not require that they do so. If you have a specific parish question, ask us and we’ll do the research for you.
What is Manufacturing “Machinery and Equipment”?
“Machinery and equipment” is defined by R.S. 47:301(3)(i)(ii)(aa) as tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part in the manufacturing of tangible personal property for sale. “Machinery and equipment” also includes tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part of the production, processing, and storing of food and fiber or of timber.
Specific examples of tangible personal property that this statute categorizes as eligible “machinery and equipment” are computers and software that are an integral part of the machinery and equipment used directly in the manufacturing process; machinery and equipment necessary to control pollution at a plant facility where pollution is produced by the manufacturing operation; machinery or equipment used to test or measure raw materials, the property undergoing manufacturing, or the finished product, when such test or measurement is a necessary part of the manufacturing process; machinery and equipment used by an industrial manufacturing plant to generate electric power for self consumption or cogeneration; and machinery and equipment used to produce news publications whether the news publications are ultimately sold at retail, for resale, or distributed at no cost.
Buildings (usually) Don’t Count — Categorized by the statute act as ineligible for the manufacturing “machinery and equipment” exclusions are a building and its structural components, unless the building or structural component is so closely related to the machinery and equipment that it houses or supports that the building or structural component can be expected to be replaced when the machinery and equipment are replaced; heating, ventilation, and air-conditioning systems, unless their installation is necessary to meet the requirements of the manufacturing process, even though the system may provide incidental comfort to employees or serve, to an insubstantial degree, non-production activities; tangible personal property used to transport raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete; and tangible personal property used to store raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete.
What is a “Manufacturer”?
Here’s one of the sticking points. To take advantage of this exemption, your company must be a “manufacturer”. The term “manufacturer” is defined in the statute as a person whose principal activity is manufacturing, and who is assigned by the Louisiana Workforce Commission a North American Industry Classification System (NAICS) code within the agricultural, forestry, fishing, and hunting Sector 11; the manufacturing Sectors 31-33; the information sector 511110, all as they existed in 2002, or under industry code 423930 as a recyclable material merchant wholesaler who is engaged in manufacturing activities, which must include shredding facilities. R.S. 47:301(16)(o) additionally defines the term manufacturer to include a person regulated by the Louisiana Public Service Commission or the Council of the City of New Orleans who is assigned a NAICS code 22111. This 22111 NAICS code applies to electric power generation businesses.
Persons whose principal activity is manufacturing, but who are not required to register with the Louisiana Workforce Commission for purposes of unemployment insurance, can apply to the Louisiana Department of Revenue to be classified as a “manufacturers” under NAICS sectors 11, 31-33, or 511110 for purposes of this sales tax exclusion. The department will determine from income tax data whether applicant would have been so classified had the applicant been required to register with the Louisiana Workforce Commission.
What is a “Plant Facility” and What is Meant by “Predominantly and Directly” in the Actual “Manufacturing Process”?
The term “plant facility” is defined as “a facility, at one or more locations, in which manufacturing referred to in sectors 11 and 31-33 of the North American Industry Classification System of 2002, of a product of tangible personal property takes place.” “Used directly” means used in the actual process of manufacturing or manufacturing for agricultural purposes.
“Manufacturing for agricultural purposes,” means the production, processing, and storing of food and fiber and the production, processing, and storing of timber.
“Manufacturing”, the statute provides, means putting raw materials through a series of steps that brings about a change in their composition or physical nature in order to make a new and different item of tangible personal property that will be sold to another. The statute provides that manufacturing begins at the point at which raw materials reach the first machine or piece of equipment involved in changing the form of the material and ends at the point at which manufacturing has altered the material to its completed form. Placing materials into containers, packages, or wrapping in which they are sold to the ultimate consumer is part of this manufacturing process.
For purposes of the sales tax exclusions, manufacturing does not include repackaging or redistributing; the cooking or preparing of food products by a retailer in the regular course of retail trade; the storage of tangible personal property; the delivery of tangible personal property to or from the plant; the delivery of tangible personal property to or from storage within the plant; and actions such as sorting, packing, or shrink wrapping the final material for ease or transporting and shipping.
What About Other States?
We put together a chart using our resources with CCH to show you the current status of the manufacturing exemptions in some of the top states. That chart is reproduced below. If you’d like more detail about those states, or in other states, just let us know and we can help you with that.
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):
Massachusetts has enacted an amnesty program also. It’s good for periods before January 2007. It only waives the penalty, but no interest. It expires June 30, 2009.
Massachusetts Governor Deval Patrick has signed legislation authorizing a two-month tax amnesty program, during which penalties for failure to timely file or pay Massachusetts taxes will be waived if the taxpayer files all outstanding returns and pays, or at the Commissioner’s discretion provides security for, all tax and interest due. The amnesty period will begin on a date to be determined by the Department of Revenue and will end no later than June 30, 2009. The amnesty program will not apply to any tax liability for a period that commenced on or after January 1, 2007. Also excluded are penalties that the Commissioner does not have the sole authority to waive, including penalties applicable to fuel taxes administered under the International Fuel Tax Agreement and local option portions of taxes collected for the benefit of cities, towns, or state governmental authorities. Any taxpayer who has been the subject of a tax-related criminal investigation or prosecution is not eligible for amnesty. Taxpayers who have delayed payment due to a pending abatement application or appeal must waive the right to delay payment, and pay all assessed tax and interest, in order to participate in the amnesty program. Payment of tax and interest will not affect the taxpayer’s appeal rights.
Since WI has conformed its laws to the SSTP, then it should be admitted as a full member of the Agreement. Once that happens, then amnesty will be available for a one year period. The SSTP amnesty is pretty great because companies are not only forgiven penalty and interest but the tax also. However, the downside is significant. You also have to register with all SSTP states and those in the Agreement for over a year offer no amnesty at all.
Here’s the details according to CCH: Wisconsin Gov. Jim Doyle has signed a budget repair and economic stimulus bill that enacts provisions conforming Wisconsin sales and use tax laws to the Streamlined Sales and Use Tax (SST) Agreement.
Wisconsin sales and use tax laws are conformed to the SST Agreement, effective October 1, 2009. With the enactment of this legislation, the state may petition to become a full member of the Agreement. The state must be found in compliance with the Agreement by the SST Governing Board before it can become a full member of the Agreement.
Amnesty: A seller is not liable for uncollected and unpaid state and local sales and use taxes, penalties, and interest on previous sales made to Wisconsin purchasers if the seller registers with the Department of Revenue to collect and remit taxes on such sales in accordance with the SST Agreement. In order to receive amnesty, the seller must:
— register within one year of the effective date of the state’s participation in the Agreement; and
— collect and remit state and local taxes on sales to purchasers in Wisconsin for at least three consecutive years after the date the seller registers.
Amnesty is not available to sellers that were already registered with the Department during the year immediately preceding the effective date of Wisconsin’s participation in the Agreement; sellers that are being audited by the Department; or sellers that have committed or been involved in fraud or an intentional misrepresentation of a material fact.
If you have fewer than 500 employees and you didn’t take advantage of Maryland’s last amnesty offer back in 2001, then you might want to participate in this program.
Maryland Gov. Martin O’Malley has signed legislation that provides an amnesty period from September 1 through October 30, 2009, for taxpayers who failed to file a return or pay personal income, corporate income, withholding, sales and use, or admissions and amusement taxes. The comptroller will waive civil penalties (except previously assessed fraud penalties) and half the interest due if a taxpayer files all delinquent returns and pays all tax and half the interest due, or enters into an agreement with the comptroller, during the amnesty period. Amnesty is not available to taxpayers who have more than 500 U.S. employees, who participated in the 2001 Maryland amnesty program, or who were eligible for the 2004 Delaware holding company settlement period. Taxpayers cannot be charged with a criminal tax offense arising out of any return filed or tax paid during the amnesty period, but amnesty does not apply to criminal charges that are already pending or under investigation.
Connecticut has also enacted an amnesty program that expires June 25, 2009.
Here’s the details from CCH:
The Commissioner of Revenue Services is required to establish a tax amnesty program for persons who owe any tax for any affected taxable period to be conducted from May 1, 2009 to June 25, 2009, inclusive. “Tax” is defined as any tax imposed by any Connecticut law and required to be paid to the Connecticut Department of Revenue Services, as specified. “Affected taxable period” is defined as any taxable period ending on or before November 30, 2008, for which: (1) a tax return was required by law to be filed with the Commissioner and for which no return has been previously filed or made by the Commissioner on behalf of an affected person; or (2) a tax return was previously filed but not examined by the Department and on which the tax was underreported.
In addition, upon the filing of an amnesty application by the affected person during the tax amnesty period, and payment by that person of all taxes and interest due for affected tax periods, amnesty shall be granted and the Commissioner will waive any civil penalties that may be applicable and will not seek criminal prosecution. In the case of taxes due for an affected taxable period that is paid in full on or before June 25, 2009, interest is computed at the rate of 0.75% per month or fraction thereof from the date such taxes were originally due to the date of payment or June 25, 2009, whichever is earlier.
Any person who wilfully delivers or discloses to the Commissioner or the Commissioner’s authorized agent any application, list, return, account, statement, or other document, known by that person to be fraudulent or false in any material matter, shall be ineligible for the tax amnesty program, and may, in addition to any other penalty provided by law, be fined not more than $5,000 or imprisoned not more than five years nor less than one year or both.
NJ has an amnesty program in place that also expires soon — June 15, 2009 to be exact. This from CCH:
The amnesty applies only to state tax liabilities for tax returns due on and after January 1, 2002 (the day following termination of the most recent amnesty period), and before February 1, 2009. During the amnesty period, a taxpayer who has failed to pay a state tax can pay the tax and one-half of the balance of interest that is due as of May 1, 2009, without the imposition of the remaining one-half of the balance of interest that is due as of that date, recovery fees, and civil or criminal penalties arising out of the tax obligation. The amnesty is not be available to a taxpayer who, at the time of payment, is under criminal investigation or charge for any state tax matter.
Now Here’s the Catch — If You Don’t Take Advantage of This Amnesty, You’ll Owe an Additional 5% Penalty Later!
If a taxpayer eligible for the amnesty fails during the amnesty period to pay taxes owed, that taxpayer will be subject to a 5% penalty that may not be waived or abated. The 5% penalty will be in addition to all other penalties, interest, or collection costs otherwise authorized by law.
Believe it or not, amnesty offers don’t come around all that often. From time to time we like to highlight the current states who are offering some type of amnesty program.
Arizona has a program that is just about to expire. You’ll have to hurry to take advantage of it. But if you’re under audit in AZ you might want to do something quick. Here’s the details from CCH, and I quote:
“The Arizona Department of Revenue will conduct a tax amnesty program from May 1, 2009, through June 1, 2009, that covers personal income taxes, corporate income taxes, transaction privilege (sales ) taxes, tobacco taxes, and liquor taxes. The amnesty provides an opportunity for those who live, work, or do business in Arizona to pay any back taxes owed to the state without penalty or criminal prosecution. Additionally, a reduced interest rate will apply for those who qualify.
For taxes filed on an annual basis, amnesty is available for years beginning on or after January 1, 2002, and ending before January 1, 2008. Taxpayers who file taxes on a monthly or quarterly basis are eligible for tax periods beginning on or after January 1, 2003, and ending before January 1, 2008.
Amnesty tax returns must be submitted with the Amnesty Application form, and be filed or postmarked and paid in full by June 1, 2009, in order to qualify for the program. Amnesty program forms and applications are available on the Department’s Web site under the Forms & Calculator section.
Tax amnesty is available to:
— those who failed to file a tax return;
— taxpayers who failed to report all income or all tax, interest and penalties that were due;
— taxpayers who claimed incorrect credits or deductions;
— taxpayers who misrepresented or omitted any tax due;
— nonresidents or part-time residents who receive income that may be taxable in Arizona;
— out-of-state and multi-state businesses; and
— taxpayers who are under audit (not finalized).
Persons who are a party to any criminal proceeding with respect to any tax imposed by any law of Arizona and required to be collected by the Department that is pending on May 1, 2009, for failure to file, failure to pay, or fraud may not participate in the amnesty program. Additionally, persons under criminal investigation may not participate in the program. Tax amnesty does not apply to 2008 Arizona income tax due April 15, 2009.”
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.
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.