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Crowell & Moring's Jeremy Abrams meets regularly with state tax commissioners and their counsel to bring Bloomberg BNA's readers candid and timely observations from the country's top state tax decision-makers. In this column, Indiana Commissioner of Revenue Adam Krupp discusses formation of a tax advisory council, tax reform, Indiana's effort to “Kill Quill,” and the need to treat every taxpayer as a valued customer.
Adam Krupp, interview by Jeremy Abrams
Adam Krupp is the Indiana Commissioner of Revenue. Jeremy Abrams is an attorney with Crowell & Moring LLP and can be reached at firstname.lastname@example.org. For more information about Crowell's state tax practice, visit www.crowell.com/statetax.
It's great to see you again, Adam. You have an impressive background – clerkship, private practice, deputy director for Indiana's Division of Family Resources, general counsel for the Bureau of Motor Vehicles – but you're probably the first former high school teacher featured in this column! You also served as special counsel to former Governor Mike Pence, where you focused on agency compliance with Indiana's Access to Public Records Acts. Tell us about that experience.
Indiana realized when Governor Pence was selected for the ticket that within days if not hours the public records requests would come flying in, and they did. Public records requests typically came from local media or individuals curious about specific transactions but the next thing you knew we had hundreds of requests from Politico, Washington Post, New York Times, Opposition Research, you name it. So the governor's office decided quickly they needed someone to help just shepherding these requests. And these are the type of requests that of course have a political nature to them so they were sensitive in that you still need to disclose the records but let's make sure we know what's getting put out there. So they identified me as someone who as general counsel with the Bureau of Motor Vehicles had experience with high profile matters, and they said, let's see if he'll help out with this. So I was happy to serve Governor Pence in that capacity, in addition to my full time duties.
You recently announced the formation of a tax advisory council. What's that all about?
Indiana's Department of Revenue in terms of its relationship with taxpayers, tax practitioners, stakeholders, business leaders, you name it, has had a reputation of being standoffish or difficult to work with. I said well the only way to truly break that down and truly gauge the voice of the customer – that's what taxpayers are, customers – we need an advisory council. We issued a press release to open that up. The deadline is December 1. I will be appointing 12 people to a two year term. It was important for me to open it up to anyone – lawyers, CPAs, business owners, or just interested Hoosiers – because there are people out there that care about good government and get frustrated by the process, in particular with us because of the millions of tax returns that we process. Let's make sure that anybody that has ideas, concerns, complaints - let's make sure they have an opportunity to be on this. We've seen 4 or 5 applications so far. My hope is that there are more than 12 so I have some decisions to make! But the key is to get a variety of interested folks from all over the state. The number 1 priority for me is that this cannot be just an Indianapolis thing. We're located in Indianapolis, we'll only meet quarterly, we have conference call bridges for a reason. We're really hoping to get all corners of the state. Two purposes really, dual purposes there: I want to hear from them, we need to hear from them, how do we improve? But also, we want to show people what it is we do every day behind the scenes - not just process tax returns or audit or collect we want to show the work we do on fraud prevention, identity theft protection. I said for the first meeting in January, we'll take them on a tour of our return processing center. It looks like a warehouse but behind those doors mail trucks back up with tens of thousands of envelopes, employees constantly processing. I think if people see that, and put faces and names to what's happening at the Department of Revenue, my hope is that there will be less anger, less frustration. Let's remember the people processing these transactions are neighbors, friends, and family members, just like us. Sometimes we forget that.
Are you open to having representatives from out-of-state companies serve on the council?
Yeah, that's a great question. We are going to reserve a couple slots for people outside Indiana. These people and companies do a lot of business and contribute a lot of revenue to Indiana so they go through the same processes and have similar issues, so the customer includes folks outside of Indiana too. I want to be careful about having it dominated too much by large corporations outside the state but we will certainly reserve a couple slots for them.
[Editor's note: Click here http://www.in.gov/dor/5739.htm for information on how to apply to participate on the tax advisory council.]
President Trump recently praised Vice President Pence for his tax reform work in Indiana, and said that Indiana should serve as a model for federal tax reform. Can you describe some of those reforms and their impact on Indiana's revenue?
The corporate tax rate in Indiana just 5 years ago was 8 and a half percent. It's down to 6 and a quarter and legislatively it's a wind down process. By 2021 it will be less than 5 percent. So there's a wind down in the corporate tax rate. Under Governor Pence in 2013 they repealed the inheritance tax. President trump has talked about that, specifically when he came to Indianapolis. We don't stack local sales tax on top of our state tax rate at 7 percent. Individual income tax has been slashed. I know some other states are probably a little better but a little less than 3 and a quarter percent, and Governor Pence cut that by 5 percent, it's one of first things he did as Governor. These numbers keep going down in Indiana so we always get the question ‘aren't you in a deficit?’ and the answer is no. ‘Well how do you do that?’ Indiana very fortunately has quite a surplus, so always a balanced budget but that's all the way down to agency level. So as a state, if you're going to have a balanced budget and you're going to spend properly with taxpayer dollars, we do that at each agency. So each agency is allocated their biannual budget, they get their annual allocation, but at the agency level we're required to then create a reversion that goes back into state general fund. So if our operating budget at DOR is $85 million, we know up front that roughly $2.5 to $2.7 million of that is going to go back to the general fund. So we balance our budget internally and we operate our business with an amount minus that reversion so at the end of fiscal year all these agencies are putting money back in and very rarely do we find agencies that exceed what their appropriation is and have to ask for more. So in terms of how we operate as a state, we have the ability to lower some of these rates because we're not spending at rates that exceed what's coming in.
I understand you've taken some steps to reform the tax appeals process in Indiana, as well.
That's right. The philosophy of the past was “well, here's an audit assessment, here's the amount you owe, if you disagree with it we'll see you in court.” And so our tax court docket was overloaded with “controversies” that shouldn't be there. Shortly after I came in, I sent a letter out to the representatives of every pending case and I introduced myself and said I would like to open the door to the opportunity to reinitiate settlement conversations for every single case on the docket, and they were very receptive to that. We settled dozens of cases after that letter.
Overall, I think it's a great idea to have a tax court because you get that specialized attention on tax cases that are very complex. But we have one tax court judge, Judge Wentworth, and I wanted the court to have the opportunity to really focus on questions of policy, statutory interpretation, real cases in controversy, not a dispute between taxpayer and DOR where we say you owe $150 k and they say they owe $80 k. Those cases can always be settled. Why are we in court?
Speaking of tax litigation, you're in court now over Indiana's economic nexus bill, and Governor Holcomb commented publicly that it's time to revisit and overturn Quill. Is Indiana part of the “Kill Quill” movement?
HB 1129 was modeled after South Dakota's legislation, absolutely. Indiana's general assembly took the opportunity to make their intentions known, as you'll see some of the language towards the end of the bill that talks about how the tax base is eroding due to remote sellers. Traditional brick and morters need to level the playing field. Governor Holcomb said that specifically in comments to public, about leveling the playing field. So the legislature authorized us to file a declaratory judgment action to start the process and in doing so that would stay enforcement of the legislation. Trade associations came in the door first, they filed suit. In doing so, that did not stay enforcement of the legislation because 1129 specifically states if the DOR were to do that. So then we came back and the governor authorized us to file a declaratory judgment ourselves. But in that trade association suit of course I am named in my official capacity; the governor is named as well, so we are very active in it. [Am.Catalog Mailers Ass'n, et al. v. Krupp, et. al., No. 49D01-1706-PL-025964 (Ind., Marion Super. Ct., filed June 30, 2017)]
We are paying attention to what's going on in South Dakota. I listened to oral arguments to try to hear what some of the arguments are going to be just as a litigator. We are working with the AG's office, we want to make Indiana's intentions known that we support the effort to overturn Quill. In terms of where we are now, it's stayed. We're going to look at some discovery. One of the criticisms of the way the process played out in South Dakota which came out in oral argument was that perhaps it wasn't ripe, there was no discovery. Lets tell you we want this changed and we're just using you as a runway to get to the Supreme Court. Not necessarily the approach I would've taken. So from Indiana's perspective we'd actually like to develop that case, we'd like to do some discovery, we'd like to bring in some experts, and not rely on what a casual observer thinks is happening but let's get some expert testimony and lets' get some data that shows what's actually happening in the economy. Times have changed. The law was wrong. It only applied – we're talking about a law that applied before the internet was a thing.
Another thing that didn't exist in 1992 was the cloud. Software as a Service (“SaaS”), a form of cloud computing, is a hot topic in Indiana right now. How is SaaS treated for sales tax purposes?
It's taxable, under certain circumstances, in Indiana. The question is - every product is different. Some states don't tax it. Some say yes and it's across the board. Indiana is sort of in the middle, and it's in this gray are. Tech leaders and CEOs have actually been in my office and asked if nothing else please provide some clarity on this issue, please work with the general assembly. So we issued an information bulletin [Sales Tax Information Bulletin #8] that explains software as a service, and what is and is not taxable, and there are multiple scenarios discussed. And you read those, and you still have trouble determining whether or not a particular product is or isn't taxable. So what I've advised folks in the tech community to do is to request a revenue ruling. We'll consider the facts and issue a ruling to a particular company, and then that company will know whether or not their product will be taxed. But it's complicated. That is such an innovate, cutting edge market; its always moving faster than the law. The laws cannot keep up with technology in terms of products, everything going into the cloud. We've got regulations that are outdated. I think we're gonna take a look at that, our general assembly, our governor, folks are talking about it. We're gonna try to see what we can do at a minimum to provide some clarity, because the information bulletin is out there and we use it but from my perspective an information bulletin should not generate more questions and that's what it does now.
Is there anything else you'd like Bloomberg BNA's readers to know?
I entered this job in January with a passion for public service and a fundamental belief that we have to focus on fairness to taxpayers, whether they're in Indiana or outside Indiana. Fairness includes consistency, responsiveness, transparency, things that I have heard over 10 months have not necessarily been the pillars of the Indiana Department of Revenue. So as we modernize our IT infrastructure, I think Indiana over the next couple of years will be much better suited and have the tools to better serve all taxpayers. Especially on the corporate side - opening up our E-filing strategy, etc. We are operating under an outdated system, an outdated approach. We're trying to be innovative. Innovation doesn't always mean new technology. So innovation is happening at the Indiana DOR and when I say that I mean we are changing the way we approach transactions, we're changing the way we think about taxpayers. One of the most important things that I have been trying to preach around the state is that I view every taxpayer as a customer. I actually had someone push back on that and say ‘well I'm not your customer because customer indicates that I have a choice where I go.' And I said, sir I understand that, by statute you have to interact with us and it's your only mechanism. But it's a mentality and it's a culture of an organization to shift from taxpayer to customer. So customer service is our number one priority. You have to think about what that means.
The last thing I'll close on is – we've changed the mission statement for the DOR. We have a new CFO, a brand new COO position, a new policy director, a new GC, we have me, a new communications director, and most of these folks have private sector experience. So we are coming in together to operate like a business. We're looking at this as a customer service organization that's going to operate with a business mentality. So number 1, and the governor has talked about this, state government agencies in Indiana should try to operate at business speed. We tell our staff that all the time. If someone comes to us with a question, we're gonna answer that question right away. We're not gonna wait weeks, we're not gonna wait for a customer to follow up with us. To me there's nothing more aggravating than having to follow up 3 or 4 times and I know customers do that with us. My goal and my overall vision is to flip the narrative and rewrite the script of not just state government and what typical state government looks like but what the DOR means to our customers, to where IN DOR can ultimately be looked at, I say like a well-oiled machine. We're innovative, we have latest and greatest technology, we're consistent, our process is transparent and people just know that when they need something done by the DOR in Indiana it will get done and it will get done quickly. That's a narrative that is not there now but that's the end goal.
Thanks, Adam. I hope you'll keep your commitment to fair tax administration when you're governor!
(Laughter) Thanks, Jeremy. I appreciate it.
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