Chapter 8-State Tax Services

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Moris Richards
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1 Federal Tax Research, Ninth Edition Page 8-1 Chapter 8-State Tax Services IMPORTANCE OF STATE AND LOCAL TAXES 1. State and local tax planning has become big business for tax professionals. a. An untapped planning opportunity. b. Compliance and penalties becoming more important in SALT. c. SALT area becoming increasingly more complex. 2. SALT taxes significant a. State and local taxes (SALT) may be 50 percent of a businesses tax obligation. b. SALT rates have been increasing in recent years. c. For individuals, state taxes are more than one third of national tax burden on average. HISTORICAL PERSPECTIVE 1. Local taxes in U.S. have existed since early colonial times. 2. Taxes originally based on local economy. a. In the south, based on imports/exports due to cotton production. b. In the north, based on farming. 3. Introduction of different taxes. a. Property taxes by the end of the 18th century. b Wisconsin introduces income taxes. c. Early 20th century, state sales taxes introduced. d. 1930s, New York City has first city sales tax. LEGAL PERSPECTIVE 1. Federal and state constitutions important in state tax law validity. a. State tax laws commonly questioned as constitutionally valid at state and Federal level. b. Federal tax laws rarely questioned as constitutionally valid. 2. Federal Constitutional clauses frequently provide basis for state taxation disputes

2 Page 8-2 INSTRUCTOR S MANUAL Supremacy 1. Federal Constitution Supremacy provision confers superiority to the Federal laws over state laws. 2. This provision immunizes Federal government from taxation by states. Due Process 1. Due Process Clause found in the 14th Amendment. 2. Used to limit territorial scope of state taxing authorities in interstate commerce. Commerce a. Business must have a nexus to be taxable by state. b. Tax must reflect taxpayer s activities in state. c. Level of business activity to meet Due Process Clause different than for Commerce Clause. 1. The Federal Constitution Commerce Clause gives Congress the power to regulate commerce. a. Provides most significant Federal limitation on a state s capacity to impose taxes. b. Places constraints on the ability of states to tax interstate trade. 2. Important Case: Complete Auto Transit Inc. v. Brady 430 US 274 (USSC, 1977). Public Law a. Court developed criteria that controls whether a state may tax interstate commerce. State tax can be levied if activity has a substantial nexus (connection) with state. Tax is fairly apportioned. Tax is not discriminatory against interstate commerce. Tax is related to services provided by state. Prevents the income taxation of interstate commerce if a company s only business within the state is the solicitation of orders for sales of tangible personal property. STATE TAX STRUCTURE 1. State tax structure modeled after Federal tax system. Constitution a. Three branches of government. b. The state governor signs statutes. c. Regulatory agencies similar to the IRS.

3 Federal Tax Research, Ninth Edition Page Each state s taxing ability is constrained by the U.S. Constitution and the state constitution. a. A state s own constitution is the fundamental law that places restrictions on state s taxing authority. b. Ultimate role of courts is to insure state laws fall within restraints of Federal and state constitutions. 2. Constitutions of most states require taxes be imposed only for public purposes. Legislative a. Public purpose rarely defined. b. Federal and state courts generally accept legislative interpretation of public purpose. 1. State legislatures responsible for enacting revenue laws. a. Most states have two legislative bodies. b. Nebraska has one. 2. States place varying reliance on Federal tax laws. Administrative Judicial 1. Administrative agencies. a. Interpret and enforce state tax laws. b. Issue regulations, rulings, and pronouncements. 2. Federal regulations and rulings may be pertinent to state tax issues. 1. Most state judicial systems are three tiered like Federal; some are two tiered. 2. Generally no state Tax Court, rather administrative (quasi-judicial) tribunals. Multistate 1. Companies with business in more than one state apportion income to states for paying taxes. 2. Uniform Division of Income for Tax Purposes Act (UDITPA). a. Drafted by the National Conference of Commissioners on Uniform State Laws in b. Adopted by the Multistate Tax Commission in Multistate Tax Commission (MTC). a. Created by Multistate Tax Compact.

4 Page 8-4 INSTRUCTOR S MANUAL b. Issued regulations interpreting the UDITPA in 1971 and c. Most states are members or participants; not associated are Delaware, Nevada, and Virginia. d. Purpose to improve fairness, efficiency, and effectiveness of state taxing systems. e. Joint Audit Program - allows MTC to perform comprehensive audit of business for several states. f. For taxpayers, MTC provides the Multistate Alternative Dispute Resolution Program. ILLUSTRATIVE RESEARCH EXAMPLES 1. State tax issues can be researched using several databases including: a. RIA State and Local Tax Service b. CCH Network State Tax Service c. LexisNexis Academic d. LexisNexis Tax Center e. Westlaw State Services f. BNA State Services OTHER RESOURCES 1. WG&L s State Taxation as well as CCH s Multistate Corporate Tax Guide. PERIODICALS AND INTERNET SITES Journals 1. Journal of Multistate Taxation and Incentives (Warren Gorham & Lamont). 2. Journal of State Taxation (CCH). Newsletters 1. Tax Analysts: a. State Tax Today Offers the latest breaking state tax new daily. Provides links to full-text documents. b. State Tax Notes Authoritative source of state and local taxation news.

5 Federal Tax Research, Ninth Edition Page BNA: Summaries of judicial, administrative, and legislative developments. a. Tax Management Weekly State Tax Report; Comparable to State Tax Notes. b. Publishes several other state newsletters. 3. CCH newsletter is called State Tax Review and RIA s is State & Local Taxes Weekly Internet Sites 1. Tax and Accounting Sites Directory web site contains links to all states and some local taxing authorities. 2. Also has links to state tax news. SUMMARY Tax planning for state and local taxation has become more important to taxpayers and therefore to tax researchers in recent years. The research service industry has responded to this escalating need by providing a variety of tax research products, all designed to improve the practitioner s efficiency and effectiveness in state and local research.

Pass-Through Entities Face Myriad State-Level Taxes, Compliance Obligations

Pass-Through Entities Face Myriad State-Level Taxes, Compliance Obligations 1 Key Contributors: Steven N. Wlodychak is a principal with Ernst & Young LLP s Indirect (State and Local) Tax Practice. Based