10 things we learned at the 2021 state and local tax 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.
6. 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.”
7. 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.”
8. 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.”
9. 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.”
10. 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.”
