States of Motion: 2021 state and local tax summit
June 16–17, 2021
State and local tax issues are moving forward along with the digital economy and growth-minded businesses that are eager to apply lessons from the pandemic. RSM’s State and Local Tax Summit: “States of Motion” dug into that dynamic Thursday, concluding the two-day event with sessions about SALT issues in the digital economy, controversy best practices and SALT considerations for businesses in transition.
Here are five things we learned on Day 2 of the summit:
1. Growth of the digital economy means new state and local tax questions—and opportunities
As companies build their digital capabilities to deliver products, add revenue streams, strengthen customer connections, and create efficiencies, the list of open-ended questions about state and local tax (SALT) implications seems to grow.
The 3-D printer sitting off-camera in Brian Kirkell’s home office helped exemplify that point. Kirkell, the leader of RSM’s Washington National Tax state and local tax team, crafted a hypothetical situation in which he printed a dishwasher seal to make a home repair. Hyperlocal manufacturing, he called it.
But what about the dishwasher company that supplied Kirkell with the instructions and materials to print the seal at home? Jamison Sites, RSM’s blockchain and digital assets tax leader, had questions.
“If you’re helping customers with 3-D printing, is that a service?” Sites asked rhetorically. “Does the company own the printer, or is it subscribing to a goods output? Is it selling intellectual property? Are you, Brian, buying the good, and the company provides the service on the back end?
If a company scaled up such an operation to have customers 3-D printing in various states, it would multiply the SALT implications of how those questions and similar ones are answered. This underscores the value of incorporating tax considerations into strategy about growing a business using new technologies.
“There’s all kinds of things a business can do here,” Kirkell said. “But you don’t get to do them if you don’t proactively engage and look at what you’re buying, think about how you’re going to use it, and ultimately structure your purchases and sales to navigate through the jungle of state and local tax laws.”
2. Growth of the digital economy is outpacing states’ capacity to tax it
States have proven their willingness to tax digital goods, services and new technologies, especially by applying sales tax. Meanwhile, though, the digital economy is evolving with the proliferation of cryptocurrencies and blockchain and new forms of digital interactions between businesses and their customers.
“The states’ pace of change is behind where we are,” Kirkell said. “As we move into the future that we’re seeing, you’re going to have a lot of uncertainty.”
The implication is that business models are being developed or enhanced without an understanding of how they eventually might be taxed.
Sites equated the extent to which cryptocurrency could disrupt peer-to-peer transfers of value to how the internet disrupted communication. In the 1980s, who could have envisioned the social media platforms and streaming video services we have today? Well, he said, we should view cryptocurrencies and blockchain with a similar perspective of unpredictability.
For example, blockchain’s ability to securely record transactions via internet-connected devices could enable companies to track shipments of goods and enhance fair trade practices. It will improve visibility into the supply chain, and that will have tax implications.
“It’s permeating,” Sites said. “It will be a market structure shift. Stay tuned. It’s hard to look into the crystal ball and predict Twitter, YouTube and the disruption the internet caused, but we’re starting to see the groundwork.”
3. Resuming in-person interactions on tax controversy matters could pay off
As work resumes in traditional office spaces, the benefits of in-person interactions stand out compared to the virtual activity required over the last 15 months.
Tom Chrzanowski, RSM’s state and local tax leader for Indiana, relishes the proximity of his office in downtown Indianapolis to clients that need his help.
“It’s just easier to walk over there and go through the issue live with a taxpayer advocate,” he said. “You don’t want to have to have to elevate everything up to a high level with the Department of Revenue.”
Mark Siegel, an Atlanta-based partner in RSM’s SALT practice, echoed the sentiment.
“Especially when you’re coming toward the end of an audit or you’re addressing specific technical issues or even negotiating a settlement, it’s going to be important to maintain face-to-face interactions,” Siegel said. “Video conferencing is OK, but it’s still not as effective as when you’re sitting across the table from somebody.”
4. Wayfair remains a hot topic.
The Supreme Court decision in the landmark tax case is four days from its third anniversary, and its effects continue to resonate. The evolution of the digital economy and pandemic effects on e-commerce are shaping new considerations about the sales-and-use tax collection and remittance responsibilities of remote sellers.
“There’s a big misinterpretation that Wayfair relates only to tangible products and the economic nexus around that,” said Scott Durham, a Kansas City-Mo.-based senior manager in RSM’s SALT practice. “In reality, it’s products and services you sell based on whatever the economic threshold is in a certain state.”
As businesses develop technologies to enhance their ability to interact with customers, Durham emphasized the importance of considering how those developments affect nexus and states’ differing thresholds.
5. Trends in business expansion and acquisition underscore the value of location analyses.
Sherri York sees a number of companies looking to expand either from within or by acquiring similar businesses. In many cases, lessons from the pandemic are driving this growth strategy. Maybe a business wants to alleviate a supply chain problem that was exacerbated in 2020, or the current interest rate environment is facilitating capital investment as part of a natural evolution for a company.
York, RSM’s national SALT compliance leader, wants those businesses to understand how expanding would affect their state tax footprint, especially if they’re entering a state for the first time.
Having location options is ideal, she said, because it enables decision makers to compare tax implications as part of a comprehensive analysis that prioritizes business needs.
“Without exception, credits and incentives come to mind as part of an expansion project or acquisition,” York said. “But there are other things you need to think about. Is there an effective tax-rate play you can make? What kind of rules does that state have? There is some modeling and number-crunching that need be done up front.”
Optimism, progress and growth were the main themes Wednesday at RSM’s State and Local Tax Summit: “States of Motion.” The two-day event kicked off with sessions about state fiscal dynamics that defied gloomy projections, from the depths of the pandemic, state and local tax considerations for hybrid work location models, and how digital solutions for sales tax challenges can help businesses ride the wave of economic growth.
Here are five things we learned on Day 1 of the summit:
1. As remote workforce arrangements solidify, companies should weigh potential tax costs against the benefits of a stronger talent pool.
Hybrid work location arrangements are becoming common for companies that see value in reopening their offices and are able to do so after enjoying a positive outcome from having employees work remotely during the pandemic. This hybrid model introduces a variety of costs, including state and local tax compliance, and benefits, such as a having a talent pool larger than traditional geographic limitations allowed.
How should companies balance those considerations? There’s no easy answer, said Eric Manus, partner in RSM’s state and local tax practice.
“Our talent is our most valuable commodity,” Manus said. “So what can we do to help support our talent and give them flexibility along the way, even if there is a tax cost to the company?"
Growth-minded companies value having more talented employees that enjoy their work experience.
“And through that experience, you should be seeing sustained growth because those employees will have stronger relations with their organizations because they had that flexibility and it was balanced with cost,” Manus said.
It could be challenging, of course, for companies to understand and quantify the costs of a hybrid arrangement, given a variety of factors. Some safe harbor agreements enacted by jurisdictions early in the pandemic remain in place. With corporate tax rates part of federal and many state-level legislative discussions right now, policy changes could shift any analysis. Also, numerous states and localities have corporate and individual incentives to attract remote workers.
“That’s where we need to have more effective planning discussions up front,” Manus said. “Through those discussions, businesses will be better informed, and they’ll be able to understand their budget better.”
2. The state tax implications of potential federal tax changes should not be underestimated.
As President Biden’s tax proposals plod through the legislative obstacle course, businesses would benefit from understanding how potential changes would affect their state tax burden relative to their overall tax profile.
For example, an increase in the corporate income tax rate to 28%, as the administration has proposed, would change a driver of state-tax conversations. Brian Kirkell, the leader of RSM’s Washington National Tax state and local tax team, explained that since the federal corporate income rate was lowered from 35% to 21% by the Tax Cuts and Jobs Act in December 2017, state corporate income tax has been a much larger percentage of business’ overall corporate income tax burden.
“The impact of that might flip back,” Kirkell said. “Businesses might spend less time considering their state income tax than they have over the last few years. I would say that’s a mistake. There’s more opportunity to mitigate taxes in the state tax space.”
Of course, uncertainty about the outcome of Biden’s tax and spending proposals underscores the value of maintaining a state-tax perspective while closely following legislative developments, which have been steady since before the administration announced its tax plans.
“What is certain,” Kirkell said, “is that there are going to be some conformity issues no matter what gets done.”
3. States will continue competing for a share of the reshaped workforce.
As it becomes clear that some form of remote work is here to stay, states sense the importance of preserving their respective tax bases and potentially adding taxpayers to them. A state that offers individual and corporate incentives in exchange for new jobs and investment could have those costs outweighed by income, sales, property and other tax revenues.
Kevin Foral, RSM’s state and local credits and incentives leader in the Central region, said representatives from states’ economic development programs have begun contacting him more frequently to discuss remote workers and businesses that might be interested in relocating.
“I’m seeing outside-the-box thinking from these states,” Foral said, referencing Kansas’ commitment to counting any in-state remote workers as part of a company’s incentives program as long as the company has a facility in the state.
“States are realizing they’re going to need to start considering that not everybody is just going to be sitting in a manufacturing plant, industrial park, or commercial office building in my state,” Foral said. “I think you’ll see, maybe, a little bit of a tightening in the administration of programs, but I don’t think they’re going away at all. You’ll probably see some newer ones come out to address remote workers, as well as some adjustments to other existing incentives programs.”
4. Healthy state tax revenues bode well for state budgets—and taxpayers.
State budgets mostly have defied last year’s forecasts of colossal shortfalls for a variety of reasons, including federal relief and stimulus money, mitigated effects of the pandemic and some predictions about lifestyle choices and spending habits that did not come to fruition on a large scale. California, for example, recently announced it expects a $76 billion surplus after it forecasted last year a $54 billion deficit.
Preliminary data on new tax revenues is encouraging, as well, said Mo Bell-Jacobs, senior manager on the state and local tax team in RSM Washington National Tax. And with federal money set to reach many consumers later this year—for example, in the form of a child tax credit—the combination of pent-up demand and disposable income fuels budget optimism.
“This is going to be the best year ever for sales and use taxes,” Bell-Jacobs said. “We’re probably going to get more than just back on track. I think we’re going to exceed where we would have been without the pandemic.”
Those surpluses are the backdrop to state-tax policy decisions. States such as Nebraska, Oklahoma, Montana, Iowa and Idaho have enacted some forms of tax cuts or reductions that David Brunori, senior director on the state and local tax team in RSM Washington National Tax, characterized as “relatively modest and explainable.” He also cited Connecticut as an example of a state that recently did not enact proposed significant tax increases despite its record of willingness to raise taxes.
“The state looked at its budget surplus and said maybe it’s not a good time to be raising taxes because we don’t need the money,” Brunori said. “I think you’re seeing that thought throughout the country, kind of shying away from significant tax hikes. That more moderate approach on both sides is holding firm.”
5. Digital solutions for sales and use tax issues require the proper fits
There are several software platforms designed to help a company meet its sales and use tax compliance needs, create efficiencies through automated processes and illuminate areas for potential savings.
Choosing the right system begins with identifying how a company’s data, workflows and system infrastructure capabilities match up with its sales and use tax requirements. Then that fit is assessed against the capabilities of various systems, keeping in mind how important it is that the solution software is with the company’s existing systems.
Especially as automated processes are developed and implemented, planning and testing are critical because numerous departments or individuals within a company feed data into the sales tax system.
“It’s very important to speak with all the stakeholders,” RSM Sales Tax Compliance Leader Lauren Jones said. “We don’t know what we don’t know.”
Our two-day summit featured six state and local tax webinars focused on helping your business move forward amidst change. The summit covered mportant topics such as:
- State tax policy changes and the implications on your business
- Tax implications of your reshaped workforce in 2021 and beyond
- State tax strategies in the expanding digital economy
- New approaches to state tax controversy
- Taking the next step in business transitions
We are excited to present these topics and more to help your business accelerate its approach to managing state tax challenges.
This event may qualify for up to 6 hours of CPE credit. To qualify, participants must log in to the webcast and provide your first name, last name and email address. Participants must meet minimum participation minutes and answer 75% of the polling questions for each event. Group CPE credit is not available. Certificates will be available for download immediately following the session. For more information regarding administrative policies, such as refunds, cancellations and complaints, please contact us.
RSM US LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State Boards of Accountancy have the final authority on the acceptance of individual course for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.