Once again, our team has debated and discussed top issues in state and local tax to identify the most pressing for taxpayers. Ten have risen to the top. Here’s the SALTovation Team’s Top Ten State and Local Tax Issues to watch in 2024.
Once again, our team debated and discussed top issues in state and local tax to identify the most pressing for businesses. Ten rose to the top. Here’s the SALTovation Team’s Top Ten State and Local Tax Issues to watch in 2024.
1. Broad state revenue grab continues
We anticipate in 2024 new tax types and expanded tax bases as states continue to find new ways to generate revenue. In Maryland, the digital advertising tax is still in effect, with potential litigation on the horizon. The state of Minnesota has followed Colorado into retail delivery fees, and more states are expected to join the bandwagon.
2. Income tax exposure grows with PL 86-272 modernization
States like California, New Jersey, and New York are contemplating or adopting the MTC statement on PL 86-272, leading to potential pushback. New Jersey has already adopted it. The ACMA lawsuit in California marked the first challenge to new state interpretations on the federal law. ACMA recently won a ruling on Dec. 15, 2023, setting a precedent for challenges elsewhere. ACMA’s early victory underscores the need for California to follow proper regulatory channels.
3. Streamlining state tax administration and home rule enforcement
Efforts continue to streamline administration, particularly in states with home rule enforcement. The State and Local Tax System (SUTS) in Colorado now includes almost all cities. Alaska moved forward with a single filing system for home rules in 2023. Expect an uptick in home rule audits in Alabama, Alaska, Arizona, California, Colorado, and Louisiana.
4. Transaction activity and SALT implications
With M&A activity healthy, there are significant State and Local Tax (SALT) implications. Businesses cannot avoid state tax obligations during sales, and successor liability is a crucial consideration affecting the sales price –whether it is a stock or asset sales as sales tax liabilities follow – no one wants to buy someone else’s mistakes!
5. CPA firm qualifications and litigation risks
An ongoing North Carolina case is highlighting the importance of specialized knowledge in sales tax matters. An online retailer in North Carolina has filed a complaint against its CPA firm for not making them aware of Wayfair-related issues, leading to significant remediation costs. Is your CPA qualified to handle state and local tax issues? Not many are. Read The Importance of Hiring an Ace Tax Provider at TaxOps.com for more guidance. Not all CPAs or sales tax experts are the same, know what you are buying and from whom.
6. Choosing the right sales tax automation
Greater competition in sales tax solutions provides more options for businesses to choose solutions that suit their needs. It also drives innovation and potentially lower prices in the long run. The market for sales tax automation is competitive, leading some companies to promise advisory services that they are not qualified or licensed to deliver. Players entering the market are also offering differentiated services, such as Ceretax, which emphasizes use tax functionality, and Anrok, which exclusively focuses on software companies. These options can be confusing to businesses that simply want to do the right thing but are unsure of the many components of state and local tax administration. Companies should work with a sales tax expert who specializes in sales tax automation and administration solutions customized to the business to avoid false starts and remediation costs.
7. Federal-level Moore case and SALT considerations
Moore v. United States case at the federal level has potential trickle-down effects on State and Local Taxes (SALT). The case questions whether Congress can tax unrealized profits without apportionment among states, with implications for dividend received deductions and more. We are following this case closely.
8. Apportionment litigation galore
Apportionment-related litigation is abundant as companies ask the courts to define distinctions between apportionable and allocable income. The Cities Management case relates to business and nonbusiness income. Other notable cases, such as the Minnesota Supreme Court case on Cities Management, which relates to business and non-business income. The case involves the Department of Revenue disregarding the Nadler decision, leading to litigation. The Minnesota Supreme Court ruled in favor of the Department on technical grounds. Sweeping changes in New Jersey with regard to the adoption of revised MTC statements on P.L. 86-272 and changes to Finnegan reflect the state’s aggressive approach and seems to make it challenging for businesses to avoid liability even if they do meet revised statement requirements.
9. Post-COVID audit enforcement
Post-COVID, states are dedicating resources to audit enforcement, focusing on compliance. There’s also been a shift from field audits to desk audits, which could increase the pace of enforcement. possibly influenced by remote work trends. Companies should consider lookback periods and, if non-compliant, prepare for audit and remediation strategies. The average cost of a sales tax audit is $100,000 or more in time, tax, penalties and interest – is it really worth it to roll the dice?
10. Automation challenges in SALT Administration
Despite increased automation, audits reveal that companies may not be collecting taxes correctly. Challenges include evolving product codes, changes in laws, and the need for continuous monitoring and updates to the automation system. There are instances of companies using system overrides to negate taxes on invoices, leading to inaccuracies. Another common issue requiring attention is new products defaulting to taxable status. The overall message here is the importance of continuous review and adaptation in sales tax administration and automation. Businesses must stay proactive to avoid over-collecting, under-collecting, and other issues related to changing market conditions, and see automation as a valuable tool, a single component of a comprehensive SALT administration process.
These discussions in 2024 expose the dynamic nature of sales tax administration and automation, the challenges faced by businesses, and the need for constant vigilance and adaptation in the ever-evolving landscape. Contact your TaxOps Advisor with questions or concerns.