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Tax Executives Institute - Federation of Tax Administrators meeting; minutes December 9, 1994.

On December 9, 1994, Tax Executives Institute held its annual liaison meeting with representatives of the Federation of Tax Administration, an organization of state tax commissioners. The minutes of the meeting, in which representatives of the Committee on State Taxation (COST) also participated, are reprinted below.

I. Introduction

On behalf of the Federation of Tax Administrators (FTA), James W. Wetzler welcomed the delegation from Tax Executives Institute, Inc. (TEI). On behalf of Tax Executives Institute, TEI President Linda B. Burke thanked the FTA for meeting with the Institute.

At the request of the FTA, representatives of the Committee on State Taxation (COST) also participated in the meeting. Representing COST were the following (individuals whose names are marked with an asterisk are also TEI members): Henry A. Duitsman(*) of General Mills, Inc.; Charles Drury of E.I. Dupont de Nemours, Inc.; Richard E. Perkins* of General Electric Company; Kenneth C. Stewart(*) of Georgia-Pacific, Inc.; and J. William McArthur, Executive Director of COST.

II. Report on Illinois Developments

Mr. Wagner invited taxpayer groups to become more involved in Illinois with the Department of Revenue (DOR) observing that, based on the agenda items presented for discussion, it was clear that there were a number of areas of mutual concern, particularly in securing legislative changes on administrative matters. Mr. Wagner reported that Illinois was establishing an electronic bulletin board system (BBS) to permit taxpayers to obtain copies of statutes, regulations, rules, policy information bulletins, and tax forms by fax. He said that the BBS would be in operation by January 16, 1995.

Mr. Wagner next reported that there had been a number of changes in administrative procedure in Illinois. Specifically, as of December 1, 1994, appeals hearing officers (who formerly reported to the General Counsel Division of the Department) report directly to the Director of Revenue. Mr. Wagner said that the new reporting relationship, coupled with the promulgation of a rule prohibiting ex parse contacts between the trial lawyers from the General Counsel Division and administrative hearing officers, will expand the actual and perceived independence of hearing officers. Mr. Wagner added that, in connection with the reorganization of the hearings division, an informal conference unit had been established to expedite resolution of unagreed examination issues prior to issuance of a formal assessment notice. The goal, he said, was to reduce the number of unagreed cases.

Mr. Wagner said that, with the assistance of the IRS District Directors in Illinois, the Department of Revenue had undertaken to publish a joint IRS-DOR newsletter to keep taxpayers better informed on administrative and substantive developments. He concluded by encouraging TEI Chapters in Chicago and St. Louis to become involved in the DOR's commissioner's advisory group to enhance communications on administrative and substantive tax matters.

Ms. Burke thanked Mr. Wagner for his report and expressed the Institute's commitment to follow-up on his

invitation for greater participation in the Illinois commissioner's advisory group.

III. Training Program for New Commissioners

Ms. Burke observed that the results of the November elections at the state level implied a high turnover among state administrative positions. Since TEI is an organization devoted to training, she said, TEI would be pleased to participate in the FTA's training seminar for new commissioners and their staffs. TEI could provide background on an important constituency group for new state commissioners--business taxpayers. Mr. Wetzler thanked Ms. Burke but demurred, explaining that the New Commissioners' Seminar (to be held in March) already had a very full--indeed, overflowing--agenda. He continued that a session at the forum would be devoted to identifying stakeholder groups, the purpose of which was to make the new commissioners aware of stakeholders such as TEI. Mr. Wetzler asserted that there was little opportunity for interaction at the forum and suggested that TEI would gain as much by submitting written materials as through attending. For its part, he said, the FTA encourages new commissioners to follow up with TEI and other groups in local, face-to-face meetings.

Mr. Drury observed that one of the purposes of the New Commissioners' Seminar was to identify and discuss emerging substantive and administrative issues. He suggested that business taxpayers should participate to help frame the issues. Mr. Wetzler responded that the only instructors at the forum would be incumbent commissioners and their staffs. He explained that, if TEI or COST were invited to participate, questions might arise whether other groups should also be invited in order to provide balance. Mr. Wetzler said that he could not justify inviting some groups but not others and candidly expressed a desire to avoid tax policy debates at the forum, especially with the limited time available.

Mr. Duitsman stated that the suggestions had been made because it was important to elevate and intensify the dialogue between taxpayers and the FTA. He referred to the recent initiatives concerning revenue agents' reports in the State of New York and the FTA task force of taxpayers and States in respect of issues raised by the use of electronic data interchange (EDI) technology as examples of collaborative efforts to resolve issues of mutual concern. He suggested that the FTA apprise taxpayers of its concerns in respect of emerging issues in order to focus the debate, permit the most efficient use of resources, and facilitate timely resolution of issues.

IV. Uniformity Initiatives

Mr. McCormally referred to the agenda item concerning uniform substantive and administrative positions among the various states. He noted that detailed position papers had been previously submitted independently by TEI and COST and discussed in prior years'liaison meetings. He requested an update from the various States concerning their position on the various issues.

Mr. Wetzler noted that a joint MTC/FTA-taxpayer task force had recently proposed a uniform apportionment formula for financial institutions. He reported that the State of California had recently adopted the proposal and expressed the view that the State of New York might adopt it soon. Mr. Wetzler noted that the FTA had also completed a proposal for a uniform state regulation concerning visiting nonresident athletes. He observed that the it was extremely difficult to manage a uniformity project, given the turnover of personnel among the 50 state commissioners and their staff. He added that the FTA was governed by consensus of its members and that, as a result, it was difficult to persuade all its members to adopt a uniform rule. Mr. Wetzler spoke comparatively of the difficulty TEI or COST would have in achieving unanimity among its members regarding the uniform application of, say, the combined reporting rules of the Multistate Tax Commission.

While acknowledging that achieving uniformity on substantive issues such as combined reporting or industry apportionment rules may be difficult, Mr. McCormally suggested that it would be far simpler to achieve uniform procedural and administrative rules. For example, he inquired, have the States made progress toward adopting a uniform time period for the reporting of changes to taxable income arising from federal revenue agents' reports (RARs)? Mr. Duncan replied that the FTA had previously issued a report on the subject, but acknowledged that the report could probably stand to be "freshened up." Mr. Duitsman volunteered to send the results of COST's latest research on the progress of the States toward uniformity in respect of this and other issues.

Mr. Duncan inquired whether the use of contract auditors by the States or the imposition of audit fees on taxpayers remained "live" controversies. Mr. Duncan said that, as far as he was aware, only Florida employed contract auditors at the state level. Moreover, he added, Florida had eschewed the practice of compensating its contract auditors on a contingency fee basis. And, since the repeal of New York State's bank audit fee, Mr. Duncan added, only Oklahoma continued to bill taxpayers in respect of auditing expenses incurred by the State.

Mr. Stewart expressed the view that a major source of taxpayers' frustration with contract auditors was their lack of training and experience. Mr. Duncan agreed, saying that the States were often equally dissatisfied with their experience in employing contract auditors, which led to most States' abandoning the practice of using contract auditors. Mr. Duitsman said that another concern among companies was that contract auditors were not careful in guarding the confidentiality of taxpayer information, and added that he did not believe the phenomenon was limited to Florida.

Mr. Scott said that personally he disliked the notion of employing contract auditors in Arizona. Nonetheless, he said, he faced continuing pressure to privatize as many governmental functions as possible and, further, that his department's qualms about contractor auditors would likely not "carry the day" in isolation. Hence, Mr. Scott said that he would appreciate letters from the business community expressing support for the use of professional tax examiners employed by the State. Mr. Arnold agreed that business support was essential to quell periodic political or legislative initiatives to privatize state tax collections, especially since the groups lobbying for privatization were often accounting firms that would provide the audit function in return for a fee. Mr. Wetzler added that smaller accounting firms regularly approached him to propose that New York's audit function be privatized. Mr. Wetzler said that it was important that state legislators hear from someone other than state tax officials who, he added, may be perceived as "protecting their turf." Mr. Murphy acknowledged that TEI members faced an analogous battle with accounting firms, fending off sporadic proposals to outsource a company's tax function. Mr. Clark said that this was a case where tax administrators and taxpayers share common concerns, but the legislators must be convinced that a professional examination function maintained by the State was preferable to contract auditors.

Maintaining the confidentiality of taxpayer information was another area where state tax administrators could use the support of business taxpayers, Mr. Scott added. Often, he said, proposals to disclose tax return and revenue data originate from private-sector businesses seeking to obtain competitive advantage through disclosure of rivals' business data. Mr. Scott explained that the Arizona Department of Revenue generally opposed the disclosure proposals because of the deleterious effect disclosure may have on voluntary tax compliance. Mr. Arnold urged the business community to oppose taxpayer information disclosure proposals. Ms. Burke cited TEI's opposition to a Massachusetts corporate tax return disclosure provision, saying that TEI agreed that tax return disclosure proposals were generally harmful to tax administration. She urged the commissioners and the FTA to contact local TEI chapter presidents or TEI Headquarters whenever such legislation is proposed and business support is necessary.

Mr. Wetzler next inquired whether business taxpayers were seeking uniform rules among the various States or, rather, whether the goal was conformity between federal and state provisions. Since many States apply an identical interest rate to refunds and deficiencies, he queried whether taxpayers would desire conformity with the federal rules and, thus, a differential interest rate for refunds and deficiencies. Mr. Clark said that taxpayers were more likely to achieve a goal of equalizing the interest rates than to persuade the States to conform their refund and deficiency rates to the federal rules. Mr. Wetzler next remarked that, with respect to penalties, the State of New York had conformed to the federal penalty provisions prior to 1989. When Congress rationalized the federal penalty structure in 1989, there was little support for adopting conforming state changes. Mr. Wetzler inquired rhetorically whether, in seeking conformity, taxpayers should not accept "bad" conforming changes along with the good.

Mr. McCormally responded that--notwithstanding the tension between the twin goals of achieving uniformity among substantive state provisions (such as equalizing interest rates on assessments and deficiencies) and achieving conformity with federal provisions--there should be uniformity and even-handedness among the States and taxpayers concerning procedural provisions. As an example, he suggested, there should be uniform rules regarding what a "reportable change" to federal taxable income is for purposes of making a report of that change to the various states. Mr. Wetzler acknowledged that conformity with federal administrative and procedural provisions was more likely to be achieved than conformity on substantive provisions.

Mr. Drury said that achieving uniformity for uniformity's sake is not the goal; rather, he said, the objective is to ensure a level playing field for the tax administrator and taxpayers. He added, as an example, that there was no reason for a taxpayer to exert extraordinary efforts to file an administrative protest within an arbitrary time period only to have the appeal languish for months on a state hearing officer's desk. Mr. Clark observed that only five percent of deficiency assessments in Rhode Island were ever appealed and averred that the abbreviated period for filing administrative appeals permitted the State to initiate its collection activity (in respect of the other 95 percent) on an expedited basis.

Mr. Duncan reported that the AICPA had initiated a project to update its report on uniform state administrative procedures and an administrative bill of rights for taxpayers. He added that the report could form the basis for further discussions. Mr. McCormally noted that, at a previous joint meeting with the FTA, representatives of TEI, COST, the AICPA, and the American Bar Association's Tax Section had clearly signaled their support for the States to move toward greater uniformity; the consensus no doubt continued. Mr. Duncan added that within the constraints of a voluntary organization, the FTA was promoting uniform administrative approaches. He cited the FTA's pioneering efforts to promote standardized electronic filing formats for diesel and motor vehicle fuel excise taxes. Mr. Scott cited the efforts of the Border State Caucus (involving California, Arizona, New Mexico, Texas, the United States, and Mexico) to promote standardized sales and use tax exemption certificates as an example of state activity to promote uniform administration.

Mr. Stewart said that there were also substantive tax areas where uniformity would benefit tax administration without being divisive. He explained how his company often faced the quandary of multiple taxation caused by differing state standards with respect to third-party drop shipments, particularly if neither the manufacturer nor the re-seller was registered in the (destination) State where the ultimate customer used the goods. Mr. Scott explained the Arizona requirements for third-party drop shipments. Mr. Perkins said that a survey of the various state requirements on third-party drop shipments and the collection of resale exemption certificates would assist taxpayers comply with the law, mitigate protracted controversies on examination, and advance the move toward uniformity. Mr. Duncan replied that the Institute on Property Taxation (IPT) had performed a survey and published a compilation of state rules in this area. Mr. Stewart agreed that the IPT survey could serve as a useful starting point, and recommended that the FTA validate the IPT survey and consider whether additional guidance should be developed. Mr. Arnold stated that the FTA's agenda was already brimming with issues and requested that TEI and COST develop the facts, identify the issues, and pose potential solutions with respect to third-party drop shipments.

V. Uniform Nexus Standards

Mr. McArthur inquired whether the FTA had taken a position on Senator Bumpers's proposed federal legislation to establish a uniform sales and use tax collection standard for all States--the so-called Consumer and Main Street Protection Act (S. 1825, 103d Cong., 1st Sess. (1993) [now S. 545, 104th Cong., 1st Sess. (1995)]). Mr. Duncan replied that the FTA supported the bill and endorsed its aims. Mr. McArthur queried whether the FTA's position was consistent in respect of the desirability of federal legislation affecting state taxing authority. He said that, in seeking federal authority to impose additional sales and use taxes, the FTA might be undermining the States' "sovereignty" argument against congressionally imposed limitations on state taxing authority on, for example, source taxation on nonresident pensioners.

Mr. Wetzler acknowledged that the FTA had submitted a letter in support of the Bumpers bill, but characterized the bill's passage as "unlikely," even if TEI or COST were to add their support to the measure. Mr. Duncan explained that the FTA had consistently opposed federal limitations on state taxing authority. The FTA supported the Bumpers bill, he explained, only as a matter of final recourse to lift the restrictions imposed on state taxing authority by the Constitution and the U.S. Supreme Court decisions in National Bellas Hess and Quill. The States, Mr. Duncan said, have pursued many avenues from proposed state legislation to persuasion and education of business taxpayers and consumers in respect of the obligation to remit use taxes properly due on mail-order sales. In response to a question, Mr. Duncan noted that, as a trade-off for limitations on States' use of the worldwide combined reporting method for income and franchise taxes, a proposal was circulated in the mid-1980s to expand state authority to collect sales and use taxes on mail-order sales. Mr. Duncan explained that States had strenuously opposed such linkages by arguing that the two issues were entirely separate and should not be connected.

VI. Electronic Data Interchange

Ms. Burke said that TEI was delighted to participate in the FTA's task force seeking solutions to the tax issues arising from the expanding use of electronic data interchange (EDI) in commercial transactions. Mr. Arnold reported that the FTA staff had provided substantial support for the task force and that there was some progress to report already. Mr. Arnold described the meetings that had been held to date in Washington, D.C., and reported on the agenda for upcoming meetings in Ft. Worth, Texas. Representatives from TEI, COST, IPT, and the various states were serving on various workgroups and had identified a number of issues for study and recommendations. Mr. Arnold expressed the view that the legal requirements and record retention workgroup was likely to finish its work first since there was a pre-existing federal standard in Rev. Proc. 91-59 as well as a draft California regulation concerning EDI records retention.

Ms. Burke stressed that the federal standard required substantial improvement and suggested that the workgroups draw from a TEI submission to the IRS that included a completely revised draft of Rev. Proc. 91-59. Mr. Duncan reported that TEI's revised draft, as well as Rev. Proc. 91-59 and the California draft EDI regulation, had been included in an initial package of documents provided to task force participants. Since the federal procedure was not helpful in respect of transaction-based taxes--such as sales and use taxes--he added, the California draft regulation supplied guidance missing from Rev. Proc. 91-59. Mr. Murphy inquired whether the IRS was involved in the workgroups. Mr. Duncan reported that representatives of the IRS were being apprised of the developments and that a representative from the IRS (Jerry Davis) would attend the meeting in Ft. Worth later in the month.

VII. Taxation of Nonresidents

Mr. Perkins summarized the administrative and accounting difficulties of sourcing employer pension distributions by State where an employee retires from service following an active career involving multiple work locations. He said that it was unlikely that any employer currently maintained records that would permit accurate allocations of pension payments on a state-by-state basis to the State where the pension income was "earned" by the employee during his or her working life. As a result, he inquired, would the States continue to perniciously pursue potentially penurious pensioners, or their former employers, for taxes attributable to contributions made (and investment earnings credited) during the employees" active work life? Or, would the States acquiesce to proposed federal legislation restricting the states' ability to employ the source principle to tax pension distributions?

Mr. Wetzler stated that the principle of taxing income at its source was fundamental to the States' power to tax and that the FTA officially opposed attempts to impose limitations on that power through federal legislation. He suggested that the controversy over "source" taxation of pension income was essentially limited to one state (California) and one group of retired employees (California public employees who retire to Nevada). As a practical matter, the FTA decided not to actively oppose either the House- or Senate-passed restrictions on the taxation of a specified amount of qualified pension income, which were attached to federal bankruptcy legislation but languished in the waning days of the 103d Congress.

One proposal advocated by the Profit Sharing Council, however, involving a complete ban on source taxation, he said, would cause the States and the FTA to actively oppose a bill. The States, he explained, were generally opposed to federal preemption but they would acquiesce in reasonable limitations on the scope of their power to tax so long as those limitations did not open up substantial planning opportunities for taxpayers. Mr. Wetzler commented that the States wished to limit federal legislation to distributions from qualified plans. Also, he said, the States wished to retain the option to tax lump-sum distributions that were not rolled over into IRAs or other qualified plans.

Mr. Wetzler continued that the States had to retain the ability to tax nonqualified plan distributions. If the federal legislation encompassed nonqualified plans, he said, such plans could be crafted to evade state tax rules. Mr. Wetzler added that another difficulty arising from federal legislation limiting state taxation was whether there would be an administrative body to supply interpretative rules to supplement and enforce a not-so-precisely drafted federal statute. He opined that leaving the task of issuing state-enforced rules to a federal agency would satisfy no one including States, taxpayers, or the federal agency. Mr. Wetzler asserted that opponents of "source" taxation of pension income paid to nonresidents should seek a solution in those few States where a problem exists. He noted that the State of Iowa had recently settled its nonresident pension cases administratively. Mr. Duncan added that Connecticut had also resolved its issues.

VIII. Joint Federal-State Initiatives

a. State Information Returns. Mr. Murphy inquired about the federal program involving the sharing of federal information return data with the various States. He reported that some States seemingly did not participate in the program. He noted that if the States participated in the federal program, return filers could be relieved of the burden of filing duplicate reports of identical information with the States. Mr. Wetzler stated that the State of New York had long ago recognized that the information returns supplied to the IRS through the federal-state informationsharing program supplied a vast array of easily accessible and useful compliance information. As a result, he said, New York had eliminated altogether its separate filing requirement in respect of information returns. He added that the FTA was working with nonparticipating States to increase the level of participation. Ms. Smith reported that there was a "problem" involving the sharing of the information return data among some States and the IRS; she said that the IRS federal-state liaison representative had advised that the problem was "temporary" and that the barriers inhibiting participation by some States were being addressed.

b. Update on Simplified Tax and Wage Reporting System (STAWRS). Mr. Rasmussen described TEI's involvement on the Internal Revenue Service's STAWRS project, whose goal is to study and make recommendations to combine federal and state payroll and income tax withholding deposit systems into a single administrative body. Mr. Rasmussen summarized TEI's letter to the federal contractor (MITRE Corporation) performing the Phase I feasibility study. He said that TEI had questioned the time-and-motion study methodology through which the contractor developed its cost-savings analysis for employers. He said that, in TEI's view, the benefits of the STAWRS system were quite small for large employers, but that large employers would clearly incur substantial transition costs modifying accounting information systems to comply with revisions to the current system. TEI contended, he explained, that the cost savings accruing to larger, multistate companies from a combined federal-state wage tax system were likely to be eviscerated by the decision to move away from a uniform wage definition. The decision by the contractor to seek a "harmonized" definition of wages among the States had eliminated (or at least substantially diminished) the purported employer burden reduction that the feasibility study benefits rested upon. He concluded by requesting a summary of the FTA's position with respect to STAWRS.

Mr. Duncan responded that the FTA's position had not changed from the prior year. In essence, the FTA saw little benefit from a centralized reporting structure or the creation of a new infrastructure for the collection of payroll and withholding taxes. Rather, he said, the FTA supported a concept that saw STAWRS primarily as a single electronic interface allowing employers to satisfy multiple tax obligations through one means. Moreover, he said, the States would oppose any attempt to impose a uniform definition of wages or rates. His understanding of the STAWRS proposal was that the "harmonized wage code" workgroup would attempt to define in a uniform fashion the various components of compensation, but the States would then be free to include or exclude the various components in defining their tax base. He said that the STAWRS workgroups were looking at a host of interrelated issues including the conundrum of properly classifying workers as employees or independent contractors as well as the problems posed by the broader definition of economic income that most states employ for purposes of paying unemployment compensation claims. Mr. Wetzler opined that it was unlikely that there would be a truly centralized STAWRS administration any time soon.

IX. Conclusion

On behalf of the FTA, Mr. Wetzler thanked the TEI and COST delegations for taking the time and effort to prepare for the meeting. On behalf of TEI, Ms. Burke expressed her gratitude to the FTA representatives for meeting with the Institute. On behalf of COST, Mr. Duitsman thanked the FTA representatives for the meeting.


James W. Wetzler 1994 President of the

Board of Trustees

of the FTA

Commissioner, New York

State Department of Taxation William C. Hamilton

1994 First Vice President of

the Board of Trustees

of the FTA

Deputy Comptroller, Office of

the Texas Comptroller of

Public Accounts Ralph Slaughter

1994 Secretary of the Board of

Trustees of the FTA

Secretary, Louisiana Department

of Revenue and Taxation Harold W. Scott

Director, Arizona Department

of Revenue Stanley R. Arnold

Commissioner, New Hampshire

Department of Revenue Administration Raymond T. Wagner, Jr. Commissioner, Illinois

Department of Revenue Kenneth L. Miller

Commissioner, Indiana

Bureau of Revenue Thomas M. Hoatlin

Commissioner, Michigan

Bureau of Revenue William M. Remington

Director, Delaware Division

of Revenue R. Gary Clark Tax Administration, Rhode

Island Division of Taxation Harley T. Duncan

FTA Executive Director Jonathan Lyon FTA Staff Verenda Smith FTA Staff


Linda B. Burke(*) TEI President

Aluminum Company

of America Jack R. Skinner(*) TEI Senior Vice President

Halliburton Company Kathy M. Blankley(*) Bell Atlantic NSI Christopher W. Baldwin Chair, TEI State and Local

Tax Committee

Gannett Co., Inc. Michael J Murphy TEI Executive Director Timothy J. McCormally TEI General Counsel and

Director of Tax Affairs Jeffery P. Rasmussen TEI Assistant Tax Counsel

(*) Members of TEI Executive Committee
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Title Annotation:Liaison Meeting Special
Publication:Tax Executive
Date:May 1, 1995
Previous Article:Tax Executives Institute - U.S. Department of Treasury liaison meeting; minutes December 1, 1994.
Next Article:TEI holds inaugural liaison meeting with Multistate Tax Commission; April 27, 1995.

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