Legislative proposals being considered by the Virginia Department of Taxation for the 2005 General Assembly: October 21, 2004.

On October 21, 2004, Tax Executives Institute sent the following comments to the Virginia General Assembly in response to a request for comments on legislative proposals that the Department of Taxation is considering for the 2005 session. The comments were sent as a letter from Virginia Chapter President Herbert M. Smith of Dominion Resource Services, Inc.

I am writing in response to your September 21, 2004, request for comments on legislative proposals the Department of Taxation is considering for the General Assembly's 2005 session. On behalf of the Virginia Chapter of Tax Executives Institute (TEI), I thank you and your colleagues in the Department for providing an opportunity for TEI to comment on these proposals.

Background

Tax Executives Institute was established in 1944 to serve the professional needs of business tax professionals. Today, the Institute has 53 chapters in the United States, Canada, and Europe, including the Virginia chapter and a Baltimore-Washington chapter in which many Northern Virginia tax professionals are active. TEI's more than 5,400 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe. TEI has more than 150 members based in Virginia, as well as many non-Virginia based members whose companies have significant operations and sales within the Commonwealth. As a professional organization, the Institute is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the costs and burdens of administration and compliance for the benefit of taxpayers and government alike.

Comments

Of the proposals sent to us for comment, only F-TAX-5 deals with issues of direct importance to the members and companies represented by TEI. This proposal would authorize the Tax Commissioner to adopt procedures that eliminate paper requests for an extension of time for filing income tax returns. The proposal would also increase the penalty for failing to pay at least 90 percent of the tax by the original due date from 0.5 percent to 3.0 percent per month. Although we support efforts to decrease paperwork, we regret that the authority granted in the proposal may be misapplied to require taxpayers to file for extensions electronically. Additionally, TEI strongly objects to the increased rate proposed for the failure to pay estimated tax penalty.

The increased monthly penalty rate is unreasonable, particularly for multinational taxpayers. Taxpayers strive to be timely when making payments, but may have difficulty obtaining the requisite information from reporting units. Failure to pay and failure to file penalties work in conjunction with the interest provisions to fairly compensate the state for the time-value of money as well as provide incentives for timely filing and payment. The proposed six-fold increase in the penalty rate, however, is beyond the pale of good tax policy. The Commonwealth is already fairly compensated for late payments, since taxpayers pay interest on any taxes not remitted by the original due date in addition to the current penalty, if applicable. The equivalent of a thirty-six percent annual rate is usurious; at a minimum, a penalty so harsh should also contain a reasonable cause exception.

TEI supports efforts to lessen the burden of tax-related paperwork. Expanding the opportunity for taxpayers to secure extensions electronically by establishing a taxpayer election is commendable. The proposal gives the Commissioner significant latitude regarding procedures for enabling taxpayers to elect an extension. TEI suggests the Commissioner use the grant of authority in the proposed legislation to eliminate even more paperwork relating to extensions: We recommend that the Department eliminate entirely the requirement to file a separate Virginia extension form. Indeed, many states (including Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Illinois, Iowa, Indiana, Kansas, Louisiana, Maine, Minnesota, Mississippi, Montana, New Hampshire, Ohio, Oklahoma, Oregon, South Carolina, Utah, and Wisconsin) have already taken this approach. These states either automatically grant an extension or accept a federal extension request. Taxpayers make a separate extension-related filing with these states only if additional tax is due. In the interest of streamlining tax administration, TEI respectfully requests that the Commonwealth consider a similar procedure. We do not, however, support procedures that would eliminate any flexibility for taxpayers in managing their affairs by mandating that requests for extensions only be made electronically.

Conclusion

TEI appreciates the opportunity to review and comment on these legislative proposals. Please let me know if you have any questions regarding our comments or would like to discuss any of them in more detail. I can be reached at 804.771.4143 or [e-mail].