By William J. Hayes, managing editor, Pennsylvania CPA Journal
Drew VandenBrul, CPA, managing director, state and local tax, for Grant Thornton LLP, appeared on a panel (along with fellow PICPA members Timothy Billow, Frank Czekay, and Kenneth Stoops) at the Oct. 29 PICPA Multistate Tax Conference and discussed some of the hottest trends in multistate taxation. In this blog we discuss prominent indirect state tax issues and aspects to be monitored in the area of combined reporting.
What would you say is the biggest trend to keep an eye on among direct state tax issues?
A lot of the trends we’ve been watching for years are starting to slow down. This includes single sales factor apportionment and combined reporting, mostly because so many states have already implemented these changes. We are still seeing steady enactment of legislation for market-based sourcing of service receipts, which is a trend that’s likely to continue. Unfortunately, the pace of regulatory guidance on market-based sourcing still lags well behind the legislative changes, leaving room for uncertainty in application of these rules.
Currently, the biggest issue may be how the states are struggling to digest the complexity of the changes from the Tax Cuts and Jobs Act. With federal guidance still in process or proposed, states are grappling with the impacts of the international provisions, such as GILTI and FDII, and the net interest expense limitations under IRC Section 163(j). Even where the tax impacts are understood, the tax reporting for corporations and pass-through entities remains a challenge for state administrators and tax preparers.
Looking forward, I see economic nexus trending for corporate income tax. Following the Wayfair decision, states immediately focused on the sales tax implications on remote sellers and marketplace facilitators. We see evidence now of a turn toward the application of Wayfair to income taxes, including legislation setting out bright-line nexus thresholds. Hawaii recently joined this group of states, and we can expect even more activity in the 2020 legislative sessions. Proving this trend, Pennsylvania just released Corporation Tax Bulleting in 2019-04 outlining the Pennsylvania Department of Revenue’s position that sales of $500,000 or more may create a corporate net income tax filing requirement beginning in 2020. The bulletin raises many questions, which we will address at the conference.
What is a prominent concern with indirect state tax issues?
In a word, Wayfair. Over a year after the Supreme Court’s decision, the practical implications are still playing out for many taxpayers. There are far-reaching effects on the volume of tax compliance, registrations, exemption certificate management, and taxability determinations that go beyond the initial scope of the states’ transaction and/or sales volume thresholds. As anticipated, this is also pushing into the realm of inbound sales by foreign sellers. The myriad considerations under Wayfair may ultimately impact business decisions far beyond tax.
Is there anything we should be monitoring in the area of combined reporting?
There’s no way of knowing which state may be the next one to consider combined reporting legislation. What we do know is that New Jersey’s combined reporting change is effective for tax years ending on or after July 31, 2019. While taxpayers have been addressing the financial statement impacts of this change since its enactment, the time is fast approaching when tax returns will need to be prepared under this new methodology. New Jersey has been issuing a steady stream of administrative guidance on combined reporting and TCJA changes, and anticipates more releases in the near future. These, along with upcoming tax forms and instructions, will begin to shape the compliance process.
Pennsylvania again introduced combined reporting legislation with the fiscal year 2019-2020 budget, but it was not ultimately enacted. The trend of introducing some form of this legislation has been consistent, but we’ll have to wait until next year’s budget to see if this receives any additional consideration for eventual enactment.
Hot Topics at the Multistate Tax Conference