CHICAGO, Dec. 22, 2010 – While the “Great Recession” may have been declared over by the powers that be, the tepid recovery in 2010 did not help states gain a foothold on their budgets. In fact, many states will have to deal with multi-billion dollar budget gaps in 2011 and beyond, as structural deficits that can only be fixed by drastically raising taxes or cutting services are not being addressed sufficiently. From a tax perspective, pure tax increases have been difficult to adopt, in part because of political considerations, and even if such increases were adopted, there is no guarantee that such increases would guarantee significant revenue growth.
At the same time, the states’ income tax, sales tax and property tax bases are not growing organically as they normally would in a strong economy. Both corporate and personal income tax collections have suffered in the recent economic environment. With the shift of many transactions to the Internet, many out-of-state vendors are not collecting and remitting sales tax on the basis that they do not have physical presence in the state in which their customers are located. Property tax bases have stagnated in the past couple of years due to the retrenchment in housing prices. As states are still feeling the pain, it is not surprising to see new and distinctive methods by which they try to bridge their budget gaps, some of which challenge the bounds of constitutionality. To assist companies, Grant Thornton LLP has released a new State and Local Tax Alert identifying the top 10 SALT stories of 2010.
“Now more than ever, states are looking at what the federal government is doing in the income tax area as a template for future activity,” noted Giles Sutton, a Grant Thornton Tax partner and the State and Local Tax Technical Services practice leader. “The federal adoption of statutory economic substance principles and uncertain tax position (UTP) reporting this year is sure to be copied in some form by the states. It is a means to generate revenue without imposing pure income tax increases. On the other hand, states are continuing to decouple from the latest federal economic stimulus programs, which again address bonus depreciation and other items that reduce the federal income tax base when initially adopted and likewise impact state income taxes.
“The push to enact mandatory unitary combined reporting is still ongoing, and the threat of legislation remains real in a few states,” continued Sutton. “States are also looking at economic nexus provisions, particularly rigid receipts thresholds, in an attempt to increase the number of filing taxpayers. The method of apportionment of service income is slowly changing, as states are focusing more on where a taxpayer’s customer is receiving the benefit of the service, and less on where a taxpayer is incurring its own costs of performance. Again, this development is being driven in part because states believe that overall, apportionment factors will rise, particularly for out-of-state taxpayers, and revenue will grow accordingly.”
“On the sales tax front, states have begun to consider coercive forms of disclosure as a method by which they can persuade out-of-state retailers to register, collect and remit sales taxes from their customers,” noted Jamie Yesnowitz, a SALT senior manager in Grant Thornton’s Washington National Tax Office. “In an attempt to avoid increases in the nominal sales tax rate, states are considering how to broaden the sales tax base by trying to tax sales of services. And of course, the Streamlined Sales Tax (SST) effort continues onward, as nearly half of all states that have adopted a sales tax now conform to the agreement.
“States are continuing to use broad tax amnesty programs as a means to supplement revenue,” concluded Yesnowitz. “These programs are diverse in scope, with some offering significant breaks on penalties and interest, and others not so forgiving. Many of these programs provide the ‘incentive’ of participating or being charged with post-amnesty penalties if a taxpayer is later assessed by the state tax authority. Further, the economic environment puts pressure on state tax authorities to be especially rigid when it comes to penalty waivers at the audit level. Gone are the days where a boilerplate letter could informally eliminate a penalty imposed on a taxpayer for failure to file a return or make sufficient tax payments in a timely manner. Now, abatement of penalties has become a much more formalized process. Having reasonable cause is not always enough.”
To read the entire Grant Thornton State & Local Tax Alert, SALT top stories of 2010, please go to www.GrantThornton.com/SALTalerts.
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