On Saturday, January 14, the National Conference of State Legislatures (NCSL) Task Force on State and Local Taxation (Task Force) met in Scottsdale, Arizona to discuss many of the key legislative issues that are likely to be considered by states in 2017. The Task Force consists of state legislators and staff from 33 states and serves as an open forum to discuss tax policy issues and trends with legislators and staff from other states, tax practitioners and industry representatives.
Below is a short summary of the key sessions and takeaways from the first Task Force meeting of 2017. PowerPoints from all sessions are available on the Task Force website.
Nexus Expansion Legislation Expected to Continue
With lawsuits pending in South Dakota and Alabama over actions taken by states in 2016, MultiState Associate’s Joe Crosby provided an overview of 2016 nexus expansion legislation (as well as legislation introduced thus far in 2017), with NCSL’s Max Behlke pointing out that he expects a lot of states to act on this trend this year.
In particular, it was pointed out that the US Supreme Court’s denial of cert in DMA v. Brohl (upholding the decision of the 10th Circuit) should give states confidence about their ability to constitutionally adopt similar notice and reporting laws. Last month, Alabama Revenue Commissioner Julie Magee publicly stated that Alabama plans to introduce notice and reporting legislation similar to Colorado, along with at least two other states.
Economic nexus laws directly challenging Quill, similar to South Dakota SB 106 passed last year, are also expected to be prevalent in 2017—with five states (Mississippi, Nebraska, New Mexico, Utah and Wyoming) already introducing bills or formal bill requests that include an economic nexus threshold for sales and use tax purposes. Notably, the Wyoming bill (HB 19) has already advanced through the House Revenue Committee and its first reading by the Committee of the Whole and is expected to receive a final vote in the House this week. The Nebraska bill (LB 44) takes a unique approach in that it would impose Colorado-style notice and reporting requirements on remote sellers that refuse to comply with the economic nexus standard.
Behlke pointed out that he doesn’t see Congress acting on the remote sales tax issue in early 2017 due to other priorities—including federal tax reform. With a final resolution of the kill-Quill efforts by the US Supreme Court most likely not possible until late 2017 (or later), state legislatures are likely to feel the need to take matters into their own hands. From an industry perspective, this presents a host of compliance concerns and requires companies currently not collecting based on Quill to closely monitor state legislation. This is especially true given the fact that many of the bills take effect immediately upon adoption.
Need for States to Conform to Federal Partnership Audit and Adjustment Rules
In a session co-hosted by COST’s Fred Nicely and Nikki Dobay, TEI’s Pilar Mata and the MTC’s Tom Skimkim, the speakers encouraged states to adopt uniform legislation for reporting federal tax and audit changes in light of the new partnership rules adopted as part of the Bipartisan Budget Act of 2015 that will be applicable for tax years after Dec. 31, 2017. The MTC’s Partnership Work Group is currently in the process of considering this important issue.
Proposed legislative solutions offered as part of drafting the model act include: (1) revising the definition of “final determination” to be consistent; (2) allowing reporting of changes on a streamlined report in lieu of amended returns; (3) incorporating a de minimis exception (for tax changes amounting to $250 or less) that would allow for a less-burdensome administrative process for reporting minor changes; (4) clarifying the statute of limitations for failure to file amended returns; and (5) allow for the filing of an estimated payment to toll interest accrual on adjustments.
Federal Tax Reform Coming –State Tax Implications
The Tax Foundation’s Kyle Pomerleau gave an insightful summary and outlook of the two current federal tax reform proposals (Trump’s campaign plan and the House GOP “Better Way” plan), which are expected to be but have not been formally put into legislation yet.
This session was followed by an overview of the potential state tax implications of the Better Way plan by COST’s Karl Friedan, Turner SALT’s Greg Turner, MultiState Associate’s Joe Crosby, and CBPP’s Michael Mazerov. The speakers highlighted that simply conforming to the forthcoming federal tax reform has the potential to generate more revenue than many of the other high profile state tax issues being discussed—such as remote sales tax collection. More specifically, the broader base and lower rates included as part of the proposal will likely increase the revenue to states—which only conform to the federal tax base (not rates). Therefore, the 14 states that automatically conform to the federal tax base might see a significant increase in revenue generated without taking any affirmative action. Others would need to adopt legislation conforming as of a specific date to achieve the same results. Regardless of the method of conformity, states that do conform are likely to see a windfall of revenue based on the increased federal tax base, without affirmatively reducing rates consistent with the federal reform. The speakers pointed out that there are a number of issues that states need to carefully consider before blindly conforming to the federal tax reform, including potential violations under the foreign Commerce Clause based on the changes in treatment of foreign profits. This is an issue to closely watch that will require further evaluation as one or more federal tax reform proposals become available in more detail in the coming months.
Digital Taxation and Augmented Reality
McDermott’s Steve Kranz and Entertainment Software Association’s Tom Foulkes gave an update on the state and local approach to taxing the world of digital content and services and provided an overview of issues likely to come before legislators in the coming year—including virtual and augmented reality. A copy of the presentation is available here.
Final Tax Expenditure Best Practices Adopted
In concluding the day, the Task Force adopted a final version of best practices regarding tax expenditure budgets and reports, which is available here.