In the last few years, there’s been a discernable focus on federal tax issues in the wake of the passage of the most comprehensive tax reform package in three decades. But much of the action is taking place in state legislatures and state departments of taxation. We wanted to get a better handle on those state tax issues, so we invited three experienced practitioners in the field to participate in a roundtable discussion in January. They are Robert Clary, state tax manager at Ford Motor Company; Julia Owen, vice president of tax for the C&S Wholesale Grocers group of companies; and Jennifer Wilson, state and local tax manager at Masco Corporation. Michael Levin-Epstein, Tax Executive’s senior editor, moderated the discussion.
Michael Levin-Epstein: Let’s start off by looking at the state tax filings for 2019. How did those filings compare with the previous filing seasons?
Julia Owen: We are a unique company when it comes to taxes. The way we are structured, we are a flow-through company for tax purposes; therefore, the most impact we see is primarily at the shareholders’ level. We have some C corps in the structure, and we’re also on a fiscal year, so I think the major impact is going to be for this year’s compliance. The biggest challenge for us on the operational side is the volume and data integrity. On the legislative side, it’s states’ conformity, and on the tax compliance side it is state apportionment.
Julia Owen: We are a unique company when it comes to taxes. The way we are structured, we are a flow-through company for tax purposes; therefore, the most impact we see is primarily at the shareholders’ level. We have some C corps in the structure, and we’re also on a fiscal year, so I think the major impact is going to be for this year’s compliance. The biggest challenge for us on the operational side is the volume and data integrity. On the legislative side, it’s states’ conformity, and on the tax compliance side it is state apportionment.
Jennifer Wilson: The 2018 return filing season was by far one of our most complex seasons yet. When we felt like we had a handle on the research earlier in the year and our positions of how to treat federal reform items, the various states began to digest and address or change their positions when they were in session during the summer. The roadmap of necessary adjustments to the state returns [became] overwhelmingly complex. Mapping these federal reform adjustments in our tax software added to the complexity.
Levin-Epstein: Are there specific states or issues that present challenges to you now in terms of filing state tax returns?
Owen: For us the most challenging state is Pennsylvania, with its locals. New York and Texas join PA; and California is unique, and that’s where we see challenges and uncertainties as they relate to the state tax filing and compliance overall.
Clary: The jurisdictions with significant challenges for Ford are the home state of Michigan, California, New York State/City, Ohio, and Texas. Those states present many complex issues. Michigan is particularly difficult because of Ford’s tax footprint. The company is subject to current filings and prior statutory requirements because of tax incentives that the company has been awarded which support the labor force and capital investment. As to issues, tax reform changes (GILTI and Section 250 deductions) impacted all returns. Taxable? Is GILTI a dividend? If so, [is it] subject to the state dividend-received deduction (DRD)? If a Line 28 state, meaning the state begins with federal taxable income before the federal DRD, are the Section 250 deductions allowed? Ongoing complex issues are state net operating loss (NOL) reporting, market sourcing for services, and mandatory unitary combined filing.
Wilson: Putting federal reform aside, I would say our biggest challenge states are California, Texas, Massachusetts, and New York.
Addressing Challenges
Levin-Epstein: How did you go about addressing those challenges?
Owen: Well, from our side we have to have solid documentation. And, you know, that’s an internal challenge when a company that has been around for a long time grew through multiple acquisitions, but still we have to deal with different sources of information. So, for me, as the head of the tax department, my goal is to find the best use of our resources through automating our processes, through integrating more with our businesses, understanding businesses so we are asking for the right information, and understanding the reports we have been receiving from different businesses. And to shy away from basically churning returns and doing manual work that presents very little value and turn more to analytics. So, understanding what those numbers really represent, challenging the numbers, and asking the right questions. That’s where I see the challenge and how we go about it.
Clary: The compliance burden for Ford is complicated from numerous aspects. The complexity begins with the volume of information. Ford is a legacy company that has been operating for a long time. That history is a challenge, because critical data sources can be difficult to extract. Accurate information is essential. To ensure our data sets support the business activity, we have moved aggressively towards a more technology-based environment through numerous avenues—implementation of a data hub for analysis and reconciliation, use of analytic tools such as Alteryx and away from traditional Excel models, and utilizing third-party applications to manage complex attributes (state NOLs). The technology tools allow my team to determine that our data does represent the business and correctly represents the sourcing of that business (i.e., state apportionment). We need to understand where revenue is earned, as that has a direct impact on the income subject to tax in any jurisdiction. The sourcing of revenue is critical. Our technology initiatives also support our state tax audit exposure.
Owen: I just wanted to add that I am with you, Rob, because we are just starting to play with Alteryx. We’re in our trial period. The way we are looking at it is like, if my analyst can spend two and a half seconds getting the data that would normally take him eight and a half hours, that’s a great investment. That’s a great improvement. So, we are also trying to move away from Excel and get more of an approach to data manipulation and data analytics.
Wilson: We have an excellent tool that gathers [the] majority of necessary apportionment data from our business units at year-end. My team analyzes that apportionment data and gets all work papers essentially ready to be used by our interns. All the apportionment and majority of manual inputs are loaded into our tax software. We have interns that prepare the majority of our state returns. Over the last couple of years, we’ve improved our process on return prep documentation with our tax software so that the transition with different interns every year goes smoothly.
Interaction With Federal Tax Reform Legislation
Levin-Epstein: How did the state tax function intersect with recent federal tax reform legislation?
Owen: It’s a work in progress, right? Because some states are still going through the changes in the law—and figuring out how they can adopt the provisions or not adopt the provisions. And the next phase is how we’re going to implement it. Do we have the budget to implement these changes? Do we have the resources? Every time we go we have sessions with the heads of tax departments in different states, that’s what they share. They see it as a challenge as well. They were not ready for it. So, then that’s where it comes all . . . there is no clarity, there is no clear guidance, and we are still in the transition period of waiting to see what policies states will adopt and where their focus will be.
Clary: Our tax reform process was very rigid. We created a task force within our group: a senior analyst, a member of our state audit team, and me. We held bimonthly meetings to discuss any changes or guidance issued by the jurisdictions which would impact our expected treatment of an item from the last time we met. We generated a robust matrix, state-specific, which listed all aspects that tax reform presented. We then considered the clerical aspect of state tax return forms, which tend to be rigid. The reporting of information does not allow much flexibility. Certain items go in certain places.
Once we determined our filing position, we looked at the compliance software which will report the information, considering the rigidity of the forms. Some jurisdictions were straightforward and easy to implement. We then identified jurisdictions which decoupled from federal tax reform, meaning that the state did not adopt the federal changes. We needed to ensure that the software excluded the tax reform changes from the taxable base. Finally, we identified the states where the rigidity and the clerical nature of the tax return form would impede any opportunity. We adopted a methodology to report the changes within the form and customized the compliance software as needed. In general, we were successful.
Wilson: Not being able to instantly quantify the material impact of federal reform items in the state area became a concern once federal reform was signed into law. Early on, conversations from our federal/international teams and our auditors were critical—all parties being kept in the loop was important. We (the state team) began to put together matrixes on how we should address the items by state. With changes along the way once the states went into session, we diligently stayed in tune with these changes. Like Rob mentioned, the added complexity this past filing season was how to map these changes in our tax software as well.
2020 Predictions
Levin-Epstein: What do you consider your number one challenge in meeting those demands and requirements in the 2020 season?
Owen: Well, I think 2020 is going to be an interesting year for us. We’re looking at the impact of Sections 163(j) or 199A, but I think what we’re looking for is just some clarity, the rules that are set, the local governments come out with more clear guidance and more consistent practice. Because sometimes you are at the mercy of a particular auditor that has a certain style, right? And you can’t predict how your auditor’s going to be, what position the state will take, and what the political climate in the state is going to be. So, I think obviously we are looking for more guidance, maybe even more engagement with industry people, maybe reaching out to industry and listen to what concerns we have as practitioners in particular states and somehow engaging with the practitioners and implementing the recommendations in the guidance.
Clary: As I look at 2020, the 2019 compliance tax year, the number one priority will be to focus on opportunities that may present themselves a year after tax reform. We expect there will be more guidance from the jurisdictions. I am interested as to how the filings that we submitted during 2019 will be processed by the jurisdictions. My focus will be to look for opportunities that we did not have the ability to fully investigate during 2019, because we were faced with addressing the clerical issues I mentioned earlier. The focus is always on minimizing our cash tax rate.
Wilson: For Masco, like some have mentioned, we expect additional changes in position on federal reform items to continue this filing season. With that, we have the challenge before us on the sale of a significant business unit, the research and positions to be taken on the inclusion of the gain in sales apportionment.
