Tax Conformity: Look for Tax Policy to be Key Issue in 2019.

• Author: Fox, Jason
• Position: Capitol Beat

While the IRS has been trickling out guidance and interpretations on the Tax Cuts and Jobs Act throughout 2018, state tax regulators have been assessing how the new laws align with state tax code.

The Franchise Tax Board has identified conflicts with the current state tax code and its report to the Legislature summarizing the differences begins the first major step in what will likely be one of the most significant tax conformity discussions in years.

The FTB is also reaching out to stakeholders, including CalCPA, to gather input on the most significant items that taxpayers and tax practitioners recommend the FTB and the Legislature address in the conformity process. The FTB will bring together stakeholders during the fall and winter, and will then make any legislative change recommendations regarding conformity to the Legislature.

The Legislature and its respective tax policy committees (Assembly Revenue and Taxation and Senate Governance and Finance) will then determine what will or will not be included in a tax conformity bill.

While tax conformity occurs intermittently, the number and complexity of the changes to be considered, combined with the political dynamics that linger between Congressional and California leaders, sets the table for a conformity process that will be one of the most substantial in years.

As the FTB works with stakeholders through the end of 2018 and early 2019, it is expected that a conformity package will garner significant attention during the 2019 legislative session.

However, this creates an opportunity for California to take steps toward addressing long-standing conformity issues. Setting aside politics and policy decisions of tax rates and credits, there are many areas that need to be addressed to ease the administrative burden for taxpayers complying with two very different tax codes.

Nonconformity leads CPAs, and the taxpayers they serve, to make numerous adjustments using different methodologies to accommodate the variances in state and federal tax returns. The additional complexity increases the potential for taxpayer errors or inadvertent noncompliance, which could result in costly penalties to the taxpayer.

In addition to conformity to federal tax laws, the Legislature will likely address the significant shift in tax policy set by the South Dakota v. Wayfair Supreme Court decision. This decision overturned a long-standing policy of determining when and how states could apply sales tax on remote sellers...