Eileen Reichenberg Sherr

State and local tax trends

Congress is considering uniformity in mobile workforce legislation. How does this affect CPAs?

July 9, 2012
by Eileen Reichenberg Sherr, CPA

State and local taxes are an important and often burdensome part of most tax practices and businesses. States and municipalities continue to consider changes in order to cope with their budget deficits. As state taxation continues to be a hot topic in the state legislatures, the state tax commissioners and departments of revenue are busy interpreting and trying to implement these new state tax rules. The federal government also is interested in helping clarify taxation issues that affect all states.

Mobile workforce legislation

One such state tax issue that Congress is considering is uniformity in the area of mobile workforce legislation. The Mobile Workforce State Income Tax Simplification Act, H.R. 1864, passed the House on May 15 via voice vote, and now heads to the Senate for consideration. The AICPA supports this legislation (see our testimony and letters to Congress) as it provides a workable and uniform national standard.

Numerous state income tax withholding laws and varying de minimis exemption periods make compliance extremely difficult and time consuming. This bill would enhance compliance by instituting a uniform rule for employees who work for more than 30 days in any one state outside their resident state. The change would make state income tax withholding easier to administer and would help ensure that states and local jurisdictions get the taxes they are owed. The AICPA will continue to keep members informed as this bill is hopefully considered in the Senate this year.

Reader Note: Don’t miss the upcoming AICPA webinar: Trends in State and Local Taxation for Businesses and Individuals, July 11. Free for Tax Section members with No CPE.

Variety of nexus approaches
Regarding nexus, over the past three years, states have increased their sales tax collection efforts by expanding the activities that create sales tax nexus for out-of-state retailers without a physical presence in the state primarily due to the need to raise additional revenue. An April 2012 The Tax Adviser article describes and compares those expansion efforts and, in several instances, the legal challenges to them.

For example, following the 2008 enactment of a click-through nexus law in New York, Illinois (like several other states) enacted its own “click-through nexus” statute that went into effect on July 1, 2011. While Amazon.com, LLC v New York State Dept. of Taxation & Fin., 81 A.D.3d 183 (N.Y. App. Div. 1st Dep’t 2010) has upheld, for now, the validity of the New York law (currently on appeal to the New York Court of Appeals), the U.S. District Court for the Northern District of Illinois recently found the Illinois law unconstitutional (Performance Marketing Assn. v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct. Cook Cty. 5/7/12)). (See Journal of Accountancy website for more information on the Illinois ruling.) With several other states passing similar statutes (such as Georgia, North Carolina, and Texas), the different rulings for New York and Illinois make this an interesting, confusing, and evolving issue for taxpayers and practitioners.

Mandatory sales tax disclosures

Also, in April 2012, as discussed further in the Journal of Accountancy, the U.S. District Court for the District of Colorado held that a Colorado law requiring out-of-state retailers to report information about customers’ purchases to each customer and to the Colorado Department of Revenue (DOR) violated the Commerce Clause of the United States Constitution (Direct Marketing Assn. v. Huber, No. 1:10-CV-01546-REB-CBS (D. Colo. 3/30/12)) because it discriminated against out-of-state retailers by treating them differently from in-state retailers and was therefore invalid on its face.

The ruling could represent a defeat for the Multistate Tax Commission, which has proposed a model statute that is similar to Colorado’s for its member states to adopt. The AICPA testified against the model statute last year for several reasons:

  • It could undermine collaborative work under way (the Streamlined Sales and Use Tax (SSUT) Project, a multistate effort to simplify and modernize sales and use tax administration).
  • Out-of-state businesses that are not required to collect and remit sales tax should not be required to police individual use tax noncompliance.
  • The costs of compliance with the statute could far outweigh the benefits received by the states.

Other developments

Jamie Yesnowitz, chair of the AICPA’s State and Local Taxation Technical Resource Panel, told the commission, “It is not clear how receipt of information on thousands of internet purchases will translate into revenue for the states,” noting states may not have the resources to receive and properly analyze such an enormous quantity of reports. The AICPA State and Local Tax Technical Resource Panel continues to monitor this issue and has many resources available to members.

There are many other interesting state and local tax issues that practitioners and businesses should be considering and working with clients to address, including the state treatment of federally authorized bonus depreciation and the Sec. 199 domestic production activities deduction, as well as the presence of flow-through entities and consequent withholding and compliance issues.

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Eileen Reichenberg Sherr, CPA, MST, is senior technical manager—taxation at the AICPA. She staffs the AICPA Trust, Estate and Gift Tax Technical Resource Panel and its Carryover Basis Task Force, and is responsible for the development and submission of comments to Congress, Treasury, and the IRS, and developing tools, updates, and alerts for members.