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Break-out Session 1A:
State audit &
controversy
Tim Pratcshler, State and Local Tax
Principal
Agenda
• State Controversy Trends
• Best Practices
• Other Considerations
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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)
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State tax collections versus projections – 2013
WA
ME
MT
ND
MN
OR
VT
ID
WI
SD
MI
NY
WY
NV
PA
IA
NE
IL
UT
CA
OH
IN
CO
MD
WV
KS
MA
CT RI
VA
MO
DC
KY
NC
TN
AZ
OK
NM
AR
SC
MS
AL
GA
AK
TX
LA
HI
FL
Source – “The Fiscal Survey of States" The National Governors Association and The
National Association of State Budget Officers. Spring 2013.
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State tax collections versus projections – 2016
WA
ME
MT
ND
MN
OR
VT
ID
WI
SD
MI
NY
WY
NV
PA
IA
NE
IL
UT
CA
OH
IN
CO
MD
WV
KS
MA
CT RI
VA
MO
DC
KY
NC
TN
AZ
OK
NM
AR
SC
MS
AL
GA
AK
TX
LA
HI
FL
Source – “The Fiscal Survey of States" The National Governors Association and The
National Association of State Budget Officers. Spring 2016.
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Ways states have tried to expand the tax base &
challenges associated with these changes
1. Single Sales Factor Apportionment Weighting
- Distortion/alternative apportionment
2. 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?
3. Combined Reporting
- Composition of the group
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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)
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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
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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
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Thank you
Tim Pratcshler, State and Local Tax Principal
Detroit, Michigan
(313) 394-6508
[email protected]
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.
© 2016 PwC. All rights reserved. In this document, "PwC" refers to
PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member
firm of PricewaterhouseCoopers International Limited, each member firm of which is a
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