Presentation on theme: "The Administrative and Legislative Search for Tax Dollars in Light of a Budgetary Shortfall David E. Colmenero, CPA, J.D., LL.M. Meadows, Collier, Reed,"— Presentation transcript:
The Administrative and Legislative Search for Tax Dollars in Light of a Budgetary Shortfall David E. Colmenero, CPA, J.D., LL.M. Meadows, Collier, Reed, Cousins, Crouch, & Ungerman, LLP Dallas, TX Matthew L. Larsen, J.D. Baker Botts, LLP Dallas, TX Dallas CPA Society’s Continuing Education Day Conference May 26, 2011 – Dallas, TX
2 Legislative Developments The current legislative session began with a report from the Texas Comptroller’s office projecting a shortfall of $26 billion for the next biennium. House and Senate have each passed their own version of the state budget, each seeking to balance the budget. A budget conference committee is now meeting to work out differences in the two budgets. If no budget is finalized before the end of this session, will need to have a special session. Session adjourns May 30, 2011.
3 Enacted Items SB 934: Signed by Governor –Broadens Comptroller's prosecution and investigation abilities for criminal tax evasion; increases criminal penalties and tolls statute of limitation during criminal proceedings –Effective 09/01/2011
4 Items Passed by Legislature HB 2403: Passed by Legislature; sent to Governor Background: –Comptroller's position - physical presence of subsidiary may give rise to nexus for parent or affiliate entity. –Comptroller's position mostly aimed at online sellers - Comptroller claims that the state loses $600 million in tax revenue due to online sales every year. –Amazon.com recently assessed approximately $269 million.
5 Items Passed by Legislature HB 2403 –Nexus created by possessing property owned by another if authorized to sell, lease or rent on behalf of owner. –Nexus created by “substantial” ownership in or by an entity located in Texas that (i) sells the same or similar products in Texas under a substantially similar name; (ii) engages in activities to maintain a market on behalf of retailer, including advertising or receiving or exchanging merchandise; or (iii) maintains a distribution center, warehouse, or similar location in Texas and delivers property sold by retailer to consumers. “Substantial ownership” refers to direct or indirect ownership of at least 50%.
6 Items Passed by Legislature HB 1841: Passed by Legislature Background: –Comptroller Rule as amended in July 2010 states that use of a computer server or software in Texas creates nexus for sales tax purposes; –Ltr Rul. 201103016L (March 24, 2011) clarifies the July 2010 amendment as follows: No sales tax nexus if only Texas contact is (i) having a website on a third-party server in Texas and (ii) delivering physical products into the state via common carrier. Storing software programs for sale (i.e., sales inventory) on a server located in Texas may create nexus.
7 Items Passed by Legislature HB 1841 –No nexus created by use of internet hosting services and no responsibility is imposed on service provider to examine or report on user activities.
8 Pending Legislation SB 1811 –Omnibus "fiscal matters" bill which includes a number of statutory changes necessary to implement reduced funding levels: Would require taxpayers to keep records for more than four years throughout any period when tax may be assessed, collected or refunded or while an admin or judicial proceeding is pending; summary records without supporting documentation would not be sufficient; Imposes minimum penalty of $50.00 for failure to timely file return; Requires that unclaimed property presumed abandoned on June 1 be delivered to the Comptroller by July 1; Suspends sales tax holiday for “deficit” years as determined by Comptroller. A proposed amendment to HB 3790 would overrule Combs v. Healthcare Corp., which held that the sale for resale exemption could apply to items purchased and transferred to the federal government as part of a non-taxable administrative services.
9 Pending Legislation Possible additions to the fiscal matters bill: –State sales tax rate increases –Repeals of local sales tax caps –Sunset of tax exemptions –Repeal of interest rates on sales tax refunds –New penalties on late filing –Extension of small business exception (revenue < $1,000,000) –Quarterly franchise tax payment schedule for certain taxpayers –Potential extension of period to claim previously accrued job and investment credits –Reduction of timely filing discount for sales tax –Reduction of prepayment interest rate for sales tax
10 Post Session Matters Adoption of rejected proposals during Special Session? Interim effort to rewrite margin tax?
11 Audit Issues: Sales Tax Comptroller’s office seeks to disregard or re-characterize some transactions on basis of economic substance/business purpose. Mostly applied to aircraft and large dollar transactions. Issue: Does Comptroller have authority to disregard or re- characterize transactions? If so, is it properly applying this doctrine? Will this doctrine be applied to other taxes? Economic Substance Cases:
12 Audit Issues: Sales Tax HB 11: Enacted in 2007, effective September 1, 2007. Authorizes the Texas Comptroller to require wholesalers and distributors of alcoholic beverages and tobacco products to report data regarding sales to retailers. Comptroller utilizes a “mark-up” method for auditing taxpayers using purchase information as a starting base point. These assessments usually include fraud penalty and are often accompanied by personal assessments against owners/responsible persons. Practitioners need to be particularly aware of possible criminal investigations. Convenience Store Audits:
13 Audit Issues: Franchise Tax Total Revenue Begins with “Amounts Reportable” on Specific Line Items of Federal Tax Return. “Amounts Reportable” mean amounts entered on IRS Form to the extent the amount entered complies with federal income tax law. Ability to report on a “net basis” for FIT purposes is generally fact specific, focusing on facts and circumstances of each case. Issue: How much certainty must exist under federal law to support a net reporting position? Net Reporting:
14 Audit Issues: Franchise Tax What level of certainty should apply? –Absolute (i.e. 100%)? –Beyond a reasonable doubt? –Clear and convincing? –More likely than not? –Substantial authority? –Reasonable basis? –Non-frivolous? Net Reporting:
15 Audit Issues: Franchise Tax Flow-through funds that are mandated by law or fiduciary duty to be distributed to other non-affiliated entities, including tax collected from a third party by the taxable entity and remitted to a taxing authority are excluded from total revenue. Comptroller appears to be interpreting this exclusion narrowly essentially limiting it to tax collected from customers. Issue: Is the Comptroller’s office constructing this exclusion too narrowly? Flow-Through Funds:
16 Audit Issues: Franchise Tax Affiliated Groups: Owner versus Owners : –Statute - group exists if controlling interest is owned by either (i) a common owner or owners, or (ii) another member entity. –Comptroller Rule 3.590(b)(1) defines an affiliate group as “entities in which a controlling interest is owned by a common owner, either corporate or non-corporate, or by one or more of the member entities.” –Issue: Must there be a “common owner” owning a controlling interest in multiple entities for an affiliated group to apply; or can there be “common owners?” Combined Reporting:
17 Individual A Individual BIndividual A Individual B Corporation A Corporation B 50%50% 50%50% Audit Issues: Combined Reporting Affiliated Group?
18 Audit Issues: Franchise Tax Unitary versus Non-Unitary: –Centralized Management: How much centralization suffices to create a unitary group? arguably, authority over purchasing, financing, product line, personnel, and marketing is required does common owner act more like an investor or a manager? –Non-Consenting Affiliate Member: How does non-unitary affiliated entity erroneously included in a combined return remove itself after the original return has been filed if the reporting entity does not agree to file an amended report? Combined Reporting:
19 Audit Issues: Franchise Tax Do entities that install or provide services with the sale of goods qualify for ½% rate (e.g., HVAC installation and auto service or repair)? Can an entity qualify as a wholesaler or retailer for ½% rate purposes if no SIC Manual 4 digit code precisely describes its activities? What does it mean to provide utilities? Tax Rates:
20 Audit Issues: Franchise Tax “Change” of Deduction Election: Taxpayers may elect between a cost-of-goods-sold and a compensation deduction to compute taxable margin. As enacted in 2006, House Bill 3 provided that “The election may be changed by filing an amended report.” Pursuant to the technical changes made by House Bill 3928, however, this language was removed and language was inserted stating, “A taxable entity shall notify the comptroller of its election not later than the due date of the annual report.” The Texas Comptroller claims that this amendment was intended to prohibit taxpayers from filing amended reports changing an election. A number of taxpayers have challenged the Texas Comptroller’s position.
21 Audit Issues: Franchise Tax Does Three-Factor Apportionment Formula Apply? –Chapter 141 of the Texas Tax Code adopts Multistate Tax Compact, which provides for a three-factor apportionment formula. –Old franchise tax statute stated that Chapter 141 does not apply for franchise tax purposes and provides instead for single factor apportionment formula based on sales. –Revised franchise tax statute removes referenced to Chapter 141, but continues to provide for single factor apportionment formula. –Some taxpayers argue that removal of reference to Chapter 141 means they can now choose to use a three-factor apportionment formula. –Comptroller claims that only single factor formula based on sales may be used for apportionment. Apportionment:
22 DISCLAIMER The information included in these slides is for discussion purposes only and should not be relied on without seeking individual legal advice. Information included in these slides is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under U.S. federal tax law, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. IRS Circular 230 Disclosure