Generally, a tax amnesty program is a state-enacted and administered program that allows persons who have underreported a tax or failed to file a return the opportunity to pay the past due taxes, usually without being assessed penalties and interest.  These programs are different from Voluntary Disclosure Agreements (VDAs) which also allow delinquent taxpayers to come forward and settle tax liabilities in that amnesty is typically available to both current and potential taxpayers, while VDAs are only available to persons who have not yet registered with or been contacted for audit by the state, amnesty programs

Another difference is that most amnesty programs do not offer a limited look-back period, which means that all back taxes will be due.  On the other hand, VDAs offer a limited look-back period, usually between 3-5 years.  However, VDAs rarely waive interest, but usually waive penalties.    Further, state amnesty programs often stipulate that participants must waive their appeal rights.  This can become an issue if the taxpayer overstates tax, or if a ruling is issued that changes taxability or interpretation in favor of the taxpayer.  The choice between settling unpaid taxes through an amnesty or VDA should be made on a company-by-company basis.

Another issue faced by taxpayers willing to come clean via an amnesty program is that all of the taxes must be paid before the close of the amnesty program in order for a taxpayer to be eligible.  Timing the payment of a tax liability within a period of a few weeks to months can be difficult or impossible if the sum is very large.  However, some states will allow for the negotiation of installment agreements.  In this case, the taxpayer will only be out of compliance, and thus subject to penalties and interest if the tax is not paid back according to the schedule agreed upon.  In the past, both Indiana and California have allowed installment payments under their amnesty programs.

Generally, the aim of amnesty programs is to increase tax law compliance, correct for underreporting errors, and encourage new taxpayers to register for sales and use taxes.  In many cases, these programs provide the states with many years worth of back taxes, which can create a big boost for the states’ depressed budgets and act as a quick fix for to reduce the shortfall that many are facing.  Additionally, although the state is forgoing the penalties and interest on the taxes paid under the amnesty program, adding a new taxpayer to the books will create a continued revenue stream as long as the taxpayer has nexus in the state.

So how successful are these amnesty programs for the states that enact them?  The result differs by state, but these programs have generated significant sums for some states.  Of the states that held an amnesty program in 2009, the total tax dollars brought in ranged from $1.1 million in Vermont to $725 million in New Jersey.  A use tax amnesty program in Delaware brought in 14,000 new taxpayers.  The Federation of Tax Administrators has published a chart of historical results of amnesty programs.  http://www.taxadmin.org/fta/rate/amnesty1.pdf

The success of these programs is usually tied to how much publicity they get.  For example, the Kansas DOR was aided in a recent Amnesty program by the Kansas Association of Broadcasters who aired a public service announcement about the program that they had developed and produced.  This enabled the state to far surpass its estimated revenue of $19.5 million and instead generate more than $23.6 million throughout the life of the program.

To make amnesty programs more memorable, states often come up with cheeky or cute titles to get the message across about the program.  For example, Alabama named a recent program “Operation Clean Slate” and Idaho recently titled a VDA initiative “Idaho Forgot to File”.  Virginia, a state who choose threatening symbols such as a guillotine and a character chasing a person down the street for its 1991 and 2003 amnesty, decided to take “a kinder, gentler” approach to its 2009   program  “Get Square on Back Taxes”, which was symbolized by a square smiley face.  

If a state offers an amnesty program, a business should take advantage of the program or settle its debt through a VDA before the amnesty period is complete. There is an increasingly popular trend among jurisdictions to impose harsher penalties after an amnesty program for businesses that are discovered.  For example, Chicago imposed a 50 percent penalty on businesses that were determined to have nexus that did not come forward during its amnesty program.  Illinois will impose double interest and penalty rates for any tax liability not reported under amnesty even for registered taxpayers in its upcoming program.  The recent Pennsylvania amnesty program stipulates that eligible taxpayers who do not participate will be assessed an additional 5% non-participation penalty, on top of normal penalties and interest. 

This trend becomes complicated when one considers the risk to taxpayers interpreting a gray area of tax law or who are in litigation over a tax decision.  Although these taxpayers are not the intended focus of the amnesty program’s additional penalties for non-participation, if a taxpayer is later found to be interpreting an ambiguous tax law incorrectly or receives an unfavorable ruling, it could be subject to the additional penalties because it did not pay tax liabilities under the amnesty program that in good faith it did not know it had. 

Another trend among states is to engage in more frequent amnesty programs, especially during times of economic downturn.  This started in the early 2000’s, when states felt the effects of the recession on their bottom lines and were trying to get an influx of cash.  For example, Massachusetts and Missouri had amnesty programs in both 2002 and 2003.  In the current recession, states are turning to similar tactics.  A study by Luna, Brown, Mantzke, Tower and Wright found that before 2000, a state waited 10.3 years between amnesties, on average.  However, between 2000 and 2006, the average fell to 4.6 years.

Although this may help offset immediate shortfalls, this can decrease overall program effectiveness and have negative effects on a state’s long term bottom line.  Naturally, each subsequent amnesty program will have diminished returns, but frequent amnesties also create subverted incentives for tax evasion.  If a taxpayer discovers an unpaid liability after the close of a state’s amnesty program, but suspects that a state will have another amnesty program in the future, the taxpayer has an incentive to not register pay the delinquent liability, penalties and interest in a timely fashion.  Although the taxpayer risks audit exposure, if the state does have another amnesty program, the taxpayer will have saved penalties and interests, and would have more time to get its systems and funds in order.  Therefore, amnesty programs that occur too frequently can subtly encourage bad taxpayer behavior.  Because of this, it is the common consensus that amnesty programs work best when used as sporadic initiatives to boost revenues and increase the taxpayer base.

The District of Columbia, Florida, Illinois, Kansas, Kentucky, Maine, Massachusetts, Nevada, New Mexico, New York, Pennsylvania, and the City of Philadelphia and Wisconsin either currently have amnesty programs scheduled or closed a program in 2010/2011.  Information on these current programs can be found on our website, http://www.ycstax.com/news.php#ref4.

 
Diane L. Yetter
President, Yetter Consulting Services, Inc.
dyetter@ycstax.com

About the author: Diane L. Yetter is the founder and president of Yetter Consulting Services, Inc. and the Sales Tax Institute, its training division.

• Another tactic used by states to increase revenue is increased enforcements.  This comes in the form of increased audits, more aggressive positions being taken by the auditors and more reliance on taxpayers to defend inappropriate assessments.  Not only are the states performing more audits, but municipalities have increased their audit of home rule sales and use taxes AND business licenses as well.  These localities are sending audit notices and desk assessments to businesses that have customers in their jurisdiction.  This doesn’t necessarily mean you have a business license requirement, so it is critical to evaluate the registration requirements and make sure you are registered appropriately.

• Audits are also starting to include areas which auditors may have previously passed on or only performed a cursory review – particularly if it hadn’t been an issue in the past.  Areas where taxpayers have seen auditors take much more aggressive positions include requesting exemption certificates for every exempt transaction and being unwilling to check to see if the entity has a valid exemption; requiring receipts that reflect the sales tax on procurement card transactions regardless of invoice amount (including from restaurants); and the reconciliation of gross sales from income tax returns to sales tax returns resulting in assessments for any differences.

• Taxpayers are experiencing shorter and sloppier audits.  Historically auditors would request waivers for six months to a year.  However, as states are anxious to collect every penny owed them, waivers are not as easy to request.  In fact, auditors are rushing through audits and issuing assessments that have not been reviewed by the taxpayer.  This shifts the burden of proving any exceptions from an audit activity to an administrative hearing activity.  These hearings are being dragged out indefinitely – forcing a number of taxpayers to make payments against the audit for the items they agree with to reduce the interest costs.  States are also conducting more desk audits – requiring the taxpayer to do much more of the work.  This saves the state travel dollars and auditor time as the taxpayer now not only gets to pay the bill, but also do all the work.  There is usually no offset of the liability for the taxpayer’s efforts.

What can businesses do to help minimize assessments during the audit process?  This is a good time to make sure all your tax rates are current and that you have valid exemption certificates for your exempt customers.  With shorter audit cycles, there is less time to obtain these certificates once an audit begins.  Also, if you are in a service business, keep in mind that if you travel to perform services at your customer site, you have likely established nexus and could be subject to not only sales tax, but also income tax.  As states look to service activities as new sources of revenue, it will be critical to monitor the laws in the states where you have customers.  Conduct a nexus study to determine if you have a liability and, if you do, take advantage of amnesty programs offered by the states.  After an amnesty program closes, the state usually steps up its enforcement efforts to identify potential taxpayers that didn’t come forward.  Also as companies look to decrease their costs and streamline processes, automation of sales and use tax functions is a logical step.  Using providers like SpeedTax to help improve your calculations and remittance can help you protect your company against the aggressive efforts of the states.

Diane L. Yetter
President, Yetter Consulting Services, Inc.
dyetter@ycstax.com

About the author: Diane L. Yetter is the founder and president of Yetter Consulting Services, Inc. and the Sales Tax Institute, its training division.

A report prepared by the National Conference of State Legislators discusses how states’ budget crises are getting worse.  Most states overestimated the expected revenue from all tax sources, including sales and use taxes.  Now that the numbers are in, it is worse than they thought.  Half of the states overestimated all three major tax sources – sales tax, personal income tax and corporate income tax.  As a result, what are we seeing from the states as they deal with the reduced revenue?  Since sales and use taxes are collected on a regular basis throughout the year, I will predominately focus on the states’ different approaches on these issues.

• During the legislative session, we saw eliminations of exemptions (sometimes called “loop-holes”), broadening of the tax base to include new areas such as services, changes in interpretations of what constitutes “doing business” in the state and some significant state rate increases.  Massachusetts increased their state sales tax from 5% to 6.25% effective August 1.  The District of Columbia increased from 5.75% to 6% on October 1 and North Carolina increased twice from 4.5% to 5.5% on September 1 and again to 5.75% on October 1.

• We’ve seen a number of states proposing and passing amnesty programs as a way to get some quick cash in the door as well as new taxpayers.  These have proved to be very lucrative for the states in the past and they are all hoping for this trend to continue.  Twelve states and two cities have or will offer amnesty during 2009. 

One of the most visible and controversial changes has been what has been termed the “Amazon” laws which classify affiliates who direct on-line customers to an out-of-state merchant’s web page to be deemed “agents” of the remote merchant.  This law was passed in New York in 2008 and in Rhode Island and North Carolina in 2009.  However, a number of other states proposed legislation only to have it either vetoed by the governor or tabled after Amazon threatened to sever affiliate programs in the state.  This has raised the question of whether the states’ actions to add taxpayers to its roles would increase revenues or actually decrease them since it could put the in-state affiliates out of business.  This will be something to watch in next year’s legislative process.

More information on state solutions will be given next week in Part 2 of this blog, including tips on what businesses can do to get ready for sales tax audits.

Diane L. Yetter
President, Yetter Consulting Services, Inc.
dyetter@ycstax.com

About the author: Diane L. Yetter is the founder and president of Yetter Consulting Services, Inc. and the Sales Tax Institute, its training division.