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State information sharing.

In recent years, many states have entered agreements to share tax information with each other. Thus, as a business ventures into another state for a new source of revenue, the taxing authorities of that state may venture into the taxpayer's home state for the same purpose. A taxpayer adopting a "wait and see" strategy before filing tax returns in other states may ultimately face substantial tax and administrative problems somewhere down the road. In addition to the cost of filing delinquent returns and paying back taxes and interest, the taxpayer may be subject to stiff penalties; in many cases, the taxing authorities of other states may use the courts of the taxpayer's home state to enforce collection of these liabilities.

Information sharing

A basic information-sharing document (Exchange of Information Agreement) has been drafted by the Multistate Tax Commission (MTC) and endorsed by officials from a number of states. The agreement is designed to assist participating state governments in administering their income/franchise and and sales/use tax laws. More than 20 states with corporate or individual income or franchise taxes have entered into MTC information-sharing arrangements, and a similar number of states have endorsed the MTC sales tax agreement. Those states that endorsed these agreements mutually agree to exchange information, to the full extent permitted under their state's laws.

Most recently, the MTC and the Federation of Tax Administrators developed a new tax information network called Tax Exchange. This network, after a one-year trial period involving 15 states, became available to all states effective Oct. 1, 1991. The network is designed to provide more timely information to state administrators on topics such as the status of current cases, views on important issues and new discovery techniques.

As an alternative (or in addition) to using the MTC as a source for collecting data, a number of states have entered separate sharing or information collecting arrangements. In the Midwest, for example, several states participate in the Great Lakes State Tax Compact. New York administers the Northeast States Tax Compact and actively solicits information from corporations on behalf of participating states. Similar arrangements exist in other regions of the country.

Some states have taken information gathering a step further by setting up "shop" in other states. The Michigan Department of Treasury, for example, recently established an office in Ohio. As a member of the Great Lakes State Tax Compact and a border state of Michigan, Ohio may prove to be an excellent source of revenue for Michigan. Michigan has significantly increased its ability to actively audit Ohio taxpayers, many of which have the requisite nexus to be subject to tax in Michigan. A number of other states also assign audit personnel to various regions of the country. Finally, it is not uncommon to have an out-of-state auditor visit several taxpayers within a state as part of an audit "circuit."

During the course of a state audit, out-of-state allocation and apportionment calculations are closely scrutinized. State auditors usually request copies of the returns filed by the taxpayer in other states, to verify the amount of revenue apportioned to those states. If the taxpayer fails to file a return in another state or understates income in that state, state administrators are willing, or even eager, to inform the other state of these facts, particularly if the other state has entered a reciprocal agreement with the auditing state.

Many states also participate in MTC audits to determine if taxpayers are fully complying with local laws. The MTC will perform corporate income/franchise and sales/use tax audits at the request of its member states. The ability to jointly audit one large multi-state corporation can provide benefits to several states at one time. In addition to obtaining audit compliance information, states gain access to statistical sampling and other information collected by the MTC during the course of the audit.

Enforcing collection of state taxes

In addition to information sharing, most states permit their courts to be used to collect other states' taxes. The ability to use another state's court system for tax collection generally depends on whether reciprocity exists with the other state. In many states, it is not even necessary to obtain a judgment in the taxing state before filing suit in some reciprocal jurisdictions.


Taxpayers expanding their business operations to other states are wise to review each state's nexus standards and filing requirements for income, franchise, and sales and use tax returns. With the increased flow of information between state administrators, a state's ability to identify taxpayers residing in other states is steadily increasing. Taxpayers who have previously adopted a "wait-and-see" approach to taxation outside of their home states should reevaluate their position in light of this expanded flow of information. Such taxpayers may be creating a double tax burden--i.e., it is conceivable that the statute for amending returns to obtain refunds in their home state may be closed, while the laws in another state in which the taxpayer has carried on business and owes tax could remain open indefinitely, due to the taxpayer's failure to satisfy that state's filing requirements.
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Article Details
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Author:Sowa-Holmes, Marcella
Publication:The Tax Adviser
Date:Dec 1, 1991
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