March 7 --Bloomberg BNA interviews with top revenue department officials from more than half of the states revealed an array of tax administration and enforcement priorities for 2014.
Many state tax directors are using new technologies and management strategies in efforts to close the “tax gap” between obligations owed and amounts paid voluntarily, and to flag potentially fraudulent returns. Creating more opportunities for electronic filing was also often cited as a goal.
Implementation of 2013 tax code changes dominates revenue department planning in a number of states, while several are anticipating action on significant tax legislation in 2014. Details from the individual interviews follow.
The Arizona Department of Revenue's top priority for 2014 involves implementing legislation enacted in 2013 (H.B. 2111) to overhaul the state's tax collection system, spokesman Sean Laux said Feb. 13.
The new law, which was signed by Arizona's governor June 25, 2013, goes into effect Jan. 1, 2015.
Among its provisions, the law states that beginning in 2015, companies that operate in Arizona will have to submit just one online tax filing and be subject to one audit statewide. That replaces a system under which companies have had to file separate tax returns in each municipality where they do business, and could be subject to multiple audits.
In addition, Laux said, the new law calls for the state to administer its transaction privilege tax (TPT) for all cities in the state, including those that could opt out in the past.
“We are trying to bridge some technology gaps, issues of that nature, to ensure that we can comply with those requirements,’’ Laux said.
The state is active in the area of closing the tax gap, Laux said. Its audit division, with five assigned members, has several confidential programs and routines that it runs electronically to identify fraud and such things as e-theft, Laux said.
In 2009, he noted, the unit stopped almost $2 million in fraudulent returns. By contrast, he said, in fiscal 2013, which ended June 30, 2013, the unit stopped nearly $32 million in fraud. In the current fiscal year, the unit has already stopped $23 million in fraud, with four months remaining, he said.
As for hiring, Gov. Jan Brewer (R) in her budget message to the Arizona Legislature in January recommended additional appropriations for fraud-detection tools, in addition to new staff and technology to help assist with compliance efforts. Her recommendation is pending before the Legislature.
The only other tax reform item currently on the governor's agenda is a proposal that would exempt from the TPT sales of electricity to manufacturing businesses. Brewer first proposed it in her State of the State message as an economic development incentive to businesses, and it also is pending in the Legislature.
As for new tax filing strategies, Laux said the department is modernizing its electronic filing system with an eye toward making it easier for large businesses. One such measure is bulk filing, which will allow larger taxpayers with multiple locations in multiple jurisdictions to file more easily and give them an incentive to file electronically.
“It's a lot more cumbersome for an agency to process paper returns,’’ Laux said.
The California Franchise Tax Board is halfway toward completing a massive information technology project that touches everything from audits to mailing addresses and is already on target to bring in $1 billion a year in accelerated or difficult-to-collect revenue.
The Enterprise Data to Revenue project is a key part of the FTB's strategies for tackling the estimated $10 billion tax gap for the personal and corporate income taxes it administers, Executive Officer Selvi Stanislaus said Feb. 7.
Phased in from 2012 to 2016, EDR will cost $670 million and is expected to bring in at least $2.8 billion by 2016. Revenue will level out to about $1 billion a year in 2016 and following years.
Through the project, the FTB is modernizing its return and payment processing systems, collections priorities, taxpayer access to account information and audit selection methods. EDR will also improve the FTB's ability to have up-to-date mailing addresses for taxpayers, Stanislaus said.
EDR has enabled the FTB to scan all paper correspondence, including returns and payments, so it can be shared electronically within the tax agency. The project also includes a new data entry system and electronic processing of payments.
Even though most taxpayers file electronically, the FTB still receives 10,000 paper documents a day, Stanislaus said.
The EDR project's goals are to improve revenue, efficiency and legacy systems at the FTB. It has exceeded revenue targets by at least 100 percent each year so far, with some of the revenue related to the tax gap such as collections, and some revenue coming from accelerated payments, Stanislaus said.
“It is on target and on budget,” she said, adding that it is one of the most successful information technology projects in California.
The FTB also launched an agreement in July 2013 with the New York State Department of Taxation and Finance that targets tax debts, Stanislaus said. Under the agreement, if taxpayers are due refunds in New York or California, but owe tax debts in the other state, the refund will be applied to the debt. If the pilot project with New York is successful, the FTB might expand it to other states.
California has collected $371,000 so far from New York residents through the agreement, according to the FTB. About 11,000 taxpayers who live in New York owe California $135 million in delinquent income taxes.
The tax agency is continuing with a program called Financial Institutions Records Match, through which the FTB matches tax debtors to accounts held at financial institutions and collects debts from those accounts. Launched in January 2012 with agreements between the FTB and the institutions, the program brought in $150 million in the 2012-13 fiscal year, Stanislaus said.
FIRM required passage of legislation in 2012 to authorize the FTB to disclose taxpayer information to the institutions for purposes of matching, and to impose penalties on institutions that fail to provide records.
The California State Board of Equalization is in the planning stages for a technology upgrade that would replace its legacy computer systems and bring in at least $200 million a year in unidentified revenue, Executive Director Cynthia Bridges said Feb. 13.
In the meantime, the SBOE is using its existing technology along with old-fashioned shoe leather and grass roots outreach to help close the gap of $2.3 billion in sales and use taxes owed but not collected each year, she said. A little more than half of the sales and use tax gap stems from unpaid use tax liabilities. About a quarter comes from nonfilers or tax evaders, and the remaining quarter comes from registered taxpayers who don't pay what they owe, according to the SBOE.
The SBOE administers the state sales and use tax, as well as about 30 other special taxes and fees.
A law that took effect in September 2012 requiring some out-of-state retailers to collect use tax from California customers is helping close the use tax gap. The law permitted the collection of $349.2 million in revenue from 45 retailers in the first year, according to the SBOE.
“By no means has it resolved the issue completely,” Bridges said.
The SBOE modernized its website in the past year, with more direct links and industry-specific pages to help taxpayers get the information and forms they need. The tax agency also offers seminars, classes and online training for specific industries such as nonprofit organizations, restaurants and small business owners.
Through the SBOE's Statewide Compliance and Outreach Program, the agency targets businesses in specific ZIP codes in the state, mails letters to those businesses and visits them to verify they are properly registered to collect and remit taxes and fees to the state. The agency has visited 417,000 businesses in California through the SCOP, which brought in $85.9 million in the 2012-13 fiscal year, Bridges said.
The SBOE also places automated reminder phone calls to taxpayers with a history of failing to file returns, and has seen a 7 percent increase in filings from those taxpayers, Bridges said.
The agency's major technology project, called the Centralized Revenue Opportunity System, is expected to expand online services and improve communication for taxpayers, and use technology to reinforce transaction accuracy and security.
Early changes the SBOE has made to prepare for CROS are expected to bring in $66.5 million in the 2013-14 fiscal year. The SBOE is currently in the procurement process for the project and expects to begin working with a vendor to build the new system in spring 2015. CROS will take up to four years to complete.
“It will allow us to operate more efficiently and do more with our data to identify noncompliant taxpayers,” Bridges said.
By Tripp Baltz
The chief focus of the Colorado Department of Revenue in 2014 will be implementing the state's new taxes on retail marijuana.
“This is a large undertaking,” John Vecchiarelli, the department's senior director of taxation, said Feb. 5. “It has far-reaching implications and we have the eyes of the world upon us.”
In November 2012, voters in Colorado approved the use, sale and transfer of recreational marijuana by licensed retail outlets. In November 2013, voters approved a new 15 percent excise tax and an additional sales tax of 10 percent for retail pot.
“Both of these taxes will be filed electronically so it is essential that we properly test the system, that we solicit input from the industry about usability and that we train the members of the industry on how to properly file and pay their taxes,” Vecchiarelli said.
The total tax on retail pot in Colorado is 27.9 percent. Only the state sales tax of 2.9 percent is assessed on medical marijuana.
The retail marijuana initiative will bring new agents to the department, Vecchiarelli said. The state budget set aside funding for 55 new employees in the department's Marijuana Enforcement Division and 22 new employees in its taxation divisions, he said.
“Hiring this many people, training them and getting them deployed is time-consuming and involves the participation of almost every manager in the department,” he said.
The department also continues to view implementation of the governor's 2012 directive to consolidate and eliminate unnecessary and redundant regulations as a major priority, Vecchiarelli said.
The department has a very modest legislative agenda for the year and doesn't anticipate having to respond to any major initiatives from the governor or the Colorado General Assembly, Vecchiarelli said.
With respect to Colorado's tax gap, the department's Field Audit program audits the books and records of approximately 2,000 businesses per year, said Daria Serna, spokeswoman for the department. The department's “Discovery” program uses data matching techniques to issue approximately 100,000 bills to noncompliant and underreporting taxpayers, she said.
The department recently completed a five-year project called the Colorado Integrated Tax Architecture (CITA) to replace its tax processing systems with the GenTax system developed by FAST Enterprises, Serna said.
As part of the project, its field audit group worked to transition its audit selection from a largely manual process to an automated one, with predictive analytics being one of the tools in the automation, she said. The department is just beginning to conduct audits chosen as part of this automated process and is optimistic the audits will generate positive results, she said.
Additionally, the department is expanding its use of Revenue Online, a Web-based service that allows taxpayers to “self-service” their accounts by resolving issues and questions on their own, Serna said. Revenue Online was implemented during the CITA project and has been a tremendous success for the department so far, she said.
The department and the Governor's Office of Information Technology are seeking $93 million from the Legislature to replace and upgrade systems within the Division of Motor Vehicles, Michael Dixon, senior director of the division, said Feb. 13.
On the legislative front, the department supports a bill (H.B. 1107) that would allow taxpayers to voluntarily opt in for electronic notices rather than receive paper notices. The full House approved the measure on a third reading vote Feb. 18 and it now awaits consideration by the Senate Finance Committee.
Additionally, several bills now pending before the Legislature would create new tax credits and exemptions, some of which are geared toward providing tax relief for relief workers and victims of wildfires, floods and other disasters.
Connecticut Revenue Commissioner Kevin Sullivan said Feb. 11 that the Department of Revenue Services is focusing a great deal of effort on providing more online resources to taxpayers to make it easier for them to pay their taxes.
“It does help when we are not making it more challenging than necessary to actually pay their taxes,” he said.
In terms of hiring, Sullivan said while the DRS has hired collections and audit staff recently, it has also hired in the area of taxpayer services.
“We have an approach that says that it is important in going after what you are owed and know about, and going after what you are owed and don't know about,” he said, “but equally important are the front-end services of the agency.”
In another area, Sullivan said DRS asked for and received legislation allowing the agency to deny the issuance of permits to retailers and others who owe the state taxes. Since that legislation was adopted, the DRS has seen approximately 1,000 businesses become compliant, generating $3 million to $5 million in additional revenue, he said.
Further, the permits that are issued to formerly noncompliant businesses are conditional, so taxpayers must continue to be in compliance in order to receive their renewals. “A very small step sometimes can be meaningful,” Sullivan said.
In terms of technical developments, the agency has moved to mandated online business filing and the use of Quick Response (QR) codes to allow taxpayers to access tax assistance information via their smartphones.
And among the efforts underway in Connecticut to address the tax gap was the hiring of an outside vendor in 2013 to install additional fraud screens in the state's tax system, Sullivan said. This had been helpful in weeding out false claims.
Sullivan said Connecticut plans to focus more attention on repatriated funds that the federal government is collecting but not disclosing to the states in a meaningful way.
He said the state is working to better understand the whole issue of offshore income, which then doesn't get properly attributed to the appropriate state as a taxing jurisdiction. Sullivan said states realize this is a very significant area of revenue, but given the level of sophisticated economic modeling and analysis required to compute such data, the state intends to seek outside assistance.
Sullivan said the state would also like to be in a better position to offer guidance to large multinational corporations who do business in Connecticut. Ideally, the DRS would have the ability to agree upfront so that both the multinational taxpayer and the state have some certainty on what is going to be sourced to Connecticut and how it is going to be sourced, and what the rules of apportionment are going to be.
“We have one major multinational that has come in for exactly that, but it requires a level of economic analysis we don't yet possess,” Sullivan said, “so we have to figure out how to get in that game.”
One area that has been very successful is the use of automated collections scoring, he said. This program provides an automatic prioritization by analyzing cases and saying “this is a good one for collection because you are probably going to get the money and get most of the money, and this is a bad one because you are probably not going to be successful and not going to get most of the money.”
It scores the audit and collection cases based on certain parameters to show which tax cases are going to lead to successful collection based on the known criteria, providing “more bang for the buck,” Sullivan said.
By Chris Marr
The Florida Department of Revenue is rolling out additional uses of third-party data in 2014 as part of its ongoing efforts to make tax collection and enforcement more efficient and effective, a department official said Feb. 20.
Among those efforts, the department plans to fully implement by June 30 a financial institution data match program, which will let collections staff identify bank accounts eligible for garnishing as a way to collect past-due taxes, said Maria Johnson, program director for general tax administration.
The financial institution match is a part of the department's broader collection analytics initiative, which Johnson described as a systematic approach to assessing and collecting on past-due accounts. She credited collection analytics with yielding a $66 million increase in tax revenue through collections for the fiscal year ending June 30, 2013.
The initiative, which began in April 2011, also has brought some new views about collections, with more emphasis on resolving accounts through receiving payments or correcting errors. Previously, effectiveness was judged by statistics such as the number of phone calls made on an account, Johnson said.
“We're focused now on the outcomes of working cases versus the output,” she said.
The department is looking for ways to expand its third-party data matching initiative to the processing and auditing functions in 2014, Johnson said. One example is an effort to compare sales numbers reported by auto dealerships against the auto sales numbers collected by the state's Department of Highway Safety.
This builds on existing data matching efforts in other industries. In 2011, the state Legislature ordered tobacco and alcohol wholesalers and distributors to provide sales data to the state, so the Department of Revenue can compare those numbers with the sales figures reported by retailers such as grocery and convenience stores.
“Back in the old days, you look at averages. You just estimate,” Johnson said. But third-party data matching allows verification of the reported sales figures directly with relevant sources. “It really makes the audits much more efficient,” Johnson said.
The percentage of state taxes submitted voluntarily in Florida averages 98.4 percent annually, according to data from the past five fiscal years provided by the Department of Revenue, and the new enforcement programs are aimed at increasing the amount of voluntary payments, Johnson said.
Much of the state's tax revenue comes from sales taxes, since the state has no individual income tax. The state recorded $34.7 billion in tax revenue for FY 2013, a rebound from previous years when a weak economy dragged the figure down to a range of $29.7 billion to $32 billion from FY 2009 to FY 2012.
Corporate income tax accounts for approximately $2 billion in annual revenue, and voluntary payments in that category tend to average just less than 97 percent, according to the data provided to Bloomberg BNA.
Florida's revenue agency also continues to work on technology and procedural improvements to make its work more efficient and customer-friendly, Johnson said.
The department has largely rolled out a remote capture functionality, to allow its 22 remote Florida offices plus seven offices in other states to process tax returns and payments on-site, rather than bundling them to send back to the Florida capital for central processing, Johnson said. Going forward, the department will gradually make this service available for small tax categories such as the fuel tax, likely over the next few years, she said.
In the technology category, the department is in the initial stages of creating mobile applications for use by taxpayers, as well as mobile functionality for the department's staff in the field, Johnson said.
The department aims to launch its first two apps within two years. The first app for taxpayers will be a resale verification app, which will allow vendors that sell products and services to other companies to verify that those companies may be exempt from sales tax because they plan to resell the product or service.
By Chris Marr
Georgia's Department of Revenue is entering its third year of partnering with a data provider to screen tax returns for fraud, and the state's revenue commissioner suggested the partnership might already be decreasing fraudulent filings.
Douglas MacGinnitie, Georgia's revenue commissioner, said Feb. 20 that his department partners with LexisNexis to run tax returns through a series of screens, comparing personal information on the returns against the LexisNexis databases. Historical addresses for the tax filer would be one example of the information that is accessed. Georgia's success with the program has caused other states to consider similar initiatives, he said.
The partnership with LexisNexis was credited with stopping $23 million of fraudulent returns in its first year and $7.5 million in its second year. MacGinnitie said he views the lower number as a good sign that fraudulent tax filers are beginning to avoid Georgia.
“We may not be able to go get them all and arrest them, but at least we can force them to go away and file to some other state,” he said. “We have anecdotal evidence that that is happening.”
In addition to the LexisNexis partnership, the revenue department also has an internal antifraud team that screens returns for signs of fraud. The two efforts combined were estimated to stop more than $100 million of fraudulent returns during the past two years, MacGinnitie said.
Along with the antifraud efforts, Georgia's revenue department is pursuing better tax compliance through other initiatives, such as more efficient data sharing.
The department has compared tax returns against wage and salary data from the Department of Labor for several years, but in 2013 made notable improvements in the technology to exchange and analyze that data, MacGinnitie said. “We expect to more fully realize the benefits of that this year,” he said. “The right technology allows us to focus our compliance efforts on people who are underreporting or not reporting.”
A state audit report published in January found that the state spent $67 million on tax compliance efforts in 2013 and estimated a return on that investment of $457 million in delinquent tax payments and blocked fraudulent claims. The audit report also suggested the revenue department could learn to make better use of data analytics within its Integrated Tax Solution technology--a need the revenue department acknowledged in the report and said it has taken steps to address.
The development of mobile apps is another area of technology improvement for the revenue department, MacGinnitie said. The department has one simple but useful app in operation now, Where's My Refund?, which gives taxpayers another way to check on the status of refunds without the need to talk with a customer service representative.
The department plans to roll out additional apps aimed at business filers, MacGinnitie said.
The Illinois Department of Revenue hopes to take a more aggressive stance on tax fraud and noncompliance in 2014, including criminal prosecutions, with new resources and a favorable climate in Illinois courts, IDOR Director Brian Hamer said Feb. 21.
Hamer said IDOR had an active enforcement program during 2013, collecting $1.6 billion in “compliance revenue,’’ which includes tax dollars gathered through audits, noticing, billing, collections and criminal enforcement. Despite flat budgets for several years, he said IDOR has been able to shift resources to the state's audit bureau by creating efficiencies in other functions of the agency.
“Over the course of the last dozen years, we have been able to move resources from pushing paper to enforcement, and in particular audit, with the help of new and more powerful technology as well as electronic filing,’’ said Hamer, Illinois's top tax official for 11 years. “So we have been able to hold our own on the enforcement side, although my hope would be that we could expand enforcement.’’
Hamer said he looks forward to greater success in 2014 with the possibility of some new resources. While IDOR's budget is likely to remain static, Hamer said he anticipates being able to hire as many as 50 new auditors. Most of those new hires will replace retiring auditors, but Hamer said he expects a net gain for IDOR's audit bureau. He also said that IDOR is submitting legislation to the General Assembly seeking to expand the audit bureau further.
Hamer said criminal prosecutions will be a key component of the state's enforcement program in 2014. He said IDOR has seen success in a series of investigations targeting gas stations. The effort has netted $90 million in compliance revenue and jail time for unscrupulous gas station owners.
“We have in fact seen a sea change in the courts over the course of the past year and we will continue to press that in the coming year,’’ Hamer said. “We are requesting prison time for the worst tax cheaters and judges increasingly across the state are sending scofflaws to prison. This past year we sent a dozen different individuals to prison, which is something Illinois has not seen before.’’
On a separate issue, Hamer said the state wouldn't seek review from the U.S. Supreme Court following the Illinois Supreme Court's surprising decision in October 2013 voiding the state's Mainstreet Fairness Act. The court determined Illinois's law was preempted by the federal Internet Tax Freedom Act (Performance Mktg. Ass'n Inc. v. Hamer, Ill., No. 114496, 2013 BL 290322 ( 10/18/13)).
After considering an appeal, Hamer said attorneys for the state concluded Illinois would have greater success taxing e-commerce transactions by simply passing legislation patterned after New York's click-through nexus law.
“We believe the issue the Illinois court identified can be cured by additional legislation,’’ Hamer said. “So I think the matter goes back to the General Assembly and they will have to decide over the course of this session or beyond, whether they want to make the changes to bring back the Illinois statute.’’
Hamer pointed to two important rulemaking projects for 2014. In January the department issued emergency rules and proposed permanent rules designed to help businesses determine their local sales tax obligations in the aftermath of the Illinois Supreme Court's decision in Hartney Fuel Oil Co. v. Hamer, Ill., No. 2013 IL 115130 (11/21/13).
The rules clarify that sales taxes must be paid in the jurisdiction in which the bulk of business activities occur. The rules entirely reject the theory that local sales tax situs is fixed exclusively on the locality where sales are accepted. Both the emergency rules and the proposed permanent rules must be reviewed in 2014 by Illinois's Joint Committee for Administrative Rules.
Finally, Hamer said IDOR hopes to promulgate regulations under Public Act 95-233, the 2007 law that converted most of the Illinois Income Tax Act from single-sales factor sourcing to a market-based approach. Hamer said the regulations would focus primarily on the sourcing of income tax with respect to service companies.
“We are finding that businesses, by and large, are sourcing in a way that we feel is reasonable and appropriate,’’ he said. “Even without more specific regulations we think businesses are getting it right, but we would like to provide more guidance.’’
Indiana is ramping up staffing and technology in order to collect some of the approximately $2 billion in uncollected taxes it is owed, Department of Revenue Commissioner Mike Alley said Feb. 13.
“We collect about $17.5 billion, so that's a pretty substantial number,” he said. “We don't anticipate we can close that gap completely, but we do think there are several hundred million dollars” that can be collected over the next several years, including about $200 million in the next three years alone, he said.
Gov. Mike Pence (R) has made reducing taxes a priority, so the department is focusing on improving collection of the taxes it is owed in order to maintain revenue, Alley said. “We think the best way to close that gap is through improved compliance and making sure everybody pays their fair share,” he said.
This filing season, Indiana is working with LexisNexis to match each return it gets with a database of taxpayers, contacting those whose information doesn't match up and asking them to take a “brief quiz” by phone or online to confirm their identities, Alley said.
“We just opened up our filing window” in conjunction with the Internal Revenue Service in late January, “and we're already identifying several thousand potentially suspicious returns, and several that we have confirmed do represent fraud and identity theft,” Alley said. “We could potentially save $20 million to $30 million in fraudulent refunds this year.”
The DOR recently hired 15 people for its identity theft protection program and another eight for its special investigations unit as part of its effort to collect unpaid taxes, Alley said. “We've put some pretty substantial resources to it,” he said. “We think it's going to garner multiple paybacks.”
Indiana also has a pilot program with a third-party vendor to improve the DOR's data warehouse, identifying individual and business taxpayers that reported income for 2009 through 2011 but didn't file tax returns, as well as those that filed returns in the past but then stopped, Alley said. “We anticipate seeing rewards from that program occurring in the latter part of 2014 and 2015,” he said.
The department is replacing its “antiquated” audit platform with a more up-to-date one that will better identify noncompliant taxpayers, Alley said. “Using these new tools will allow us to do a better job of doing statistical analysis” and identify taxpayers likely to be noncompliant, he said.
“Another key part of noncompliance is collections itself,” Alley said. Taxpayers, particularly businesses, often file accurate returns indicating taxes owed, but never follow up with a check, and an upgraded accounts receivable system is helping auditors identify and follow up with those taxpayers, he said.
“We're already seeing a dramatic increase,” with past due and delinquent collections up 19 percent over a year earlier, he said. “We're projecting an even more sizable increase in 2014 based upon the new tools we've put in place, as well as some additional management oversight,” he said.
Mandated electronic filing for businesses that took effect in 2013 has also helped with collections, as it identifies nonfilers and nonpayers quickly, Alley said. In addition, he said, “businesses love it,” and have told the department they appreciate the e-mail reminders they get when they neglect to file on time.
A statewide initiative to create a “one-stop shop” for businesses will have the added benefit of improving tax collections, Alley said. The government is in the process of implementing the plan, which will allow companies to register with the DOR, the secretary of state and the Department of Workforce Development all at once. The system, which will later be expanded to include other state agencies, will allow the revenue department to keep better tabs on businesses that may register with one department but not another, he said. The system isn't likely to be in place until late 2015 or early 2016, a DOR spokesman said.
By Mark Wolski
With much of its rulemaking driven by legislation, the Iowa Department of Revenue expects to be working on military pensions and broadband Internet in 2014.
Victoria Daniels, public information officer for the department, said Feb. 24 that the two topics are legislative priorities for Gov. Terry Branstad (R). While it is still early in the 2014 legislative session, the two issues appear to have bipartisan support.
Branstad proposed the Home Base Iowa Act (H.S.B. 589) in early January. Aimed at luring veterans back to the state, it would offer them a number of veteran-friendly programs, as well as make their military pensions exempt from the state's income tax, Daniels said.
The Connect Every Iowan Act (H.F. 2329) is aimed at providing broadband Internet access throughout the state. To that end, it would exempt those installing broadband infrastructure in unserved or underserved areas of Iowa from property taxation. The exemption would apply to installations made between 2014 and 2018.
Daniels said the department's other priorities for the year will be continued fraud detection and proactive taxpayer education. She said although the agency asked for a “status quo’’ budget, it plans to work with the state's chief information officer to improve its information systems.
Daniels said the revenue department has submitted a policy bill to the 2014 Legislature. The bill proposes changing the tax appeal process, she said, as there have been concerns about the objectivity of the process since the department's director participates. There has also been a growing backlog of tax protest cases, she said, and the department is trying to streamline the process to address those.
The policy bill will attempt to change the definition of all-terrain vehicles used for farming, Daniels said. She said farms can receive sales tax exemptions on the vehicles, provided they can show they are directly and primarily used for farming. While proving the vehicles are primarily used for farming isn't difficult, it can be difficult to show they are directly used for farming, she said. The legislation proposes removing the word “directly’’ from state law so as to make the test for exemptions easier to understand.
According to Jeannine Koranda, a spokeswoman with the Kansas Department of Revenue, the state currently has a “robust compliance-enforcement program” that features electronic data matching programs, collaboration with other agencies that maintain data collections of significance for tax compliance and reciprocal matching programs with the IRS and with other states to set off delinquent debt inventories.
The state has entered a relatively quiet period when it comes to big picture changes in tax policy and the tax code, after a very busy three-year period in which the Legislature passed bills reducing individual income tax rates between 14 percent and 24 percent for all taxpayers, and eliminating the tax on business income for small businesses, she said. The law provides for further reductions in individual income tax rates through 2018. No significant tax policy legislation is expected in 2014.
Some KDOR tax compliance efforts focus on state contractors, including an online self-serve Tax Clearance Program that is required for all bidders on state contracts, Koranda said. Obtaining a Certificate of Tax Clearance requires a comprehensive review to ensure that an applicant is in compliance with all Kansas tax laws, and also has paid all fees and taxes administered by the state Department of Labor and other state agencies.
The program is also available for local governments and for private companies that wish to check for tax compliance of those with whom they are doing business, she said.
In the area of fraud detection, KDOR has recently focused on electronic filing fraud, putting together a sustained effort to prevent fraudulent refunds from being paid out, Koranda said. Department officials also are in contact with other state agencies on the matter, and take part in the National State Tax Suspicious Filers Exchange Group, where they keep up to date on known and emerging fraud schemes, she said.
The state currently has 50 field revenue agents across the state, and will continue to hire “as needed,” Koranda said. In addition to their work carrying out audits and other enforcement activities, they conduct extensive taxpayer education efforts that are aimed, ultimately, at increased tax compliance, she said.
In the area of emerging tax filing strategies, KDOR currently offers free online filing of state income taxes and of business taxes, Koranda said. But the department has no plans yet to offer mobile apps, she said.
KDOR also operates a voluntary disclosure program that allows taxpayers who are behind on their tax obligations to come forward and pay what they owe, she said. Those who participate benefit from a limited three-year lookback period, and are able to avoid the burden of the department's normal investigative and audit procedures, she said. In addition, participants are able to avoid penalties for late filing and payment, although they are obligated to pay interest due at the statutory rate.
The state last provided amnesty opportunities in 2003 and 2010, Koranda said. There is currently no plan in place to offer another amnesty period.
The Louisiana Legislature will be limited in approving any new legislation dealing with taxes, credits, deductions, exemptions or exclusions during the upcoming 85-day regular session that begins March 10.
Fiscal-related subjects are generally limited to legislative sessions in odd-numbered years, Jason DeCuir, executive counsel for the Louisiana Department of Revenue, said Feb. 24. Some issues of tax administration can be addressed but measures can't be introduced in the 2014 session that would raise revenue or increase a tax, DeCuir said.
DeCuir said the state attempted a tax reform package in 2013 “that didn't get as far as we would have liked” due in part to a budget shortfall and budget discussions that dominated the session. The tax reform package included a proposal to eliminate the state income tax.
House Speaker Chuck Kleckley (R) has called for an independent study to closely examine Louisiana's tax structure, including all tax exemptions, deductions, credits and rebates in light of the state's current and predictable future sources of revenue. Kleckley wants the study completed in time for discussions before the 2015 gubernatorial election, DeCuir said. Gov. Bobby Jindal (R) will be barred by term limits from running for a third term.
Louisiana has a three-year tax amnesty program in place, an opportunity for taxpayers to “come clean” on taxes owed to the Department of Revenue. For two months during 2013, the program waived penalties and charged just half the interest due on delinquent taxes, DeCuir said.
As a result, the state collected $440 million in outstanding revenue, he said. Some of the more complex delinquent tax cases that had been “stuck” in audit or in litigation were resolved as taxpayers weighed the incentive of amnesty. In 2014 and 2015, the amnesty program will offer less favorable terms.
Because the first year of amnesty was successful, lawmakers may “tinker” with improving the incentive during the upcoming legislative session, an effort to clear more delinquent tax cases, DeCuir said. Discussions are also emerging about the use of installment agreements to pay individual income taxes owed to the state within the fiscal year.
The revenue department continues to look for greater tax compliance, has partnerships with private audit firms and has considered increasing the number of targeted audits related to complex corporate issues, he said.
Louisiana passed tax credit registry legislation in 2013 that allows the DOR to track each time transferable credits, including motion picture and historical tax credits, are exchanged to prevent fraud.
The department of revenue also has a new Office of Debt Recovery giving the DOR necessary tools to collect debt owed to other state agencies, including the ability to garnish refunds at the federal and state level.
The revenue department has two initiatives in its Criminal Investigation Division to address tax fraud. One is the Tax Refund Intercept Program, which reviews abnormal deductions on tax returns. The other is the LexisNexis Program, which requires taxpayers to take a quiz to identify certain aspects about themselves and their returns so the DOR can ensure that refunds are going to the correct taxpayers and can crack down on fraudulent refunds, according to DeCuir.
“Last year, we were able to prevent $3.8 million in fraudulent refunds through these initiatives,” DeCuir said.
The DOR also has a partnership with the Louisiana attorney general in which two investigators from the DOR can do more thorough interviews with taxpayers suspected of engaging in fraud as well as make arrests, he said.
Revenue officials are considering other data analytic projects, including targeted audits of complex transactions and transfer pricing.
“We want to take a look at laws on the books to make sure taxpayers have clear and concise guidance in this arena and identify those companies that engage in transfer pricing to make sure they follow appropriate guidelines,” DeCuir said.
The department is considering adding new revenue agents in 2014 and is looking at ways to be more efficient, including partnerships with the private sector and universities and adding more auditors with skill sets in complex tax transactions, he said.
Maine Revenue Services is focusing on technology in 2014 to drive new compliance goals, Executive Director Jerome Gerard said Feb. 18.
“We try to have a comprehensive across-the-board enforcement approach, though we're not hitting every taxpayer by any stretch,’’ Gerard said.
The MRS created a data warehouse four years ago that it relies on to ferret out individual, corporate and employer nonfilers. Maine's data warehouse contains the federal and state returns of all taxpayers for the past 10 years, plus statistical information such as birth and death records, motor vehicle registrations, voting information and municipal records. If someone files a suspicious return, the state flags it and uses the data warehouse to help determine if the return is accurate.
A return seeking a large refund is an automatic trigger for scrutiny, Gerard said. Small refunds are spot audited, he said.
The MRS has signed a contract with Revenue Solutions Inc. of Pembroke, Mass., to revamp the MRS website so that any taxpayer can file any type of return, Gerard said. Taxpayers will be able to set up their own payment plans online. Taxpayers also will be able to see five years of personal or business tax data if they choose.
“Our number one goal we've had for 10 years is to digitize as many internal and external transactions as possible,’’ Gerard said.
The state began digitizing tax functions about 10 years ago to allow for Internet filing and digital refunds. Eighty percent of individual state tax transactions currently happen electronically. Digitization allows for fewer temporary workers during tax season and less reliance on overtime by MRS employees.
“In five years' time we won't hire any temp workers,’’ Gerard said.
Massachusetts Revenue Commissioner Amy Pitter said Feb. 14 that the Department of Revenue has put in place a number of filters that are able to kick out returns that appear suspicious and subject them to further review in an effort to prevent fraud.
Use of this system allowed the state to stop $20 million in refund fraud in 2013, she said.
The DOR is now piloting an additional identity-based component to this fraud detection system through which LexisNexis uses publicly available information to detect suspicious use of personally identifiable information in a tax return. If the system detects potential misuse of data, it can send out a question based on publicly available information that only the taxpayer would be able to answer, such as what type of vehicle he or she drove in 2004. If the taxpayer responds correctly, the refund will go out. If not, it will be marked for further investigation.
In another effort to combat fraud, Pitter said the agency obtained legislative approval in 2013 to begin getting third-party reports from organizations such as liquor wholesalers. Those reports will allow the state to compare what a retailer purchased from a wholesaler versus what that retailer reports that it sold.
Massachusetts is also proceeding with its Genesis Project, which will use an already established commercial program to provide online filing capabilities that will also be mobile-ready, Pitter said.
She said the agency has taken steps to address the “silver tsunami” the DOR is facing as approximately 100 staffers retire each year. Pitter said the DOR has established a joint venture with Bunker Hill Community College in which the state identified a series of courses students can complete that will lead to either an associate's degree or a certificate in Massachusetts taxation.
In addition to the identified classes, the DOR is teaching a class on Massachusetts tax law and audit procedures. Students who maintain a B average in and complete the class are offered an internship at the agency, which might ultimately lead to a job at the DOR. The agency currently has its first set of eight interns, and Pitter said the program looks extremely promising.
The agency has also begun offering a new process as part of its menu of dispute resolution options, she said. The new offering is known as expedited settlement and is used in situations where an audit agent and the taxpayer--meeting without the use of a mediator--have reached an agreement and want an independent review of that agreement.
This process is less formal than mediation and probably has a smaller dollar amount, but has all the same benefits of collaboration, discussion and reaching a settlement together, Pitter said.
With respect to corporate taxes, Pitter said the agency is planning to issue draft guidance shortly on market-based sourcing apportionment for multistate corporations.
Finally, the agency has rolled out a project in which other state agencies that need information from the DOR for their real-time approval processes can get the necessary response without the DOR having to release a great deal of data. Pitter said this allows for real-time action, while protecting the privacy of the data.
The Michigan Treasury is focusing on “customer service,” Deputy Treasurer Glenn White said Feb. 12.
Michigan has changed its business tax three times in the past five years--in 2008, the Single Business Tax was replaced with the hybrid Michigan Business Tax, which in turn was replaced at the start of 2012 with a flat-rate corporate income tax--and “that's been a challenge,” he said.
The new corporate income tax is “a lot simpler” than its predecessors, and “when we digest all these changes in a few years, we'll be able to achieve some of the efficiencies” it promises, he said, “but we're not there yet.”
“Our push is really trying to update our technology base and be able to better operate in the contemporary environment,” White said. Online filing of business taxes, to be followed in early 2015 by sales and use taxes, will help boost compliance and improve revenue collection, he said.
Business tax watchers are awaiting a ruling from the Michigan Supreme Court in a dispute over apportionment requirements between IBM Corp. and the Michigan Treasury (Int'l Bus. Machs. Corp. v. Mich. Dep't of Treasury, Mich., No. 146440 (oral arguments 1/17/14)).
At issue is whether the Michigan Legislature intended to override the Multistate Tax Compact when it enacted the Michigan Business Tax Act, which includes a single sales factor apportionment formula, and whether the MTC should take precedence over state law if multistate companies elect to use its three-factor apportionment formula.
IBM used the three-factor formula included in the MTC when calculating its 2008 taxes. The Treasury contends the company should have used the sales-weighted formula required by the MBT.
The Michigan Court of Appeals in 2012 affirmed a lower court's finding that the state Legislature intended to override the option of using the MTC formula when it enacted the Michigan Business Tax. IBM argues that the Legislature didn't disallow alternate apportionment when it enacted the tax, and that the MTC is a binding interstate agreement that takes precedence over state statutes.
“It's hard to say” when the court will rule, said Lynn Gandhi, a partner with Honigman Miller Schwartz & Cohn LLP in Detroit. “We would hope to have something sooner, rather than later, but it's safe to say we do anticipate something prior to the end of the current session” in July, she said Feb 24. Gandhi represents the Council on State Taxation, which filed an amicus brief in support of IBM.
The MBT has since been replaced by a corporate income tax, and state law has been amended to provide that apportionment election isn't available as of January 2011.
By Mark Wolski
Minnesota's Department of Revenue plans to abide by Gov. Mark Dayton's (DFL) push for an “unsession’’ in the Legislature this year, perusing state statutes to eliminate those that are outdated and irrelevant.
At the same time, the department plans to work to eliminate excess verbiage in the state's tax laws, Revenue Commissioner Myron Frans said Feb. 13.
If state budget forecasts hold, Frans said the department will also work to repeal three business-to-business taxes enacted by the 2013 Legislature.
Those are the department's priorities, he said, each dependent on how willing the Legislature is to go along with the unsession and how much of a budget surplus the state has.
According to Frans, the unsession dovetails nicely with the department's efforts in the past year to clarify tax rules and language. He said the 2013 omnibus tax bill allowed the department to hold telecommunication conferences explaining tax changes and clarifying tax language. Doing so, he said, aids tax compliance and reduces call times to the department.
The unsession's clarifications may be the only tax compliance initiative put into place this year, Frans said. He said the Legislature was focused on compliance initiatives for taxation in the past few years, giving the department more money for additional auditors and increased enforcement. While each dollar spent on enforcement translated into $6 in additional taxes collected, he said, years of compliance actions have likely captured all the “low-hanging fruit.’’
Frans said the department wasn't provided any additional money for enforcement in 2013 and it won't ask for any more for enforcement in 2014. Instead, he said, the department will take stock of its efforts. It is possible, he said, that the department may ask for added compliance funding in 2015.
For 2014, he said, the department will continue to use new analytical methods for identifying fraud and tax avoidance.
Frans said the last budget forecast for Minnesota predicted it would end the current biennium with a surplus of $825 million. That is a far cry from last session, he said, when the state was facing a budget deficit.
At that time, Frans said, Minnesota enacted the three business-to-business taxes. It imposed the state's sales tax on labor service charges for the repair and maintenance of business equipment, as well as on purchases of telecommunications equipment by telecommunications companies. Both taxes went into effect July 1, 2013. The Legislature also made storage and warehousing services of business-related goods subject to the sales tax, but its implementation date is April 1.
If the state's Feb. 28 budget forecast continues to show a healthy budget surplus, Frans said, the governor and his department will advocate that the three taxes be repealed. He said if the Legislature can pass an early tax bill, the warehousing tax could be repealed before it takes effect.
Another advantage of an early tax bill, Frans said, is that it could include some federal tax conformity changes, such as eliminating the marriage penalty. Making the conformity changes early would allow taxpayers to take advantage of conformity when filing for 2014, he said.
He added that if the budget forecast still looks rosy, the Legislature may want to examine the state's gift and estate taxes. The gift tax was enacted in 2013 and allows for a 10 percent tax on the taxable amount of a gift made by an individual. While it includes a $1 million exemption, Frans said the tax is out of step with other states. Only one other state has a gift tax, he said.
The state should also look at expanding the exclusion on the estate tax, he said. It is currently $1 million and should be increased to $2 million, he said.
Closing the tax gap is a priority for Nevada's Department of Taxation, Sumiko Maser, the department's deputy executive director of administrative services, said Feb. 13.
During the 2013 Nevada legislative session, the department was provided five new compliance staffers to increase collections and audit penetration. The department also does a lot of investigative work by officers in the field, Maser said.
As for fraud detection and data analytic projects, Maser said the department emphasizes database comparisons with federal and other state and local agencies that have permitting requirements. Recently, Maser said, the department requested information from the IRS regarding “responsible person’’ declarations on Forms SS-4, Application for Employer Identification Number (EIN). Maser added it is too soon to measure how productive this will be.
An area in which the department must respond to new policy from the governor and Legislature concerns medical marijuana. The 2013 session enacted a measure that allows for the cultivation, sale and use of medical marijuana. Maser said this is “a completely new area for us, even deciding what marijuana-infused products are sales-taxable.’’
Maser said the department is also concerned about tax noncompliance following high-ticket purchases. Those range from vessels to vehicles to aircraft, which are purchased in states with no sales tax and brought into Nevada for use. The department keeps a close watch on such purchases originating in Montana, Maser said.
Nevada's tax code administration issues center on the state sales tax, as the state has no income tax. But Maser said that a margins tax will be on the November 2014 election ballot, and will be closely watched. The department “will be prepared to administer this tax, should it pass,’’ Maser said.
The proposed 2 percent margin tax to be levied on business revenue would apply to companies that earn $1 million or more. It is estimated that the tax, if approved, would raise between $800,000 and $1 million in new revenue annually to support K-12 public education in the state.
As for new tax filing strategies, such as mobile apps and electronic filing, Maser said the department “continues to educate and move taxpayers to our online filing system and away from paper filing. We are moving toward universal online filling.’’
The New Mexico Taxation and Revenue Department is placing increased emphasis in 2014 on combating suspicious filers, and on fraudulently prepared return cases, department Secretary Demesia Padilla said Feb. 12.
Padilla said a 2013 pilot program against suspicious filers proved so successful that a full-fledged unit was formed for 2014. The suspicious filers program, she said, “has really paid off. We're stopping the money before going out the door. And the prepared cases have also paid off because we have been able to get indictments.’’
In 2013, with just two staffers working part time on the effort, the suspicious filers pilot halted $6 million from going out the front door, she said. The program is staffed with eight persons in 2014. “We are hoping that this will get a great rate of return on our investment,’’ Padilla said.
She noted that suspicious filers don't just work seasonally during tax preparation time, but year-round.
“We've determined that they are always out there, just looking for that window of opportunity. So having a complete unit devoted to this and operating full time--I think that will go a long way,’’ she said.
Padilla said her department participates in a weekly conference call with counterparts in other states, to share information and to learn about the latest fraudulent schemes.
Another enforcement step the department has taken, she said, is to upgrade tax-accounting software, and introduce new databases “so that we can do better data analytics’’ to root out suspected fraud.
In addition, she said, the department is addressing retention of auditors. A recent reclassification provides a career ladder for the department's auditors, she said. The state also recently filled about 30 of approximately 60 vacancies in auditor positions.
The main priorities for the New York State Department of Taxation and Finance in 2014 include implementation of Gov. Andrew Cuomo's (D) broad tax cut proposals--if enacted, continued use of technology and data analytics to improve enforcement and a new initiative to link tax compliance with access to “privileges’’ such as a driver's license, state Tax Commissioner Thomas Mattox said Feb. 27.
Tax cuts and simplification have taken center stage in Albany in 2014 as a result of the $2 billion tax cut plan proposed by Cuomo in his 2014-15 budget and two blue ribbon commissions that issued reports late in 2013. The proposed budget, which covers the fiscal year that begins April 1, includes reductions in property, business and estate taxes.
One of the new enforcement initiatives contained in the budget would create a professional and business license clearance process that denies professional and business licenses to applicants who have certain outstanding tax liabilities. The proposal builds on a successful effort implemented by the state in 2013 to suspend the driver's licenses of delinquent taxpayers.
“There's a growing realization that, in the interest of fairness and tax administration, it's appropriate to link your access to privileges such as a driver's license with meeting your obligations as a New York taxpayer,’’ Mattox said.
Mattox said the state has raised almost $50 million in previously uncollected taxes as a result of the driver's license program, but it has also been successful “in terms of sending a message around fairness.’’
“The enforcement space continues to focus on fairness around meeting obligations,’’ Mattox said. “More broadly, we continue to look for ways, particularly as it relates to creating a level playing field for businesses, to ensure” that the department is “focused on making sure that folks are doing the right thing and meeting their obligations.’’
Mattox said the state will continue to use data analytics to help with enforcement, particularly as it relates to analyzing and matching third-party data such as credit card information with tax returns. A 2010 state law modeled after Section 6050W of the Internal Revenue Code requires financial institutions and other organizations that handle payment transactions to file annual information returns.
''Data analytics continues to be an area of focus,’’ he said. “I think it's going to be more and better. The horizon continues to expand” in terms of how agencies use data, particularly third-party data, to confirm the accuracy of representations made on returns, he said.
This state is also stepping up its e-filing program. Mattox said 85 percent of taxpayers can now file their personal income tax returns electronically for free, leading to fewer errors and quicker refunds.
The department is also focusing on “how we can support taxpayers,’’ Mattox said, through increased outreach and education. “New York state has one of the most complicated state level tax codes in the country, so compliance is a challenge.’’
The North Carolina Department of Revenue will be focusing much of its efforts on administering sweeping changes to its tax code, which require new guidance, forms and other documents, Thomas Beam, a spokesman for the agency, said Feb. 28.
In July 2013, Gov. Pat McCrory (R) signed sweeping legislation (H.B. 998) that, among other things, lowered the corporate income tax rate and changed the tiered individual income tax structure into a single flat rate of 5.8 percent. According to Beam, those changes and other revisions to the code will require modification of related tax forms, tables and published guidance.
North Carolina also recently stopped pursuing the implementation of a new tax information processing system, which had been under development for the past several years. The Tax Information Management System (TIMS), provided by CGI, was to replace a legacy processing system and allow for improved information management and auditing.
According to Beam, through the TIMS system, his agency was able to identify and collect more than $300 million in unpaid taxes. The agency “has begun the process of determining what is the best path forward with respect to replacing our tax processing system,” he said.
Regarding areas of noncompliance that have the agency's attention, Beam said staff is “continuing to develop new ways to monitor 'cash-heavy' businesses in a fair and impartial manner.”
According to Beam, the revenue agency also is working on a plan to require compliance checks for businesses seeking to get or renew a license to sell alcoholic beverages. The revenue agency estimates that such businesses owe $46 million in unpaid taxes.
The North Carolina Department of Revenue doesn't plan to request any additional resources or personnel for collection efforts during the upcoming fiscal year, Beam said.
By Mark Wolski
North Dakota revenue officials have spent little time worrying about the tax gap in light of a windfall of tax revenues generated by the oil boom in the western part of the state.
Sales tax revenue for the state have exceeded projections by as much as 30 percent to 60 percent during these boom years, said Kathy Strombeck, research analyst for the North Dakota Tax Department. With income tax revenue also up, the state has been able to reduce individual and corporate income tax rates in the past couple of legislative sessions and buy down local property tax rates, she said.
However, she said Feb. 21, the revenue increases occurred as the state was getting its arms around the oil boom. With the boom, she said, oil companies had to build pipelines and the pipelines were taxable, generating sales tax revenue. At the same time, she said, developers built homes for oil workers. The construction was also taxable, generating more sales tax revenue.
With housing and pipeline building both slowing, sales tax revenue should start to slow as well, Strombeck said. While the boom is still ensuring that tax revenue will exceed projections, the amount of the surplus may not be as large, she said.
Strombeck added that one problem North Dakota is facing with the boom could again lead to increased tax revenue. Because of a lack of natural gas pipelines, many of the oil wells in the Bakken region are now flaring, she said, burning the gas rather than transporting it for energy use. When oil producers capture the gas, the construction necessary for them to do so will likely spur sales tax revenue again, she said.
Strombeck said the tax department has yet to discover any tax filing problems connected with the Bakken and the out-of-state workers there. While there will always be workers and companies that try to avoid paying taxes, she said the department doesn't yet see the issue as a significant problem.
Strombeck said the tax department's efforts in the coming year will be focused on the state's growth. She said it must deal with growth in the volume of registrations and returns and the compliance issues that go with both.
Further, she said, the tax department is in the process of implementing a new feature for online services, Taxpayer Access Point. She said TAP will be rolled out in the late summer and will provide income tax refund tracking, as well as the electronic filing of sales tax and withholding returns.
By Bebe Raupe
The Ohio Department of Taxation has been working to reduce tax gap losses with programs that screen for fraudulent claims, said Marjorie Kruse, deputy tax commissioner for compliance.
Over the past couple of years the ODT has implemented business rules in the tax processing system designed to combat fraud schemes the department has seen, such as people falsifying Form W-2 income statements and taking deductions or credits they aren't entitled to claim, Kruse said Feb. 19. She noted that there is also a program in place to screen filers who claim zero income.
An ongoing goal seeks to stop fraudulently claimed refunds before they get out the door. For the 2012 tax year, the ODT stopped more than $8.3 million in fraudulent refund claims, up from $5.1 million in the 2011 tax year, Kruse said.
Ohio is working with other state and federal agencies on sharing fraud investigation efforts and findings, Kruse said, as well as implementing prevention programs shown to be productive in other arenas. The state is working with the IRS to identify fraud involving identity theft, she said, and with the earned income tax credit when it involves parties residing in Ohio.
In 2014, Ohio will continue to expand e-filing to new taxes, Kruse said. She specifically noted that during the second half of the year, e-filing will be offered for motor fuel tax collections.
Mobile apps are being developed as informational tools, she said, but the ODT has no current plans to use apps for filing of tax returns.
Ohio doesn't plan to increase its number of field tax examiners in 2014, Kruse said, but the ODT may redirect some of its existing staff into this area and explore new technologies, particularly with regard to data mining and auditing strategies.
After enacting a $2.7 billion package of tax cuts in 2013 as part of the state's biennial budget (Am. Sub. H.B. 59), the Ohio General Assembly isn't expected to tackle any major tax overhaul in 2014.
The ODT is working to inform small business owners and entrepreneurs regarding their eligibility for a 50 percent tax deduction on their first $250,000 of business income, a key provision of the 2013 tax package. These deductions are retroactive to Jan. 1, 2013, according to an alert issued in January by Ohio Tax Commissioner Joseph Testa.
In addition, in 2014 the department is returning more than $40 million in overpaid business taxes and pursuing legislation to establish a permanent system of fair treatment for businesses that overpay, Testa said Feb. 12 when he delivered one of the first checks, for more than $7,000, to the owner of a garden center. Testa directed the change after learning that the department previously did nothing to alert business taxpayers when they paid too much tax.
“It's extremely important to return job creators any money that they're owed, so they can use it to grow, expand and put Ohioans to work,” he said.
Oregon's Department of Revenue is poised to provide taxpayers with a more uniform experience while simultaneously moving to shrink the tax gap through the acquisition of a new information technology system costing $89.9 million.
Spokesman Robert Estabrook on Feb. 12 called the GenTax integrated tax system and data warehouse a “commercial, off-the-shelf system. We're going to be state number 18 to implement it.” Over the next four years, all the department's tax programs will be rolled out on the new system, beginning in fall 2014 with corporate income tax and tobacco taxes, Estabrook said.
“One of the primary benefits we're going to be seeing at Revenue is automated work flows,” Jack Ogami, DOR Business Division administrator, said Feb. 12.
“Right now it's a paper-based system” involving a lot of individual decision making by department employees, Ogami said. “The new system is standardized and ensures a certain level of quality assurance.”
Ogami said among the most important steps toward encouraging tax compliance is “to make it easy for the people who choose to voluntarily comply.” GenTax will allow the department to offer many more online services for taxpayers.
“Some of the other GenTax states have already rolled this out and the application has received very good reviews from taxpayers in those states,” he said.
Asked how the department chose GenTax, Ogami said, “Our people identified a whole list of things that a new system would have to do. And out of the box, this system delivered 95 percent of those key requirements. It's in all these other states and their track record has been on time, on budget, all states.”
Joann Martin, administrator of the department's Personal Tax and Compliance Division, said Feb. 12 that among those key requirements are new analytics and fraud detection capabilities.
“We'll be able to bring more data into use in our decision making” for all tax programs on the system, including compliance, Martin said.
Asked for an example, Martin said, “We might use motor vehicle information; maybe determining lifestyle in accordance with what somebody is reporting. Currently we can go out and access case by case or instance by instance, but we can't bring in a lot of information and run analytics against it. So the new system will allow us to take information like that from an outside source.”
“Right now, we work more manually in getting the information and we work very hard to get it,” Martin said. “So in the future, this system will allow us to create business rules and to bring other data points into our system that we don't have ready access to right now, in order to enable us to identify areas where we need to focus our compliance efforts.”
Rhode Island Tax Administrator David M. Sullivan said the budget proposal released in early 2014 by Gov. Lincoln Chafee (D) contains several tools designed to allow state revenue officials to go after unpaid taxes.
While the state has never done a complete study of the tax gap, Sullivan said, revenue officials think the federal projection of 10 percent to 20 percent is “fairly accurate.”
Currently the state can block driver's license renewals for those individuals who have an outstanding tax liability. The governor has proposed allowing the state to block new registrations as well. “This starts the dialogue and gets the person to come to us,” Sullivan said Feb. 11.
Also proposed is legislation that would prohibit the use of zapper technology that allows retailers to remove transactions from their receipts to avoid paying taxes, and a small initiative to require state employees to be compliant with the personal income tax law as a condition of employment.
The budget also proposed hiring seven new agents for the tax division's compliance and collections area.
At the statewide level, the division is participating in a multi-agency task force established to study the misclassification of employees as independent contractors, an effort Sullivan said has tremendous support in both the business and labor communities.
In the area of technology, the state is in the first year of a three- to four-year project to revamp the state's integrated tax system and place it all on a single platform. Sullivan said the agency expects to go live with the first phase in June, through which a series of 36 mostly smaller taxes and fees will become eligible for online processing. He expects the revised system to begin handling personal income taxes in October 2015.
In the immediate future, Sullivan said his department will issue a report March 14 to the Rhode Island General Assembly regarding the potential impact on the administration and companies if the state were to switch its business corporation tax statute to a combined method of reporting. The tax division recently completed a two-year study under which corporations that are part of a unitary business were required to file a pro forma report for the combined groups.
Tennessee doesn't have a traditional income tax, and about two-thirds of the state revenue collected is sales and use taxes, Revenue Commissioner Richard Roberts said Feb. 20.
Therefore, he said, compliance efforts are focused on closing tax gaps in sales and use tax collections and other levies that bring in the bulk of state revenue.
Currently, the Tennessee Department of Revenue is focusing its compliance efforts on collecting sales taxes on the resale of tobacco products and beer by wholesalers to retailers through its Retail Accountability Program, according to Roberts.
In 2012, the Tennessee Legislature authorized the state revenue agency to require wholesalers of beer and tobacco products to file monthly electronic reports of their sales to retailers (Public Act No. 2012-657). Roberts said that his agency compares those reports with sales tax returns provided by retailers to identify variances in the amount of items they declared to have resold.
The first assessment of retailers found under the Retail Accountability Program to have underreported their sales of beer or tobacco occurred in April 2013. More than $7 million was assessed and collected during the balance of the first year, according to Roberts. Assessments, including those for penalties, average about $1 million per month at this time, he said.
Generally, Roberts said, a 10 percent negligence assessment is imposed, but the agency will begin to levy a 100 percent fraud penalty on certain repeat offenders. The compliance effort involves relatively simple data matching and didn't require additional staff, as personnel were shifted from other parts of the agency, he said.
The data matching effort doesn't replace traditional audits, Roberts said.
According to Roberts, Tennessee also is considering means to use data generated from the federal Form 1099-K, Payment Card and Third Party Network Transactions, required for reporting to the IRS income from online sales that are paid through a payment processor.
Tennessee receives that data through the IRS, and the agency hopes to be able to use the information in the future to help determine compliance with sales tax and possibly franchise, excise and other business tax reporting and remittance, said Kelly Cortesi, a spokeswoman for the state revenue agency.
During the current legislative session, Roberts said that his agency is backing “very limited” revisions to Tennessee tax law that include changing the way diesel used by railroads is taxed to the per-unit tax imposed on other modes of transportation. Railroads have sued the state for disparate treatment because their diesel fuel purchases currently are subject to the state's 7 percent sales tax.
Another pending bill supported by the administration (H.B. 1432, S.B. 1636) would prevent certain professionals from renewing their licenses if they don't remit the $400 annual privilege tax levied by the state, Roberts said. Accountants, attorneys, engineers and other occupations in Tennessee are subject to the tax, which is separate from fees imposed by licensing boards.
Roberts said there is “very good compliance overall” with remittance of that tax, but the proposed change would assist with collection efforts and is supported by licensing boards because of the time they and the agency currently spend on such delinquent taxpayers. Fiscal notes accompanying the legislation estimates that about $1.7 million in revenue would be collected from delinquent professionals during the next fiscal year if the bill is enacted.
Roberts said that because approximately 70 percent of tax filings with the agency are now done electronically, fewer processing personnel are now needed. The state revenue agency doesn't plan to seek additional staff or funding for new tax processing or data mining systems from the Legislature in 2014, he said.
With the biennial Texas Legislature out of session until January 2015, priorities of officials with the Texas Comptroller of Public Accounts over the next 10 months will center on implementing legislative changes authorized during the 2013 session.
Lawmakers approved and Gov. Rick Perry (R) signed into law several bills that changed certain tax policy, including H.B. 500 that cuts the base franchise tax rate from 1 percent to 0.975 percent in 2014, and 0.95 percent in 2015; H.B. 800 that provides a tax credit on purchases of research and development equipment; and H.B. 3572 that changed the way the state's mixed beverage tax is levied on distilled spirits, beer, ale and wine, among other tax measures.
Rules will be proposed by the Texas Comptroller, followed by a 30-day public comment period and publication in the Texas Register, Mike Reissig, associate deputy comptroller for tax and fiscal policy, said Feb. 24.
The agency then will respond to the comments and adopt the amended rules, Reissig said. If industry members have comments on proposed rules or policy, the comptroller's office will conduct roundtable discussions with potentially impacted taxpayers to discuss issues of concern.
Additionally, Reissig said he expects that the Texas comptroller's office will address at least several interim charges from the Legislature by year-end, including an update on rules adopted that implement new tax laws passed in the 2013 session.
Texas plans to hire some 60 revenue enforcement officers this year along with 40 auditors to implement some of the new regulations, Reissig said. The Texas comptroller's office serves the state by collecting more than 60 separate taxes, fees and assessments, including local sales taxes collected on behalf of more than 1,400 cities, counties and other local governments.
Like other states that rely mostly on sales taxes, Texas addresses the tax gap in several ways that include audits and site visits to ensure compliance, among other enforcement activities, Reissig said.
Texas is unique because it doesn't have a personal income tax and relies more heavily on oil and gas severance tax than other states, he said.
In FY 2014-2015, the comptroller projects the state will collect $208.1 billion in revenue from all state revenue sources including sales tax, motor vehicles sales and rental taxes, motor fuel taxes, franchise tax, cigarette and tobacco taxes, and alcoholic beverages taxes.
Noncompliance with state tax regulations isn't a significant problem, Reissig said, but he added it is an ongoing concern for enforcement officers and auditors.
Besides routinely auditing Fortune 500 companies in Texas, the Texas Comptroller of Public Accounts audits various industries and sizes of companies to address tax gap issues, which promotes voluntary compliance, Reissig said.
Texas uses analytics to conduct more efficient audits of convenience stores and other sellers of goods and to select the best candidates to undergo an audit.
In 2007, the Legislature approved a bill (H.B. 11) that dramatically increased the comptroller's ability to identify, audit, and when appropriate, prosecute retailers who collect sales tax but fail to remit the proper amount to the state. The bill amended the Texas Alcoholic Beverage Code and the Tax Code to require distributors and wholesalers of ale, beer, wine, cigarettes, cigars and tobacco products to Texas retailers to report those sales monthly to the comptroller's office.
This allows the comptroller to compare the purchases that retailers have made of these products with the sales that retailers are required to report, and detect discrepancies and recoup any revenue loss to the state.
“In enforcement, we also use analytics to determine the best use of our time,” Reissig said. Revenue agents look at delinquent accounts, figure out which ones will “self cure” without the need to intervene, and determine which ones the agency should consider a target for collection resources.
Texas revenue officials also offer resources to taxpayers through seminars, the Web and field offices so that businesses selling taxable goods will have as many opportunities as possible to become compliant with tax regulations, Reissig said.
By Tripp Baltz
Utah recently announced a change in policy that will allow same-sex married couples to file their state income tax returns jointly, R. Bruce Johnson, chair of the Utah State Tax Commission, said Feb. 11.
In addition, the commission is “not too optimistic” the U.S. Court of Appeals for the Tenth Circuit in Denver will rule on an appeal of a state court decision striking down as unconstitutional Utah's amendment prohibiting recognition of same-sex marriages.
As a result, for 2014, there will probably be no change in the tax policy or the commission's guidance that same-sex couples married prior to Dec. 31, 2013, may file their returns jointly, he said.
The commission is continuing its focus on a January 2013 initiative launched by Utah Gov. Gary R. Herbert (R) for state agencies to improve their overall efficiency by 25 percent either by improving quality or reducing costs, Johnson said.
“I am asking every division--motor vehicle, property tax, auditing, processing--to make improvements,” he said. “Processing has already made improvements in terms of getting to returns.”
As part of the efficiency initiative, the average time to complete income tax audits has decreased, and the cost of collecting has fallen from 4 cents per dollar to 2 cents per dollar, said Charlie Roberts, spokesman for the commission.
Additionally, the commission, the chief tax policy agency in Utah, has recently cut its workforce by 150 employees through attrition, Roberts said.
To address the tax gap, the Utah Legislature passed a bill (H.B. 300) in 2013 allowing remote sellers to retain 18 percent of the amount they would otherwise remit to the commission. Johnson said the aim of the bill, which took effect Jan. 1, 2014, was for the commission to at least get some revenue from remote sales.
“Eighty-two percent of something is better than 100 percent of nothing,” he said. The bill's fiscal note estimated it would generate $18 million in revenue for the state's general fund in FY 2014. Local sales taxes would increase by $13.1 million in FY 2014, the note said.
Meanwhile, individuals not currently remitting sales and use taxes on certain purchases could see an increase in costs of about 6.7 percent, the note said.
The commission also has boosted its suspicious filer program recently, Johnson said.
“We support e-filing, but with it, we have seen increases in bogus returns,” he said. “We have stepped up our fraudulent filing program as a result.”
The commission supports the governor's budget, which didn't include any funding for new agents, Johnson said. The commission is in the final stages of a multiyear software modernization program, installing packaged software provided by Fast Enterprises. First to modernize was the individual income tax division, followed by sales and use taxes, motor vehicle, fuel, then miscellaneous. The program also upgraded the state's taxpayer access portal, he said.
Overall, the software upgrade “allowed us to do a much better job of data matching,” he said. “We identified a lot of problems we didn't know about. It helps the tax gap, because there are fewer returns with errors now.”
The taxpayer portal enables businesses to see their tax payments being made in real time, Johnson said. The upgrade also is helping make the state's tax system more secure, he said.
The commission is closely following a bill (S.B. 19) that would repeal a provision of the Utah Constitution requiring that no more than two members of the tax commission be from the same political party, Johnson said.
The Utah House gave final approval to the bill Feb. 26 and sent it to the governor.
Johnson said he thinks the purpose of the legislation is to ensure the state can find tax practitioners with solid qualifications to serve as commissioners.
The constitutional provision was originally conceived to prevent any risk of the governor or the state Legislature exercising undue influence on the commission, an issue that may not be a problem in the present, Johnson said. “We don't get attempts by the governor to influence the process,” he said.
Vermont recently launched a major four-year project to create new processing systems to make it easier for taxpayers to pay and for the Vermont Department of Taxes to spot when they don't, Mary Peterson, commissioner of the Vermont Department of Taxes, said Feb. 21.
Currently, electronic filing is limited, she said. “We don't have corporate online filing. We do allow for some payments by individuals online but it's pretty funky,’’ she said.
The new system will be a comprehensive one, Peterson said. “Right now we send a letter to people and they say they never received it,’’ she said.
Since 2011 the state has used a data warehouse to identify nonfilers and fraud. Vermont expects $16 million in additional tax revenue for 2013 as a result of the data warehouse. The state is seeing more refund fraud and catching more of it, she said.
The state also hired three outreach specialists to educate people on the importance of filing and paying their taxes, Peterson said.
The state's new pilot program, “Know What You Owe,’’ is a self-auditing program aimed at businesses that encourages them to pay sales and use tax. The online portal allows businesses to go back three years and estimate what they owe. “We haven't had a lot of participation but it's received a lot of attention so it has served an educational purpose,’’ Peterson said.
The program began Aug. 1, 2013, and runs through May 1, Peterson said.
The Washington Department of Revenue is gearing up to collect $51 million in revenue for the 2015-17 biennium from taxes on the newly legalized production and sale of recreational marijuana.
The revenue forecast released Feb. 19 by the state Office of Financial Management is a sharp revision from an earlier OFM estimate that approached $2 billion over five years.
Department of Revenue Director Carol K. Nelson said Feb. 11 that her agency is working closely with the state Liquor Control Board--which is tasked with the implementation and oversight of the new marijuana market--on protocols to collect the tax revenue.
“We have been working collaboratively with the Liquor Control Board to help them prepare to collect excise taxes on recreational marijuana,” Nelson said.
An excise tax of 25 percent of the selling price will be imposed on each wholesale and retail sale beginning with the grower and including transactions by processors and retailers. The state business and occupation tax also applies at a rate of 0.471 percent on retailers and 0.484 percent on wholesalers.
General state and local sales and use taxes also apply to retail sales.
Because marijuana remains illegal under federal law, banks have refused to take on accounts from marijuana businesses.
“Currently, because of limitations of banking laws, it is pretty much a cash-only type of business,” Nelson said. “So we are gearing up to increase our capacity to collect cash at our field offices.”
The department issued a request for proposal Feb. 7 for replacement of its tax and licensing IT system. It is a $70 million project that over six years will acquire and implement a commercial, off-the-shelf program to replace the existing core tax system and licensing programs that Nelson called “quite old and very difficult to manage.”
“With the new system, we hope to be far more efficient with much greater quality and the ability to be flexible,” Nelson said.
Richard Chandler, secretary of the Wisconsin Department of Revenue, said fraud prevention, new collection efficiencies and reducing the tax burden on individual and corporate taxpayers will be the major themes for his department during 2014.
Chandler said Feb. 26 that the fraud prevention and collection efficiency efforts are occurring with new resources from the state. Chandler said WDOR is working at the front end of a new antifraud and efficiency initiative supported by the state Legislature in 2013. Wisconsin lawmakers allocated $14 million in new budget authority to WDOR for this purpose in the 2013-15 biennial budget.
The Legislature specifically directed WDOR to devote the resources to three priorities, including reducing fraudulent earned income tax credit claims and fraudulent homestead credit claims, improving efficiency with respect to a backlog of federal adjustment notices and expanding the agency's “intensive collections effort’’ aimed at delinquent taxpayers.
Chandler said the funding has permitted WDOR to hire 67 additional agents, auditors and information specialists. WDOR is projecting the effort will trigger gross returns of $90 million, which represents additional collections and fraudulent claims prevented.
“We made the case that all of these represented a very good return on investment,’’ Chandler said.
Within the fraud prevention theme, Chandler pointed to Wisconsin's new identity verification program launched this filing season. The program hopes to halt refund frauds driven by identity theft. Under the program, WDOR will look for suspicious filing trends and then challenge filers to take an identity verification quiz. Filers failing the quiz will be denied the requested refund.
“We implemented it in late January and we think it is going pretty well,’’ he said. “There were a number of cases where people were asked to take the quiz and they didn't take it, which indicates they were probably filing the return fraudulently.’’
On the tax burden theme, Chandler said he is responding to a directive from Gov. Scott Walker (R), who called for a broad examination of the state tax code in his State of the State address. Walker also made broad comments suggesting dramatic cuts or even the elimination of the income tax, and replacing the revenues with increases to the sales tax. No specific proposals, however, have been presented.
As part of the tax code reassessment, Walker asked Chandler and Lt. Gov. Rebecca Kleefisch (R) to conduct listening sessions around the state. Chandler said three themes have emerged from the sessions--reducing the individual income tax burden, tax simplification and reducing the property tax burden.
Chandler said 12 sessions have been conducted and at least three more are scheduled. He said the process wouldn't culminate in a set of recommendations, but data gathered through the process will inform the Walker administration's long-term plans for revising the tax code.
“I don't know if we are going to do any kind of formal report at the end of this,’’ he said. “ But all of the information will help provide a basis for recommending tax changes in the future.’’
By Tripp Baltz
Wyoming lawmakers have approved changes to state law that would reduce interest rates at the local level for mineral tax audits, Dan Noble, director of the state Department of Revenue, said Feb. 21.
A bill (H.B. 22) approved by the Wyoming House and Senate in early March would drop the interest rate for audits at the local level from the current 18 percent to 12 percent, Noble said. The rate applies to ad valorem mineral taxes, he said.
“The industry approached us and said they felt 18 percent was a pretty excessive rate, given the amount of time it takes audits to get done,” he said. “It's a pretty big burden on taxpayers.”
To address tax gap issues in Wyoming, the department has been engaged in efforts to educate taxpayers as to their tax liability, especially in areas of sales and use taxes, Noble said. “That's where we have the largest exposure. There are some 27,000 vendors out there with varying business models, and we want to make sure they understand how sales taxes affect them.”
The department also has been conducting seminars for taxpayers in the oil and gas, retail, lodging and restaurant industries, in addition to charitable organizations, as part of its education and outreach efforts, he said. “We feel we can make a bigger impact on taxpayers if they are aware of their liability,” he said.
Compliance issues are somewhat easier to confront in the area of mineral taxes, Noble said, given there are about 25 or 30 entities that comprise the majority of those taxed. However, the department has only 18 auditors and there are no FY 2014 budget requests for additional agents or employees, he said.
In its strategic plan the department has a goal of achieving 95 percent compliance overall, Noble said. “We're in the high 90s,” he said.
The department recently completed a “reconstruction” of its sales and use and mineral tax technology systems, he said. “Mineral is approaching its one-year anniversary, and sales and use is approaching three years,” he said.
By Tripp Baltz
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