Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
Multinational businesses are increasingly concerned about U.S. state and local taxes as a result of recent changes in federal tax law.
States, however, may be waiting to see what impact federal changes will have on revenue before addressing conformity with complicated foreign-income provisions.
“The risk of increases in both the state tax burden and the costs of compliance are driving a lot of the state tax policy conversations right now,” Diann Smith, tax counsel in the Washington, D.C., office of McDermott Will & Emery, told Bloomberg Tax.
The 2017 federal tax act ( Pub. L. No. 115-97) made sweeping changes, including shifting the U.S. tax system from a worldwide to a territorial tax regime in which all income is subject to taxation no matter where it’s earned. This presents special challenges for states which, unlike the federal government, face constitutional restraints when it comes to taxing foreign income.
States, examining the impact of the federal law on revenue, are debating how they should respond, while business taxpayers grow more concerned over the challenges they may face complying with 50 reporting systems in 50 states, plus the District of Columbia.
“State tax has definitely been elevated in importance as a result of federal tax reform,” Smith said, adding that states will be grappling with the new federal law for years to come.
Nicole Crighton, a principal in KPMG LLP’s state and local practice, said April 25 at an annual tax conference in New York that “increasingly, international tax people are starting to pick up on state tax questions.”
However, state revenue officials may not share the same level of interest, Ann Holley, a partner in the state and local tax group of KPMG’s Washington National Tax practice, said at the conference sponsored by KPMG and New York University.
“The reality is that state corporate income tax usually makes up only 6 percent or 7 percent of state budgets,” she said, “so it’s not as huge a deal from the state revenue perspective as you might think.”
States receive far more revenue from individual income taxes and sales and use taxes than corporate income taxes.
Still, state revenue officials are interested in the various foreign-income provisions, Nikki Dobay, senior tax counsel at the Council On State Taxation, told Bloomberg Tax.
“For corporate taxpayers, they are required to figure out federal tax reform and how that will work for all the states they operate in,” she said. “For the state revenue officials, however, they have a bit more tunnel vision because they are just dealing with their individual state. So, I think they are very interested but come at it from a much different perspective.”
State officials—certainly auditors—"have always had an interest in collecting the greatest amount of tax possible regardless of whether they’ve reached a fair or correct result,” and the recent federal tax law changes don’t change that, Jeremy Abrams, counsel in Reed Smith LLP’s state tax group, told Bloomberg Tax.
“We are already seeing state legislatures struggle” with many of the federal tax law’s provisions, “both international and domestic,” Abrams said. “The less thoughtful, more short-sighted their solutions are, the more risks and opportunities there will be for taxpayers.”
So far this year, state lawmakers have been focused on individual-income provisions of the federal tax law, with a relative handful of state legislatures addressing business-income provisions. A fewer number of states, Georgia, Hawaii, Illinois, Minnesota, New York, Utah, and Wisconsin, have either considered or enacted legislation that addresses federal foreign-income provisions.
In general, the initial approach has been for states to adhere to federal provisions that increase revenue and decouple from those that decrease revenue, Crighton said.
Another complicating factor, state tax regimes have been territorial in nature because of the need to apportion income to states, so that they are taxing earnings appropriately. This “makes the policy implications of federal tax reform and the mechanics of the law even more difficult” at the state level, Holley said.
To be consistent, any inclusion of the new foreign income, the repatriation inclusion and global intangible low-taxed income, requires that the factors generating this income be included in the apportionment formula, Smith said.
“States will need to craft rules for how the factors are to be calculated,” she said. “It should not be enough to merely include the income in the receipts factor because the income is a net basis while the rest of the receipts are usually on a gross basis.”
Another source of headaches will be inconsistencies arising out of state tax-return instructions, which “across the board” don’t yet reflect new federal guidance, Crighton said.
State instructions refer to federal taxable income as reported on Line 28 or Line 30 of the federal return but “mandatory repatriation won’t be there” because it appears on a separate Section 965 Transition Tax Statement and is included in the tax computation on Page 3 of Form 1120, she said.
That split between what the new U.S. law says and what the state instructions say will make the compliance mechanics “really challenging,” she said.
To contact the editor responsible for this story: Ryan C. Tuck at firstname.lastname@example.org
Copyright © 2018 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)