With the recent passing of the Tax Cuts and Jobs Act (TCJA), the pressure is on tax departments to not only understand the initial changes, but account for the ripple effects that are likely to follow. These effects are particularly challenging when it comes to the uncertainty of the states’ response.
While it’s hard to gauge the impact of federal tax reform on state corporate income taxes, what we do know is that it will likely result in a significant increase in state corporate income taxes, absent state action. This occurs because states typically conform to federal provisions that impact the tax base, but not the federal corporate rate cuts.
According to a recent study by Ernst & Young LLP/COST, the estimated percentage change in the state corporate tax base from conforming to the TCJA is about 12% over the first 10 years (2018-2027), with significant variation among the states and from industry to industry. For multinational corporations, the uncertainty is compounded by the fact that state adoption of TCJA’s international provisions raises Constitutional questions that weren’t an issue at the federal level.
Further adding to this complexity is the fact that the Supreme Court is hearing arguments on South Dakota v. Wayfair in April. Under current Supreme Court precedent (Quill v. North Dakota), online retailers are not required to collect sales taxes unless they have a physical presence in a state. That leaves traditional brick-and-mortar retailers that collect sales taxes at a competitive disadvantage, not to mention states potentially losing out on billions of dollars in revenue annually. In recent years, states have tested the limits of Quill by adopting click-through and economic nexus policies or imposing onerous reporting requirements on remote sellers.
The outcome of this case will result in one of three actions: 1.) the Court does not rule on the merits and there is no immediate change to the status quo; 2.) the Court affirms Quill and the physical presence requirement; or 3.) the Court overturns Quill, ending the physical presence nexus requirement.
A number of states have economic nexus laws on the books that will automatically come into effect if Quill is overturned. With the fiscal uncertainty that the TCJA presents, we can expect more states to consider economic nexus as they try to balance budgets this year. In the end, it’s yet another legislative impact for companies to consider.
In such a chaotic environment, what can corporate tax professionals do now to prepare? Here we take a look at three tips.
- Use your company’s leverage in shaping state tax law.
At the state level, corporations have a chance to be proactive and determine what state law will look like. If your organization is a significant percentage of the economy in a state, you have substantial leverage over how that state conforms to federal changes. So, make sure you understand your impact in each state in which you do business and use it to decide where to allocate your lobbying funds. It’s not just about tax compliance but about shaping how tax laws are actually written.
- Understand what your peers are doing.
While proactively trying to influence new state law, corporations are also spending time modeling an array of scenarios that could play out. The reality is that significant uncertainty exists, however, trying out potential outcomes based on a set of assumptions is one way to plan for the uncertainty. Having a feel for the best or worst-case scenario can provide some level of comfort in your future.
If you’re part of a corporation that has the technical infrastructure and analytical skill sets in your department to run scenarios, you’re ahead of the game. Most are currently assessing if they’ve invested in the right level of technology and whether or not they need to hire out for the right skill sets to keep them ahead of the curve for what will likely be a couple of years’ worth of change and uncertainty.
Corporate tax departments must also stay abreast of the news and the sharing of ideas and opinions. That’s why attendance at industry conferences is up significantly over prior years, and engagement with advisory firms and trusted vendors is peaking. This is the time to leverage your network and maximize the number of ideas and opinions you expose yourself to.
Many corporations are also building out action plans. A roadmap of planned activities ensures you remain in focus and time is not wasted. During this intense period of change, tax departments may need to move quickly. Having a documented action plan will certainly provide a firm foundation in a rapidly changing tax environment.
- Take advantage of the compliance tools available.
With implications for tax provision, tax return preparation and transfer pricing documentation, it’s crucial to implement solutions that help your tax team standardize data, model scenarios, comply with changing obligations, and above all, create an advantageous tax strategy for your organization.
In this time of notable change, tax departments must expand their expertise from strictly compliance to comprehensive tax strategy. While compliance is always the number one priority, it should be the easy part. Seek out solutions that are designed to help you address the challenges of an ever-changing tax landscape, so you can focus your time on proactively helping your organization drive ROI.
While it may seem overwhelming, tax reform actually presents an opportunity for corporate tax departments. Use this compelling, high-profile event to elevate tax and your tax department in the eyes of senior leadership. If you get it right, tax is guaranteed a seat at the table as a trusted partner in company strategy. If not, the repercussions could be disastrous. So, don’t wait. Tax reform and its implications require proactive planning and the time to start is now.
To learn more, join a live conversation with Thomson Reuters’ Marc Mehlman, Vice President & Head of Thomson Reuters ONESOURCE Direct Tax and Melissa Oaks, Managing Editor, Thomson Reuters Checkpoint Catalyst.