State And Local Tax
State and local taxes ("SALT") are often given little importance because their return on investment (ROI) is small compared to federal taxes. But every little bit helps, doesn't it? Multistate compliance and controversies make the SALT practice area extraordinarily complex. The combined SALT effective rates for some states can average two thirds of the federal effective rate — and the trend in SALT tax rates continues to rise because so many states are experiencing significant tax shortfalls.
Do not wait until you being audited or in trouble with the IRS or Colorado Department of Revenue to contact a tax attorney. Let an experienced tax attorney help you to reduce your tax burden now and keep you from overpaying taxes. The structure of your business or estate plan, the methods of analysis and reporting, and appeals of unfair and burdensome taxes can all be addressed and resolved.
State and local taxes significantly impact a company’s cash flow and risk profile. Together we can identify risk areas and sustainable planning opportunities for state and local taxes throughout the tax lifecycle, helping you to address your state and local tax responsibilities and to your investors to achieve your business goals in the US and around the world. I offer tax advisory, compliance and outsourcing services related to both real and tangible personal property
Most state and local taxes are "ad valorem" taxes, meaning that they are imposed "against the value." Tax is determined by multiplying a "mil levy" against the value. The "mil levies" are set by government jurisdictions and little can be done to change them. The key to reducing ad valorem taxes is to reduce the value.
Categories of Tax
State and local taxes can be divided into categories
- Direct Taxes
- Property Tax - a "mil levy" is assessed against "fair market value" or, more commonly, "assessed value". Just a comment: assessed value does NOT equal fair market value!
- Personal Property Tax also referred to as Use Taxes - as form of excise tax assessed on otherwise "tax free" tangible personal property. For example, Colorado used to have a use tax on office equipment.
- Excise Tax - a tax against a specific unit of measure of goods. For example, a tax against x-gallons of gasoline or y-cartons of cigarettes. Colorado has a whole separate group dealing with liquor excise taxes.
- Severance Tax - a big issue in mineral rich Colorado.
- Income Tax - State income tax imposed on individuals, trusts (fiduciaries) and businesses.
- Public Insurance Taxes - While the federal government imposes taxes for social security, medicare and medicaid, the state imposes tax for the state unemployment insurance ("SUI") fund.
- Consumption Taxes
- Sales Tax - A "rate" is applied against the value of the sale(s). These rates vary by city and county because the local rates are added to the state sales tax rate.
- Use Tax - Use tax is due if (1) You purchased items without paying sales tax in Colorado or out of Colorado and (2) Your items purchased were used, stored, or consumed in Colorado. You may have to pay RTD/CD/FD use taxes in some local jurisdictions. Often a problem for wholesale and retail establishments carrying inventory. Even though the goods are not "consumed", the tax is in lieu of having collected sales tax.
- Fuel Tax - Colorado has state and International Fuel Tax Agreement taxes
- VAT (Value Added Tax) - not in vogue in the US, but very common overseas. Also known as goods and services tax (GST). An excise is distinguished from a sales tax or VAT in three ways: (i) an excise typically applies to a narrower range of products; (ii) an excise is typically heavier, accounting for higher fractions (sometimes half or more) of the retail prices of the targeted products; and (iii) an excise is typically specific (so much per unit of measure; e.g. so many cents per gallon), whereas a sales tax or VAT is ad valorem, i.e. proportional to value (a percentage of the price in the case of a sales tax, or of value added in the case of a VAT).
- Privilege Taxes
- Fees & licenses
- Franchise Tax - Franchise taxes are imposed for the privilege of doing business in a state. Some states are implementing "addback" taxes. Placing assets in appropriate "safe harbors" can significantly improve your profits.
- Local Employment Tax - Denver imposes a tax per person (a "head tax") for the privilege of working within the city limits.
- Incentives and Tax Reductions - Abatements, Credits, Refunds, Exemptions, Exclusions, & Incentive Zones
- Abandoned and Unclaimed Property - A type of "escheat." Most states conduct audits to find abandoned and unclaimed property. Examples include uncashed payroll and dividend checks, credit balances in customer accounts, unclaimed estates, dormant bank accounts, unredeemed gift certificates, and unpaid amounts due under insurance and annuity contracts.
Property taxes are the largest single component of many companies’ state and local tax burden. Average property taxes comprise 37% of a company’s total state and local tax burden. Many companies pay far more in property taxes than is necessary. While income taxes are largely a result of applying a rate against a ledger entry, property taxes are usually more controllable because they are imposed against an estimate of value. .
Say a company has a $1,000,000 per year tax burden. For our example, the effective federal share is $600,000 and the state share is $400,000. If property taxes represent 37% of the total state taxes, then property taxes cost $148,000...almost 15% of the total tax burden!
Accounting principles make state and local taxes particularly difficult because SALT taxes are often based on VALUE rather than simple ledger entries. See FASB Interpretation Nos. 48 (Uncertainty - see also FIN 48), 109 (Income Taxes). They can be compared to principles that place values on such things as pending lawsuits.
Reducing The Value
How do we go about reducing the value? There are several methods:
- Appraised Value - this method requires a professional opinion of value. Most counties have an Assessor's office and use sophisticated appraisal software to estimate value. You should be aware that what the Assessor says is fair market value IS NOT. More often than not, an independent appraisal may show that the true fair market value is not what is shown on the Asessor's books. The reason? The Assessor's office does not have the resources to complete a completely accurate appraisal of every property in its jurisdiction. Another reason may be that they have not applied the appropriate depreciation principles.
- Asset Allocation - Will your HVAC system last as long as the bricks and morter of your property? Most likely not. Different PARTS of your property lose value at a different rates. For example, the HVAC may only have a 10 year life while the property itself has a 30 year life. Therefore, the VALUE of the HVAC decreases at a greater rate per year. By allocating value to different parts of your property we generally are able to reduce the composite value and property taxes are reduced.
- Nexus - Nexus refers to WHERE the assets being taxed are located. This is a critcally important element to consider for multistate companies. Addback provisions (Georgia, Virginia and others), Gross Receipts Taxes (Ohio, Texas and others), and differing tax rates can make a substantial difference in your tax burden. Properly and legally transferring assets to "safe harbor" jurisdictions can help.
- Apportionment - Apportionment refers to HOW taxes are applied against value.
- Income Classification - By reclassifying income we may be able to achieve tax savings.
- Filing Options - Reclassifying assets, applying nexus principles to transfer assets (such as income) from one state to another, obtaining reduced appraised values, and other tactics may allow our filing options to change and result in lower overall taxes.
- Credits & Other Incentives - Millions of dollars are lost every year due to sheer ignorance of the law. You may be eligible for tax credits and other tax incentives. Some examples include enterprise zones, Economic Recovery Act incentives, Work Opportunity Tax Credit, Training Incentives, Climate Change and Sustainability-related credits and incentives, etc.
- Refunds - We can identify and secure refunds associated with the overpayment of FICA, FUTA, and state unemployment insurance (SUI) taxes that can occur when a company participates in a merger, acquisition or reorganization transaction.
- Voluntary Disclosures - I once saved a client $6M by advising a voluntary disclosure of a delinquent tax obligation.
We also assist businesses in complying with FASB Interpretation No. 48 by providing advice with regard to the different aspects of identifying, recognizing, measuring and disclosing uncertain tax positions for financial reporting purposes. Our tools allow our professionals to accurately and efficiently assist companies to meet their FIN 48 tax accounting requirements.
Common Tax Issues
- Back Taxes & past due tax returns
- Mortgage Tax Relief
- Payroll tax issues
- Tax wage garnishments
- Audits - Income, Sales, Use, Payroll, Unclaimed Property, etc.
- Overvalued real estate
Tax Services
Your accountants will typically provide compliance services. However, there are times when you need to do more or even appeal your taxes. Whether before a regulatory board, commission, or in court, I can provide knowledgeable legal services to help you reduce your tax burden. I have, through many successful engagements in many industries and jurisdictions, helped clients efficiently and effectively resolve tax audits and controversies. These resolutions often translate into meaningful reductions in tax costs.
Important aspects of my services include:
- Working collaboratively with you and your bookkeepers and accountants and other professionals to gain an in-depth understanding of your company's business in order to provide effective representation. I work with a number of Appraisers, Enrolled Agents, CPA's and Attorneys to assist in this process.
- Coordinating your compliance, audit and appeal needs across multiple jurisdictions.
- Identifying potential tax benefits by applying statutory and regulatory laws to your facts. Most state laws present both traps and opportunities. Proper application of state tax laws and their subtle variations may result in a major tax impact.
- Determining which procedural route - settlement, offer(s) in compromise, conciliation conference, or administrative hearing - an individual client should pursue.
- Prosecuting any controversy through administrative appeals when issues cannot be resolved at the audit level.
- Working collaboratively within the network we develop, leveraging their knowledge and experience to attain current tax benefits and sustainable filing positions for the future.
- Providing guidance on new state tax policy and legislation.
- Providing the full range of local and multi-state tax controversy needs from complex rulings to audit defense and issue resolution.
Exactly what we can do I don't know until we set an appointment and discuss your situation. Let me help you identify tax and non-tax savings and income opportunities for past, present and future investments, job creation, research, training and other qualified investments and expenditures. Or let me help defend you against government tax collectors.
Useful Links
- Library-Tax (No articles in there yet. Give me some time! This site has only been up since March 2010. I do and will have a lot to say.)
- Colorado Department of Revenue
- Colorado DR 0145- Tax Power of Attorney
- Colorado DR 5714 - Request for Copy of Tax Returns
- TaxSites.com
- Treasury Department - State and Local Taxes