State and Local Taxation Update: Information Sharing and Transparency

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1 Jeffrey A. Friedman, Partner Michele Borens, Partner May 14, 2014 TEI Denver Chapter State and Local Taxation Update: Information Sharing and Transparency

2 Agenda Transparency in State Taxation What Type of Information is Protected? When Can It Be Disclosed? Information Sharing Among State Tax Authorities Federal to State Information Sharing Compelled Disclosures and Reporting Freedom of Information Act (FOIA) Requests 2

3 Background State Tax Authorities are increasingly requesting information not normally contained in a standard corporate income tax return Furthermore, there are increased disclosures of information in initial filings Taxpayers may also provide additional information during the course of any audit Other programs (e.g., amnesty, etc.) provide additional forums for taxpayers to provide even more information to the state Growing trend to share this information with other state taxing authorities 3

4 What Type of Information is Protected? 4

5 What is Protected? Generally state laws provided that taxpayer information is protected from disclosure States often have broad protections Taxpayer information may include: Tax Returns Information provided through audit Correspondence between the taxpayer and state Taxpayer identifying information Tax or business applications Information requested by DOR Settlement agreements 5

6 What is Protected? Example North Carolina (N.C. Gen. Stat ) An officer, an employee, or an agent of the State who has access to tax information in the course of service to or employment by the State may not disclose the information to any other person except as provided otherwise: Tax Information is defined to include: Information contained on a tax return, a tax report, or an application for a license for which a tax is imposed. Information obtained through an audit of a taxpayer or by correspondence with a taxpayer. Information on whether a taxpayer has filed a tax return or a tax report. A list or other compilation of the names, addresses, social security numbers, or similar information concerning taxpayers. The term does not include (i) statistics classified so that information about specific taxpayers cannot be identified, (ii) an annual report or (iii) the amount of tax refunds paid to a governmental entity or to a State agency. 6

7 What is Protected? Example Arizona (Ariz. Rev. Stat. Ann ) Generally confidential information may not be disclosed A person, including a former employee or agent of the department or the office of administrative hearings or a person previously having an administrative duty for the department or the office of administrative hearings, who has received confidential information while an employee or agent of the department or the office of administrative hearings, while performing an administrative duty for the department or the office of administrative hearings, shall not disclose that information except as provided in this article. 7

8 What is Protected? Example Arizona (Ariz. Rev. Stat. Ann ) Confidential information includes: Returns and reports filed with the department for income tax, withholding tax, transaction privilege tax, luxury tax, use tax, rental occupancy tax, property tax, estate tax and severance tax. Affidavits, reports or other information filed relating to taxable and nontaxable estates. Applications for transaction privilege licenses, luxury tax licenses, use tax licenses and withholding licenses. Information discovered concerning taxes and receipts by the department, whether or not by compulsory process. Return information obtained from the United States internal revenue service and United States bureau of alcohol, tobacco and firearms. 8

9 What is Protected? Example Arizona (Ariz. Rev. Stat. Ann ) Information supplied at the special request of the department by a taxpayer which the taxpayer requests to be held in confidence. Guidelines, standards or procedures that are established by the department for, or other information relating to, selecting returns or taxpayers for examination or settling or compromising any tax liability. A taxpayer's identity, the nature, source or amount of the taxpayer's income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments or tax payments 9

10 What Can Be Disclosed? 10

11 What Can Be Disclosed? Generally state laws protect taxpayer confidential information from being disclosed However, states often have broad exceptions that allow the disclosure of confidential information in certain circumstances or to certain parties, including disclosure: To other agencies of the state; To other states or localities; Because confidentiality has been waived; Because permission for disclosure has been granted; Comply with a court order; To the IRS. 11

12 What Can Be Disclosed? Example North Carolina (N.C. Gen. Stat ) Over 40 exceptions to the disclosure exception Disclosure is permitted: To comply with a court order, an administrative law judge's order in a contested tax case, or a law. Review by the Attorney General or a representative of the Attorney General. To exchange the following types of information with a tax official of another jurisdiction if the laws of the other jurisdiction allow it to provide similar tax information to a representative of this State: Information to aid the jurisdiction in collecting a tax imposed by this State or the other jurisdiction. Information needed for statistical reports and revenue estimates. 12

13 What Can Be Disclosed? Example North Carolina Standard Disclosure Language in Settlement Agreements The parties agree that the terms of this Agreement are confidential and that neither the Department, Taxpayer, or the officers, directors, employees or representatives of Taxpayer Group shall disclose the terms thereof without prior written approval from the other party unless required to do so by law, court order or pursuant to the terms of existing agreements between the Department and other governmental agencies. Either party may disclose this Agreement if necessary to enforce any term herein. Notwithstanding the foregoing conditions of this paragraph, Taxpayer may disclose this settlement and its terms to its agents, employees and other representatives to the extent that they have a need to know (e.g., one of the company s accountants). 13

14 What Can Be Disclosed? Example Arizona (Ariz. Rev. Stat. Ann ) Confidential information may be disclosed to: Any employee of the department whose official duties involve tax administration. The office of the attorney general solely for its use in preparation for, or in an investigation which may result in, any proceeding involving tax administration before the department or any other agency or board of this state, or before any grand jury or any state or federal court. Other state tax officials whose official duties require the disclosure for proper tax administration purposes if the information is sought in connection with an investigation or any other proceeding conducted by the official. Any disclosure is limited to information of a taxpayer who is being investigated or who is a party to a proceeding conducted by the official. 14

15 What Can Be Disclosed? Example Arizona (Ariz. Rev. Stat. Ann ) The following agencies, officials and organizations, if they grant substantially similar privileges to the department for the type of information being sought, pursuant to statute and a written agreement between the department and the foreign country, agency, state, Indian tribe or organization: The United States internal revenue service; A state tax official of another state; An organization of states, federation of tax administrators or multistate tax commission that operates an information exchange for tax administration purposes; An agency, official or organization of a foreign country with responsibilities that are comparable to those listed above 15

16 What Can Be Disclosed? Example Arizona (Ariz. Rev. Stat. Ann ) The auditor general, in connection with any audit of the department The office of administrative hearings relating to taxes administered by the department In any state or federal judicial or administrative proceeding pertaining to tax administration which involves: the treatment of an item reflected on the taxpayer's return is directly related to the resolution of an issue in the proceeding return information that directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer and directly affects the resolution of an issue in the proceeding. 16

17 Information Sharing 17

18 State Information Sharing Uniform Exchange of Information Agreement was executed in 1993 Currently all states (except New Mexico and Nevada), New York City and DC are signatories to the Agreement Multistate Tax Commission is also a signatory 18

19 State Information Sharing Statutes and Regulations State statutes typically follow IRC 6103, with possible exceptions (e.g., tax incentives) and/or considerations for state constitutional provisions. Statutory similarities: Exception to general taxpayer confidentiality rule, Other state s representative must be authorized, Reciprocity, and/or Tax purposes only. Examples New York: N.Y. Tax Law 202(3). North Carolina: N.C. Gen. Stat (b)(3). Florida: Fla. Stat (7)(j), ; Fla. Admin. Code New Jersey: N.J. Rev. Stat. 54:50-9(f). 19

20 State Information Sharing Statutes often define the types of information a state may share with other states Examples Typical information includes: tax returns/reports, registration applications, information obtained through audit, filing/nonfiling status, and/or taxpayer s name, address, FEIN. Other states permit more broad disclosure. For example, Washington defines tax information as including the nature, source, or amount of the taxpayer's income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability deficiencies, over assessments, or tax payments, whether taken from the taxpayer's books and records or any other source. R.C.W (1)(c). 20

21 State Information Sharing - Example North Carolina and Washington Information Sharing Agreement Provides: The parties hereby agree to exchange tax returns and tax return information to the extent permitted by their state laws Return information includes any other data received by, recorded by, prepared by, furnished to or collected by the agency with respect to a return or the determination of the existence or possible existence of a liability. 21

22 The IRS Information Sharing with States and the MTC IRS Executed a Memorandum of Understanding with State Tax Authorities Recently, IRS Executed a Memorandum of Understanding with the MTC 22

23 Compelled Disclosures and Reporting 23

24 Federal Disclosure Increased The IRS has developed alternative methods by required disclosure of certain information Schedule M-3 requires detailed reconciliation M-3 also requires expense items reconcile between GAAP & federal tax 24

25 Expanding Transparency in Legislation California AB 2439 (2012) would have required the Franchise Tax Board to disclose the name, tax liability, charitable contributions and apportionment formula of the 500 largest (measured by gross receipts less returns and allowances) publicly traded corporate taxpayers. The Bill failed in the Senate in August SB 1208 (2012) mandated publicly traded corporations to disclose the compensation of their boards of directors and five highest paid retirees. The Bill failed passage in the Assembly in August 2012 by a vote of with 12 members not voting. 25

26 Expanding Transparency in Legislation Rhode Island HB 5849 (enacted 2011) required that for taxable years beginning in 2011 and 2012, each corporation that is part of a unitary business is required to file a report for the combined group containing the combined net income of the group. Separate entities of the group members are not disregarded. The pro forma combined report must show the following information, at a minimum: the difference in tax owed as a result of filing a combined report compared to the tax owed under the current filing requirements; the difference in tax owed as a result of using the combined reporting single sales factor apportionment method as compared to the tax owed using the current three factor apportionment method; volume of sales in the state and worldwide; and taxable income in the state and worldwide. Based on the these reports, tax administers shall file a report recommending the impact on the state from combined reporting 26

27 Expanding Transparency in Legislation Tennessee HB 2372 (enacted 2012) required that for tax years ending prior to July 1, 2012, disclosure required on the face of the franchise and excise tax return for any taxpayer that paid, accrued, or incurred intangible expenses to a related party. Any taxpayer that deducts such intangible expenses in determining Tennessee net earnings and that fails to disclose the expenses is subject to a negligence penalty that is the greater of $10,000 or 50% of the adjustment. In addition, if a taxpayer does not meet the disclosure requirements, the Commissioner is specifically required to make the addback adjustment. Tennessee amended law for tax years ending after July 1, 2012 to require addback 27

28 Expanding Transparency in Legislation Maine LD 1126 (2013) would require Maine to publish information from corporate tax disclosure statements on the Internet. Required information would include total receipts, deductions, net income, factors of the corporation s combined group, and other information. The Bill was struck down in May Oregon HB 3161(2013) would require any corporation doing business in Oregon to file a statement with the Secretary of State s Office disclosing confidential information and make the information publicly available. Required information would include the consolidated group s receipts and income, factors, deductions, credits, and other information. Currently in House Committee on Revenue. 28

29 Expanding Transparency in Legislation Illinois HB 3627 (2013) would require publicly traded corporations to file an annual statement with the Illinois Secretary of State containing information such as the corporation's taxable income, base income, apportionment factor, Illinois net operating loss deduction, nonbusiness income, credits claimed, and other information. The Bill was referred to the House Rules Committee on May 2, A similar bill, SB 282, was defeated in January Arizona HB 2586 (2014) would require the Arizona Department of Revenue to identify corporations that receive tax credits over $5,000 29

30 Disclosure of FIN 48 Workpapers IRS officials have stated that FIN 48 workpapers are tax accrual workpapers State and local tax agencies have not expressed an IRS-like policy of restraint with respect to tax accrual workpapers State tax auditors are requesting FIN 48 workpapers before the company has even prepared them Multistate Tax Commission has expressed interest in understanding FIN 48 workpapers and the disclosure requirements Information-sharing agreements between tax agencies may inadvertently circumvent any restraint policy 30

31 Disclosure of FIN 48 Workpapers Issues with Disclosure of FIN 48 Workpapers Conformity (or lack thereof) of state tax laws with federal tax law Significantly less guidance (statutes, regulations, administrative guidance) at the state and local level than at the federal level Lack of uniformity in state tax treatment based on the same law and the same facts and circumstances Federalism at work state sovereignty permits each state to enact and administer its own tax regime Constitutional limitations on state taxation 31

32 Disclosure of FIN 48 Workpapers New York New York has made requests for documentation during course of audit Request specifically asks for the taxpayers to provide workpapers supporting computations and evaluations of filing positions in conjunction with Financial Interpretation No. 48 for each audit year New York has indicated that failure to provide the requested information may force the Department to issue a subpoena 32

33 FOIA Requests 33

34 Discovery of State Tax Authority s Information State Tax Authorities have refused to provide guidance on ambiguous statutory provisions Taxpayer s have had difficulty getting State Tax Authorities to provide guidance on specific legal issues through letter rulings (i.e., nexus standards) Taxpayer s have had to resort to Freedom of Information Act Requests to attempt to identify the State Tax Authorities position on a tax technical issue 34

35 FOIA Requests Common Law right Broad Scope Federal Freedom of Information Act Scope Applies to executive branch public bodies Local governments Does not apply to legislative bodies and courts. Purpose Request documents not provided by state during audit Review state contracts with 3rd party auditors and collectors. 35

36 FOIA Requests States vary drastically in scope of open records law 2002 study ranked states Best states (B grade): Nebraska, New Jersey Worst states (F grade): Tennessee, Montana, Arizona, Wyoming, Alaska, Pennsylvania, Alabama, South Dakota. Who can make request Nonresidents? Corporations? Documents Covered public writing computerized information drafts Timing of public body response Notification of reasons for denial 36

37 Questions? Jeffrey A. Friedman Sutherland, Partner Michele Borens Sutherland, Partner

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What Would Federal Tax Reform Mean for States?

Jeffrey A. Friedman March 31, 2016 What Would Federal Tax Reform Mean for States? Urban Institute Forum All Rights Reserved. This communication is for general informational purposes only and is not intended