1. Break-out Session 1A: State audit & controversy
Break-out Session 1A: State audit & controversy
Tim Pratcshler, State and Local Tax Principal

2. Agenda
State Controversy Trends
Best Practices
Other Considerations

3. The state of the states
31% of all state tax revenue comes from federal grant programs
The federal government also plays an indirect role in supporting the states (e.g., exempting interest on state and local bonds, helping to cover borrowing costs)
As Congress continues to discuss reform of the federal tax code, it will consider whether such support continues to make sense
State tax collections by tax type:
Sales Tax: 38.6% (Approximately $249 billion)
Personal Income Tax: 53.8% (Approximately $347 billion)
Corporate Income Tax: 7.6% (Approximately $49 billion)

4. State tax collections versus projections – 2013DC AK HI ME RI VT NH MA NY CT PA NJ MD DE VA WV NC SC GA FL IL OH IN MI WI KY TN AL MS AR LA TX OK MO KS IA MN ND SD NE NM AZ CO UT WY MT WA OR ID NV CA
Source – “The Fiscal Survey of States" The National Governors Association and The National Association of State Budget Officers. Spring 2013.

5. State tax collections versus projections – 2016DC AK HI ME RI VT NH MA NY CT PA NJ MD DE VA WV NC SC GA FL IL OH IN MI WI KY TN AL MS AR LA TX OK MO KS IA MN ND SD NE NM AZ CO UT WY MT WA OR ID NV CA
Source – “The Fiscal Survey of States" The National Governors Association and The National Association of State Budget Officers. Spring 2016.

6. Ways states have tried to expand the tax base & challenges associated with these changes
Single Sales Factor Apportionment Weighting
Distortion/alternative apportionment
Market-Based Sourcing of Sales Other Than Tangible Personal Property
Various ways states define market-based sourcing
Benefit received vs. services received vs. services delivered vs. customer located
Is this any different than cost of performance?
Combined Reporting
Composition of the group

7. State audit & controversy – Continuing trends
Audits
More assessments and less experienced auditors
Auditors are becoming appeals officers
States are not negotiating small assessments – states know they are too costly to fight
Multistate Tax Commission audits
Asking what positions are being taken on other states and looking for inconsistencies
Information sharing
Claims for Refund
Retroactive law changes – get refund claims in early!
Know the procedure
Statute of limitations (e.g. Michigan)

8. State audit & controversy – Best practices
Pre-audit – Advanced planning
Creation of audit ready files concurrently with return preparation
Consider federal items that impact the states (e.g. transfer pricing)
Early identification of filing positions and other issues
Audit
Development of company policies on execution of waivers
Consider that the federal waiver/RAR adjusments may keep SOL open for all state issues
Manage scope
Memorandum of understanding (as applicable)
Involve state experts as applicable
Written requests and responses to document issues
Appeals
Consider venue options
Understand state’s settlement approach

9. State audit & controversy – Other considerations
Date
State audit & controversy – Other considerations
Key Considerations:
Expect more controversy – you will need to fight to win your major issues
Consider filing returns to get the SOL running in states where claiming no nexus
File timely refund claims on issues you know will likely be litigated
Consider voluntary disclosure agreements or amnesty programs to stop interest accrual
Reporting federal audit changes – ensure you owe tax before making payments to stop interest accruals as it may prove difficult to get money back

10. Thank you Tim Pratcshler, State and Local Tax Principal
Detroit, Michigan
(313)
This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US federal, state or local tax penalties.
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