Tags
career, compliance, data, e-filing, future, internet, nexus, software, solution, Tax, taxation, Technology, US, value added tax, VAT
By Michael Beck, JD, and Matthew D. Melinson, CPA
Spring 2014
One of the many interesting things about working in the world of state and local taxation is that the environment is constantly changing. This article emphasizes that change, but not near-term change. We look at what may lie ahead in the year 2020.
Technology
The 21st century has seen great strides in tax and accounting technology. Tax return preparation has become more automated, and problem solving more streamlined. We expect technology advancements to continue as tax laws become more complex, both domestically and abroad.
One driving force for increased automation is the potential U.S. enactment of the Marketplace Fairness Act. This act authorizes states to require all sellers not qualifying for a small-seller exception (annual gross receipts not exceeding $1 million) to collect and remit sales and use taxes on remote sales, so long as the state complies with minimum simplification requirements relating to taxes, audits, and streamlined filing.
Most states have already instituted some degree of electronic filing (e-filing) mandate across various tax types. As technology advances, both among taxpayers and the states, we anticipate that e-filing will eventually be required for all state tax types, with limited exceptions.
The Marketplace Fairness Act and e-filing mandates will combine with a growing array of software solutions to make automation a necessity for most businesses. As tax obligations broaden, smaller companies will need access to enterprise resource planning and tax preparation software solutions to keep up. In turn, automation will become more feasible as smaller, niche software companies gain a wider market.
In future state and local tax environments, both taxpayers and state departments will lean heavily on data automation solutions and processes across all areas of tax. In addition to being outstanding tax experts, state and local tax professionals will have to be proficient with technology.
Nexus
Today’s technology has created a new breed of company that relies increasingly on telecommuting employees and online sales rather than physical brick-and-mortar institutions. This transition is causing an evolving analysis of traditional concepts of tax nexus.
The standard first decreed by the U.S. Supreme Court in National Bellas Hess v. Illinois? and later affirmed in Quill v. North Dakota? required a physical presence in-state before that state can impose tax. Even though those holdings were limited to sales and use tax, some courts, legislatures, and revenue departments applied the “substantial nexus” requirement to business income tax as well.
Taxing entities, however, have recently begun to recognize the growing mobile nature of our economy and imposed income tax nexus based on economic presence. Landmark cases such as Geoffrey v. South Carolina? and Lanco v. New Jersey Division of Taxation? have shown that basing nexus on an intangible presence – such as selling into a state and in turn deriving income – is possible, even when an out-of-state enterprise has no physical in-state presence.
As physical presence becomes a less critical factor in developing a market presence in a particular state, state and local taxation nexus concepts will increasingly emphasize the economic presence standard over the physical presence standard of old. There is little doubt that state revenue departments will push this concept as far as courts will permit.
Flow-Through Entity Taxation
The trend in recent years toward the use of pass-through entities relative to C corporations has been significant. As states strive to increase revenues in an efficient manner, expect revenue departments to impose much more direct entity-level taxes on pass-through entities to capitalize on their increasing use and to optimize the likelihood of collection. In the mean-time, the trend toward mandatory income tax of withholding for nonresident partners/members will continue until all states impose such a requirement.
New or Expanded Taxes
Revenue departments and governments often look for creative solutions to increase overall tax collections. States may explore some combination of expanding current sales and use (and “sin”) tax rates or bases and imposing a state value-added tax (VAT).
State sales and use tax rates currently range from about 3 percent to 7.5 percent, and may apply in addition to local rates. State legislatures could conceivably increase these percentages, and some state and local jurisdictions are already expanding the sales and use tax base to tax previously excluded service transactions. “Sin taxes” (generally sales and use taxes) on items like tobacco and alcohol will likely continue to increase.
A new issue worthy of attention relates to the potential legalization of marijuana. Should states decide to legalize marijuana, it is probable that high sin taxes will be imposed. For example, in Colorado purchasing marijuana at retail includes a 25 percent tax in addition to the normal state and local sales taxes. In Denver, for example, the tax total is about 29 percent. Enactment of a state VAT to tax the value added to a product, material, or service would avoid the cascade effect of sales and use tax while more closely mirroring consumption tax schemes worldwide. The imposition of state VATs would represent a sea change in consumption taxation that does not appear imminent, but is worthy of monitoring.
Career Opportunities
The demand for state and local tax specialists will likely increase. Along with international tax professionals, we expect state and local tax specialists to be in high demand in 2020. It is only relatively recently – in the 1980s – that full-time state and local tax specialists began to emerge.
The complex web of state and local taxes has led to more demand for full-time professionals, as demonstrated by the fact that there are now at least six major U.S. firms with at least 300 full-time state and local tax professionals. The market will continue to demand that there are several niche areas of specialization within state and local tax, such as property tax, sales and use tax, and income/franchise tax, among others.
An increasing number of state and local tax specialists will have to gain some understanding of international taxation as economies become global. This specifically includes familiarity with foreign VAT, which has concepts similar to U.S. sales and use tax as noted above.
There will be a significant increase in career opportunities for tax technology specialists, a trend that has already begun. An increasing number of regional and local accounting firms, and midsize and smaller businesses, will likely desire to build out teams of state and local tax specialists, as is already the case in larger accounting firms and within larger business tax departments.
Conclusion
State and local taxation has undergone significant changes in recent history, and change will continue. Driven largely by technological advances and today’s increasingly mobile workforce, states have begun to adapt their taxation schemes to keep up with changing times.
As technology drives the automation of tax functions, deeper specialization will be required to stay current with nonincome tax types, such as property and sales and use tax as well as credits and incentives.
Taxpayers should expect continued evolution as more business functions occur over the Internet, forever changing the way states define taxable activity and mandate compliance. An increasing number of career opportunities will be available in the state and local tax business as we see our way toward the year 2020.
Indirect Tax Technology 