Digitization, human capital, greater efficiency, tax reform, Wayfair. To corporate tax professionals plying their trade in the state and local space, these aren’t just buzzwords. They’re challenges and opportunities that dominate their daily activities. So, what keeps these SALT professionals up at night? To address these issues, we convened a roundtable of experts in the field, including Marji Gordon-Brown, vice president and associate tax counsel for MacAndrews & Forbes Incorporated; Cooper Monroe, director of tax for Duke Energy Corporation; and Michell Rodriguez, director of corporate income tax for Costco Wholesale Corporation. Michael Levin-Epstein, senior editor of Tax Executive, moderated the discussion.
Michael Levin-Epstein: What are the major issues facing corporate tax professionals today in the state and local tax arena?
Marji Gordon-Brown: There are so many. I’m going to take a little bit of a different slant. I’m not going to talk about technical issues, because I figure my esteemed colleagues may tap into that. I’m going to suggest that some of the biggest issues that we’re having—not necessarily that we’re having, that people are having—have to do with technology and systems. The systems, I think, that people are using often are antiquated. They were built in a time that extreme diversity in information wasn’t necessary. I think because of that, and through acquisitions, company systems don’t do what they really need them to do, and they don’t talk to one another. Therefore tax people—state and local tax people—are forced to use systems that really don’t answer the questions that need to be answered. We’re using a square peg and trying to put it into a round hole. An offshoot of that is budget issues. With all the money in the world, technology challenges could be solved, but it’s a very expensive dilemma—endeavor—to change all of that. The third thing, and then I’ll pass it along, is I think we have an issue with human capital. I think that the number of the people in tax, the number of people who are staying in tax, young people getting into tax—I think that’s declining. I think we have a resource issue, an internal resource issue. We just don’t have the right amount of people, and maybe that’s a budget issue, too. But I’m concerned that the number of people that are just in tax in general and, specifically focusing on state and local, is declining. Specialization in state and local tax maybe is not happening the way it used to.
Cooper Monroe: I agree with that. I agree with everything you just said about the rapid digitization and driving for efficiency. We see it at our company. I think in the state and local tax area, especially in the indirect areas like sales and use tax and property tax, there’s an especially large opportunity to bring technological processes to bear on those kinds of systems. I agree with you about the talent—building capabilities of people around changing technology and increasing efficiency. The trend is to build skills around data analytics and replacing manual gathering of data. That’s a macro issue. The other thing that I would add to what you had in your list, Marji, is just the rapid pace of change. It seems like from a regulatory and legislative perspective, the pace of change seems unprecedented. The last five years the pace of change has been particularly acute.
Michell Rodriguez: I would echo what Marji and Cooper said. I agree that we have all of these challenges going on, and maybe it’s the way that technology and tax is evolving, and then you sort of layer on, “OK, we have tax reform, which means every state is doing or not doing something completely different,” so we’re having to continuously learn all the time. Then, with Wayfair, and that case coming on, it’s causing us to evaluate all sorts of things, like whether we’re reporting or registering in the correct jurisdictions. We’re having to look at jurisdictions that we never even considered before. So, I think that the technical aspects, along with the human capital and the technology, I think we’re in this swirl of activity that’s all happening at the same time, and it feels like things are moving faster. I agree, we don’t have the resources and the people. When you interview or are hiring people coming in, that pool seems to get smaller and smaller as far as talent. I think we’re having to do more with less than we had maybe a few years ago.
The Tax Cuts and Jobs Act
Levin-Epstein: There are obviously a lot of changes as a result of federal and state initiatives, including the recent Tax Cuts and Jobs Act. What kind of impact did that have on those practicing on the state and local level?
Gordon-Brown: I would say it literally was the perfect storm. It was almost, can I say, disastrous, because we’ve faced changes before at the federal level. But they’ve been somewhat digestible, and I would dare to say maybe not even as complicated. What happened with the tax act, the jobs act, was incredible. The complexity of the rules made it so that not only did we have no idea, for a really long time, and even to this day, not certain what the states have done or not done, but also our federal colleagues and our international tax colleagues are running around trying to figure out, What the heck is GILTI? What is FDII? What is BEAT? How does 163(j) work? What are all the components? There are just so many moving parts. It was just incredibly complex, just on the federal side. So then, to layer on, is a state going to conform? Is it not going to conform? If it’s going to, when is it going to? What parts of it is it going to conform to? There are just so many questions at the start. While states have been active, I’d like to suggest that there are still many unanswered questions. I think that they attempted to react and attempted to have a voice, but I would say that all of the questions are not answered. As a result, the state and local tax professional at this moment has a great deal of uncertainty to deal with and increased volume with tracking and monitoring, probably, as Cooper said, at an unprecedented rate. I think it’s concerning because it just adds more and more uncertainty to the entire process. That’s my take on it.
Monroe: My company is a multistate utility. We file in something like forty states for state and local income taxes. What happened is we’ve had to really just use the 80/20 rule and say, “What jurisdictions do we care the most about?” Of course, you pare that back to tracking what’s happening on the state level, in conforming to the federal changes, and you concentrate on those states. It causes me, at least, a bit of unease to chop off a whole bunch of jurisdictions that we really just have to catch up to. We proactively address our core states, which is basically a handful, about seven states maybe, of that total of forty. An organization like TEI becomes a lot more important because that’s where you have a network of people that are really good in a state that you don’t have as much activity in and you can draw on that kind of expertise.
Gordon-Brown: That was such a good plug. [Laughter all around.]
Levin-Epstein: We appreciate that.
Rodriguez: I would say that it’s been challenging for us to figure out what the states are doing, what they’ve already done. A lot of states are not doing anything, like California. So, it’s tough for us to stay on top of it. We’re filing in almost every state, and we’re a fiscal-year filer, so we’re sort of late in the game. On the one hand, it gives us more time to digest what’s happening out there, but at the same time there’s so much information and so much happening that it’s kind of a blessing and a curse. I would say, for our federal folks, they’re having to use estimates and ballpark it and guess what they think is the right answer and try to be pretty conservative for provision, and then we’re trying to leverage on top of that what we think the states are going to do or not do and be conservative, because it’s very, very uncertain. The layering on of the state impacts of tax reform has been really, really complicated. We are just starting to file our 2017 returns, and the filing complexity and the options that we have or don’t have—what do we disclose, for lack of better information—it just makes it really complicated. I would say that the human capital factor of trying to prepare returns that digest all this is really challenging as well. I would echo Marji—we’re in a very uncertain time for the next few years, until states catch up and figure out how they’re going to treat a lot of this stuff.
Gordon-Brown: Michell just triggered something in my head. While I am really not a fan of the SALY approach—same as last year—at times, in our world of compliance, it allows you to move through significant volumes at a rather rapid pace. You’re able to rely to some degree on what we did last year. While “same as last year” often gets you into trouble, if there was ever a time that we cannot use SALY, it’s now. At a minimum, we have the same volume that we always had. Now we possibly have more because of Wayfair, right? Because we think it’s possible that Wayfair’s decision in the sales tax area is going to creep in, increasingly creat[ing] economic nexus problems in the income tax area. So, maybe your volume’s now increased from [Wayfair] and you have all this complexity, you have too few people to do it, and SALY doesn’t live in the building. It truly is a perfect storm.
“I think Wayfair definitely is the biggest case, because it was just such a dramatic change, and it was overturning a rule that we all kind of grew up living and breathing and just knowing.”
State Legislation and Regulation
Levin-Epstein: What’s going on these days specifically in terms of state legislation and regulation?
Rodriguez: Everyone’s taxable everywhere. [Laughter.]
Monroe: I think the states actually, before federal tax reform, foreshadowed federal tax reform. I know in some of our core states, places like North Carolina, there was significant fundamental tax reform about three or four years before federal tax reform, and it kind of follows the notion that the states are incubators of democracy, right, for the federal government. I think in that instance it actually came true. One of the federal trends or nationwide trends I see in state and local tax is this rebelling against Chevron deference—
Gordon-Brown: I love that.
Monroe: Chevron deference being this judicial doctrine that requires a court to accept an administrative agency’s interpretation of an ambiguous statute simply because the interpretation is reasonable. You’ve heard a lot about this on the federal level, and I think on the state level it’s been abused a bit by certain state jurisdictions. You’re seeing in certain states like Florida—and I know Georgia’s got a lot of activity around it now—taxpayers rising up against Chevron deference and getting action at the state level.
Levin-Epstein: Anybody else want to weigh in?
Rodriguez: My feeling was that the states were already getting more aggressive, and it feels like tax reform gave them license to [say], “Oh well, we can just conform and tax that, too.” I really feel like it’s going to be interesting to see how it shakes out on the state level with state and local jurisdictions having that aggressive position to begin with, and now they’ve got a larger tax base, potentially. It’ll be interesting to see if they rein themselves in at all, or if they keep being aggressive and wanting everyone to be taxable everywhere.
Gordon-Brown: I love the Chevron thing, by the way, Cooper. When I was in law school, I worked with a professor, and we wrote an article about Chevron deference, so it’s interesting that you bring that up.
Monroe: You were way ahead of your time. [Laughter.]
Gordon-Brown: I guess so. I think what I’m seeing more of, besides the usual answer of “mandatory unitary combined reporting, and market-based sourcing, and gross receipts tax, blah blah blah”—we’ve heard that a million times—I’m seeing a lot of creativity, can I call it that? Not in a good way. [Laughter.] Wayfair, I have to give it to them—that was creative, what they did. They forced the issue. We at TEI, the state and local tax committee, just approved an amicus brief that we’re filing in Louisiana against a parish that is taking a very aggressive, creative position regarding a marketplace facilitator and using a very old statute to claim that the marketplace facilitator should have collected and remitted sales tax. I just find that the states are getting bold, they are getting brazen, and I think they are getting a little bit more creative. Like the Massachusetts cookie nexus—come on. [Laughter.] It’s so nuanced; I don’t care for it, but I have to give them props for being creative. Let’s put it that way.
“I think in the state and local tax area, especially in the indirect areas like sales and use tax and property tax, there’s an especially large opportunity to bring technological processes to bear on those kinds of systems.”
Wayfair—A Really Big Elephant in the Room
Levin-Epstein: Is Wayfair the biggest case that you guys are dealing with?
Monroe: I think Wayfair is certainly out there [as] number one. I’m not sure what to say about one that comes in second. For my industry and my company, we’ve always been really conservative about nexus. I think Marji mentioned earlier Wayfair, while being a sales tax case, it’s most likely going to bleed over into income tax nexus as well. For my industry and my company, we’ve always had this philosophy of not being aggressive on nexus, but really going in and filing in jurisdictions if there’s even a whiff of possibility we need to, to start the statute of limitations running, and then just work on other things, like apportionment and things like that. It’s probably a lot more relevant to other industries.
Gordon-Brown: I think Wayfair definitely is the biggest case, because it was just such a dramatic change, and it was overturning a rule that we all kind of grew up living and breathing and just knowing. Like when I mentioned SALY, there are just certain things you can rely on; you could rely on physical presence, or at least we thought we could. In our time practicing in this area, I don’t think you could say that there is a bigger case than that. From there, I don’t know that there’s a second that stands out. There are so many, but they stand for so many different things. This was landmark. This was definitely landmark. I don’t know that I have another one. Michell, do you?
Rodriguez: I don’t. It’s interesting, because a lot of cases only hit specific industries. I think that Wayfair has the potential to be so far-reaching. We’ve always been very conservative, nexus-wise. We have a warehouse in almost every state, and we file there. Now we’re having to look at little small jurisdictions that we didn’t even think about that might not be anywhere near a warehouse, and it’s, like, “Oh wow, do we have to register and file there?” Administratively, the burden is just multiplied. I think that Wayfair is pretty huge to everybody. The last cases that were big years ago were the Geoffrey cases, when they were starting to look at more intangibles. I think that for our current period Wayfair is going to be the big one.
“My feeling was that the states were already getting more aggressive, and it feels like tax reform gave them license to [say], ‘Oh well, we can just conform and tax that, too.’”
Encouraging Careers in Tax
Levin-Epstein: What can TEI do to get more young people interested in a career in tax?
Rodriguez: I think part of it is just awareness. When I went to college, everyone was aware that you could get an accounting degree. It wasn’t until I pretty much graduated and realized, “Oh, I don’t really like accounting,” that one of my professors mentioned, “Well, maybe you should go get a master’s in tax.” I think that, as an industry, we sort of need to be more visible to students while they’re studying and considering their options and what’s out there. I think being visible at the college level, and the students knowing that we’re a viable profession, and as more legislation comes down we need more people. We’re a very viable profession. I think that’s the biggest part, getting to people while they’re young and studying and looking for openings.
Monroe: The thing I’d add to that is I think we went through a period of scandal that included a hit to the accounting profession.
Monroe: Yeah, that whole debacle. It used to be, I think, that the accounting profession was treated as a highly ethical, noble profession, up there with doctors. I think it’s taken a hit over the last few decades. An organization like TEI, one of their core missions is about propagating the profession and extolling its virtues. To the extent we can do those kinds of basic outreach on the ethical underpinnings of what we do, I think that would be helpful.
Gordon-Brown: What came to mind—and actually it echoes somewhat what Michell was saying—I think to help TEI, we need to get in front of people who are young and who are just dipping their toe into this arena. Why not become affiliated, if possible, or involved in master’s of tax programs? Does TEI connect with business schools? Can they sponsor something? People who are going to graduate school or have chosen a path—or at least they’re beginning to choose a path—can we get in front of them then, so that when they become professionals, when they are no longer students, and they’re employed, that they take that knowledge with them to their employer, and they maybe would join an organization such as TEI. I can tell you that I had never heard of TEI until, I don’t know, twelve years, thirteen years, into my career. That’s not good. I should have known about TEI when I went to classes in the business school. I don’t remember ever seeing the logo, ever hearing anyone talk about it. Maybe that’s too young, but I don’t think so. I don’t think so. Right? Before people start their first job. Because once they get to an employer, if the employer’s not talking about TEI, I don’t know how you become aware of it.
Rodriguez: I think the accounting firms do a really good job of touting the virtues of the accounting firms and that as a profession, but not so specific to tax. So, we definitely need something that’s more specific to tax that gets in front of people earlier in their careers or their school education.
Levin-Epstein: That’s a good way to end it.