A significant portion of the conversation centered on a comparison of Texas’ taxing system with those of other states. While all participants generally believe that Texas has one of the most favorable tax structures in the U.S., Watson pointed out that in his current work on a business relocation/incentives project involving a client’s choice between four different states, Texas stands in an enviable position. The lack of a state income tax and the tax system’s comparatively friendly attitude toward business gives state economic development officials a much better point from which to begin incentives negotiation. This is certainly one of the reasons why Texas has been consistently ranked among the top three states for corporate headquarters influx over the past six years.

In terms of property tax specifically, Texas differs from many other states in that it does not use commercial property valuation caps. The panelists agreed that caps are generally not in the best interests of property owners, mainly because they shift much of the tax burden to new owners (creating a disincentive to real estate purchases) while valuations on properties held for longer periods of time become out of sync with the rest of the real estate market.

In California, the passage of Proposition 13 in 1978 presented exactly this type of problem. The panelists agreed that many of California’s current fiscal difficulties can be traced to the enactment of this law (which severely constrained the growth of property tax revenue), while municipal and state spending was allowed to increase unabated. The resulting service deficiencies and governmental instability, combined with exceedingly high sales and income tax rates, has led to a mass exodus of corporate headquarters. As Watson pointed out, half to two-thirds of the headquarters relocations in the U.S. over the past four years have come out of California. Watson said a California-based company he spoke with two months ago about relocation specifically stipulated that they would look only at states with no income tax that were willing to make creative deals regarding property tax abatements.

With its income-tax-free environment and the degree to which its municipalities negotiate property tax abatements for businesses, Texas is an attractive option for companies looking to cut their costs. But the panel acknowledged that proposed property tax changes could negatively impact these advantages. The possibility of a statewide property tax has been discussed in the Texas Legislature and will likely be a key issue in future sessions. While the advantages of such a system are debatable, the disadvantages for economic development efforts are clear.

Watson referenced the Rackspace headquarters project he facilitated with the City of Windcrest in 2007, in which a multi-million dollar property tax abatement was negotiated as part of one of the largest incentives projects ever completed in the state. Now, Rackspace headquarters brings 3,000 employees daily to an area of Windcrest that previously stood vacant. This has stimulated retail development in the surrounding areas, which has allowed the City of Windcrest to benefit from sales tax and property tax revenues, boosting municipal services as well as the school district. If Texas moved to a statewide property tax system, municipalities would lose the ability to make these types of deals.

Aside from this particular point, the insights shared during the discussion pointed to a generally positive opinion and outlook for Texas and its tax structure – certainly in relation to other states.

MAXIMUS provides customized expansion, relocation, and retention solutions for companies seeking to take advantage of the cost-saving opportunities available via state and local incentives. We work with economic development and government officials to negotiate packages for our clients that are creative and beneficial to all parties.

MAXIMUS can also provide assistance with corporate property tax issues.

Please contact us for more information.

Oklahoma Governor Mary Fallin announced on Monday that her state would lower its current income tax rate from 5.25% to 3.5% next year, with the 10-year-goal of abolishing the income tax altogether in order to make the state more attractive to business. At the moment, Oklahoma is competing with states like Texas (no income tax), Missouri (where voters may likely abolish the income tax in November), and Kansas (where the income tax rate is also being cut this year) to create the most pro-business, pro-growth environment in the heartland area.

And with good reason. In the current economic environment, companies are taking a serious look at all of their costs to determine where changes can be made that will positively impact the bottom line. Given the fact that state and local taxes comprise such a large share of a company’s overall tax burden, it’s no wonder that many executives are re-evaluating their business location and making moves to states with more favorable economic conditions.

In our work with companies looking to relocate headquarters, we find that tax environment is a serious consideration. Even though “the tax burden isn’t the only factor that determines investment flows and growth, it is a major signal about how a state treats business, investment and risk-taking.”

22 states and Washington D.C. have estate and/or inheritance taxes. While several states raised the exemption in 2012 (North Carolina, Rhode Island, and Illinois), others lowered the exemption dollar amount significantly. These states included Connecticut and Vermont.

New Jersey currently has the lowest estate tax exemption ($675,000).

While several states are working to abolish their estate or inheritance taxes (Nebraska, Oregon, Tennessee), others, such as Ohio, have been successful. That state’s estate tax will be gone at the start of 2013.

You can check out this nifty map for an interactive view of current state estate taxes.

MAXIMUS will definitely be keeping an eye on this issue. We agree that states with budget shortfalls are looking for revenue anywhere they can find it, and lowering estate tax exemptions may indeed become a lever that legislators pull if finances become too pinched.

On Friday, The Dallas Morning News reported (subscription required) that the tax incentive program was approved by the Collin County Commissioners Court, but in a less-sweeping form. In its present form, the plan gives the 50% break to any “new or growing businesses that generate at least $100,000 in tax value and at least five new jobs” and applies only to the county portion of the property tax bill.

The explosion of drilling in the state’s shale and oil deposits has not only meant that companies have seen expansions in drilling and increased revenues but also that those working in the petroleum engineering field have become extraordinarily sought-after. Certainly, the steady rise in college graduates in this field indicates an increasingly healthy industry outlook, one we’ve certainly observed with respect to our own oil and gas clients.

Detail Audit

A detail audit means that all sales and purchase transactions for the audit period are to be examined by the auditor. Any assessment resulting from a detail audit arises solely from the taxability of the transactions and whether tax was paid. In other words, because the audit was performed using detailed methodology, taxpayer arguments are limited to the substance of the assessment. Because one “can’t argue a detail audit,” procedural arguments are rare.

Sample Audit

Although statutory requirements vary by state, sampling procedures are generally used in an audit when:

• The taxpayer’s records are so detailed, complex or voluminous that an audit would be unreasonable or impractical;
• The taxpayer’s records are inadequate or insufficient so that a competent audit for the period in question is not otherwise possible; and/or,
• The cost of the audit of all detailed records of the taxpayer or the state will be unreasonable in relation to the benefits derived.

Unlike a detail audit, a taxpayer can attack a proposed assessment resulting from a sample audit based on substantive and procedural grounds. From a procedural standpoint, a taxpayer can challenge a sample if it can demonstrate that (1) a transaction within the sample is not representative of the taxpayer’s business operations; and/or (2) the sampling method used is not in accordance with generally recognized sampling procedures.

Taxpayers should avoid assuming that a selected sample is accurate and should thoroughly review the procedure used by an auditor in conducting a sample audit.

This is because the selection of the representative transactions is critical to the final projection of the audit assessment. In some cases, the selection of just a couple of transactions that are not representative of the entire population of the company’s transactions can skew the entire sample. This can result in an inflated assessment costing the taxpayer thousands or even hundreds of thousands of dollars.

A taxpayer’s review of a sample audit should be automatic, as it is the auditor who bears the burden of constructing and applying a proper sample audit. This means that the auditor is responsible for doing all of the following:

• Properly notifying the taxpayer regarding the sampling technique methodologies;
• Designing the proper sampling techniques based upon varied factors, including but not limited to, the proper sampling methodologies, taxpayer’s business activities and records availability;
• Performing initial sample evaluations before beginning the sampling process;
• Performing intermittent sample evaluations during the sampling process;
• If applicable, amending the sample before completion;
• Performing a final evaluations of the sampling results; and
• Properly documenting and following the sampling plan.

Throughout this process, auditors are expected to use their professional judgment to make sure all of the transactions in the sample group are appropriate and that the procedure is being followed correctly.

Here is where the process gets tricky – “professional judgment” certainly does not constitute an objective standard and will almost always differ from auditor to auditor. Unfortunately, we have seen many audit sampling situations in which the “professional judgment” of the auditor has resulted in the inclusion of many transactions that are in no way representative of the whole – the result of which is a skewed sample leading to an inaccurate and inflated assessment. This is something no company can afford.

The American Institute of Certified Public Accounts (AICPA) provides guidance as to Generally Accepted Auditing Standards (GAAS) and Generally Recognized Sampling Techniques (GRST). To properly challenge a sample audit, a tax professional must understand both the substantive elements of applicable state and local tax law and the procedural elements associated with sampling.

MAXIMUS regularly challenges state and local tax audits on both substantive and procedural grounds. For more information, please contact a MAXIMUS tax professional.

Interestingly enough, the audit rate for all individual tax returns remained constant between 2010 and 2011 at 1.11%

Also interesting was the IRS’s increased audit rate for corporations reporting over $250 million in assets. In 2011, the rate was 27.6%, as opposed to 25.3% in 2010.

Frisco Chamber of Commerce officials point out that the city voted to allow the same types of alcohol sales in 2002, before the city limits were extended to include the areas currently under consideration. These business leaders cite increased tax revenues and improved development opportunities as probable results if the measures are passed.

MAXIMUS alcohol licensing and permitting consultants note that any business owners in these areas who are planning to offer alcohol sales if the measures are passed should begin their due diligence on the permitting process now.

Conscientious companies interested in proactively managing their state/local taxes often seek tax advice from the pertinent taxing authority. This process can be accomplished either verbally and/or by written submission. Hopefully, when a tax opinion is proffered by the regulatory agency, all is well. But what happens when that advice turns out to be incorrect, resulting in harm to the taxpayer? Is there any recourse?

Perhaps…using the concept of detrimental reliance.

Detrimental reliance, otherwise known as the doctrine of equitable estoppel, is often unrecognized by taxing authorities, especially if no written opinion was provided. However, in limited cases, it can be utilized to promote a more reasonable and fair result to the taxpayer.

The basic premise of detrimental reliance used in a taxing scenario is this – when a taxing authority, by certain communications and/or conduct, guides a given taxpayer to act in a particular manner, the taxing authority should not be allowed to subsequently adopt a different or opposing position that detrimentally affects the taxpayer.

Texas

Texas law requires four (4) elements or conditions be met for a taxpayer to successfully argue detrimental reliance. They are as follows:

1. the information or advice is satisfactorily proven (both as to the substance thereof and its direct communication to the taxpayer), meaning that it usually must be in writing;
2. the taxpayer followed it;
3. the taxpayer gave sufficient information to have resulted in correct advice and did not misrepresent information or deliberately withhold and/or conceal information which would affect the advice; and
4. the taxpayer has suffered, or will suffer, harm unless the Comptroller adheres to the advice.

Despite conflicting arguments, both sellers and purchasers of taxable items can utilize the concept of detrimental reliance. In the past, when a purchaser successfully argued detrimental reliance, the Comptroller typically waived only penalty and interest, but not the tax itself. Their rationale was that the taxpayer would have purchased the item and paid the tax anyway. As such, the resulting harm to the taxpayer was limited to penalties and interest due on the taxes.

However, within the last few years, the Comptroller has revisited the issue of detrimental reliance for purchasers and determined that the following broadened guidelines will be used when a taxpayer has proven detrimental reliance related to taxable purchases:

1. All penalties and interest will be waived.
2. Tax will be waived on materials directly utilized and consumed in the performance of a service or sale of a product for an unrelated third party.
3. Tax will only be waived for indirect materials or services when the taxpayer proves that these items were used in computing prices or bids.
4. Tax on assets or tools directly used in the performance of services or sales may be partially exempted based upon their purchase dates and remaining life of assets. This presumes that prices can be increased on future sales. A taxpayer with a long-term contract or fixed bid substantiate a larger waiver. For purposes of computing the remaining life and value of an asset, the Comptroller uses a 48 month useful life and straight line depreciation. That taxpayer cannot use other methods of valuation.
5. Special consideration for full waiver and possible ongoing waiver will be made if a taxpayer proves that the advice of the Comptroller was used in the decision to locate facilities in Texas.
6. The taxpayer must affirmatively prove and provide records requested by the Comptroller for any waiver discussed above. No consideration can be made or value assigned for “harm” based upon reputations or credibility of the parties.

State and local taxing agencies aim to “get it right” when providing tax opinions, but the taxpayer also has certain responsibilities during the information request process. MAXIMUS regularly assists taxpayers with written tax rulings which not only provide proper tax guidance, but also serve to protect the taxpayers’ interests in the future. Please contact us if you would like more information on obtaining a tax ruling to help protect your company in state and local tax matters.

According to Forbes’ Robert W. Wood, California’s VCI2 program has enjoyed exactly this type of success. The program allowed companies that had underreported income tax liabilities to amend their returns for 2010 and previous years in order to receive a penalty waiver. The program has raised a total of $350 million for the state of California and we assume that several companies in danger of receiving large penalty assessments are now in the clear and in compliance with their California state tax reporting.

Many states offer similar programs, for lots of different tax types. If you believe you may have unreported or underreported state tax liabilities, it may be time for you to look into such programs. MAXIMUS has assisted many clients with this process, in several different states. Please contact us if you’d like more information.