TEI roundtable takes on the top issues in state and local taxation.

• Position: Tax Executives Institute

A panel of members from Tax Executives Institute (TEI) recently held an exclusive roundtable with the Tax & Accounting business of Thomson Reuters to discuss pressing state and local tax planning and compliance issues. This article summarizes the discussion on nexus, apportionment, add-back statutes, and combined returns. An extended version of this article appeared in the October 2008 issue of the Journal of Multistate Taxation and Incentives, and covered all of the following: Nexus, Apportionability, Fair Apportionment, New State Business Taxes, FIN 48 and Other Financial Reporting Issues, Add-back Statutes, Combined Returns, Requests/demands for 51-Jurisdiction Spreadsheet Information, NCCUSL's UDITPA Project, Claiming Refunds in Matters Favorably Resolved by Courts, Definition of "Unitary" After MeadWestvaco, Business Purpose, Economic Substance, RARs and the Federal Change Reporting Process, Transfer Pricing, and Tax Automation.

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A panel of corporate tax directors, all of whom are members of Tax Executives Institute, recently held an exclusive roundtable with the Tax & Accounting business of Thomson Reuters to discuss the most complex and time-consuming state and local compliance and planning issues for corporate tax departments. TEI is the preeminent association of business tax executives in North America. Its nearly 7,000 members represent 3,200 of the leading corporations in the United States, Canada, Europe, and Asia. Moderating for the Tax & Accounting business of Thomson Reuters during the teleconference were Steven A. Zelman, Senior Vice President, and Linda Scheffel, Vice President and Publisher.

Mr. Zelman stated, "Since state and local tax planning involves some of the most complex and time-consuming issues for corporate tax departments, the Tax & Accounting business of Thomson Reuters was pleased to be able to hold a roundtable with experts from TEI to discuss the current state and local tax issues that present the greatest challenges for tax departments."

"State tax issues take up a significant amount of the resources of corporate tax departments and are perhaps second only to international tax issues in complexity. TEI meetings offer corporate executives, even those highly experienced in the area, an excellent opportunity to learn about state and local tax developments and to discuss planning, audit, financial reporting, and other trends affecting the management of their companies' state tax liability," explained Timothy J. McCormally, TEI's Executive Director.

According to Mr. Zelman: "At the Tax & Accounting business of Thomson Reuters, we have many opportunities to keep up with the concerns of TEI members. We are fortunate to meet with an Advisory Board at TEI's semi-annual meetings, and we also conduct teleconferences like this roundtable with TEI members. Meeting with Tax & Accounting's TEI Advisory Board is a favorite part of the relationship. The Advisory Board is the best example I have ever seen of tax professionals networking with their peers to share information and tax advances. In addition to the Advisory Board, we also have regular panel discussions with TEI members to discuss cutting-edge topics that have an effect on corporate tax departments. These roundtables provide Tax & Accounting with the best exposure to sophisticated analysis of tax issues facing corporate tax departments. During the roundtable, we discussed state and local tax issues with a panel of TEI members who were expert in the area of corporate state and local taxation. The expertise of TEI's membership is unparalleled and we always appreciate the opportunity to learn from the members."

The topics discussed came up most often in a preliminary poll of state and local tax professionals. According to Eli J. Dicker, Chief Tax Counsel at TEI, nexus topped the list of tax issues of concern. Also on the list were apportionment, new business taxes (e.g., the trend toward gross receipts taxes), FIN 48, and add-back statutes. Other issues of note included mandatory combined reporting (with new rules in New York, and with Massachusetts heading in that direction), the review and possible modification of the Uniform Division of Income for Tax Purposes Act, the difficulty in obtaining refunds of taxes found to be unconstitutional, and the determination of a unitary business. The tax executives also reported spending more than a little time dealing with economic substance and business purpose, reporting federal audit changes to the states, transfer pricing issues, and tax automation.

Nexus

The first series of questions involved nexus: How much time does your department spend on nexus issues? Are these issues outsourced or handled in-house? What are the specific issues related to (1) tax collection, (2) attributional nexus, (3) economic nexus, and (4) inbound and outbound (i.e., throw-out and throwback) consistency?

All the panelists agreed that nexus issues consumed about 5 percent of their departments' time. "And," the first panelist explained "it's handled in-house. I haven't touched base with our sales tax people. But the income tax issue is basically: Is the company subject to tax? And the old intangible holding company structure is where most of the nexus issues have been." Also, the panelist noted, "we struggle with the New Jersey throw-out rule and the constitutionality of that. We've handled most things consistently as we apply the rules to the states for throwback."

Another panelist found that the "only major nexus issue would be regarding an agency relationship with independent dealers who do warranty and repair work for us. We would only have sales into those states. There are generally no issues with sales tax nexus or income tax nexus. And the throwback and throw-out rules--I'm right there on ... the New Jersey [situation]. It's just always a head scratcher."

The next panelist noted: "We generally have inventory in every state; thus, we have nexus in those states. In terms of economic nexus, we do have a couple of intangible holding companies. But they're specific to our industry; licensing of some technology to specific plants. And so there's not the issue of having created nexus in multiple jurisdictions* It's generally limited to the specific location where we used the technology. And we feel like we have a pretty good handle on whether or not we have nexus in those jurisdictions." With regard to the inbound/outbound consistency, "the throwback rule isn't nearly as big a deal for us now that Texas has transitioned its franchise tax and gotten rid of the throwback rule." As for New Jersey's throw-out rule, however, the panelist said that it's "terrible for us. It's caused us to pay a lot of tax [and] I have to agree with the other participants that you really wonder if it's constitutional."

Nexus issues are handled in-house, said another panelist, although "on occasion we may consult with someone outside. But ... certainly they're a part of what we do." With regard to income tax, "the number one issue for us is [that] our parent company holds a valuable trademark, and we collect royalties." Still, "there are a number of states where we don't file, and they're not necessarily happy with that." As far as sales tax collection is concerned, "our biggest bugaboo right now, quite frankly, is the streamlined sales tax project creating a formal requirement to collect based on destination." In that regard, "the state...