If you or your client operates within a pass-through entity such as an S corporation, partnership or limited liability company, then you know what nonresident withholding is.

In basic terms, “nonresident withholding” is when a state requires a pass-through entity to withhold state income tax (or make a state tax payment) on a nonresident shareholder’s pro rata share of the pass-through entity’s income sourced to the specific state. In other words, it is a mechanism for states to better ensure that state tax will be paid by nonresident shareholders.

Now, if you or your client operates within a multi-tiered structure of pass-through entities, then nonresident withholding can become a compliance “nightmare” for both you and state taxing authorities. Most states have difficulty tracking nonresident withholding when it passes through multiple layers before it gets to the ultimate taxpayer. Therefore, state tax notices upon state tax notices can become an unwelcome, but familiar friend.

With that said, here are a few tips or questions to ask when dealing with nonresident withholding in multi-tiered structures:

1) Does the state require quarterly nonresident withholding on “actual payments/distributions” or on “allocated income”? To put it simply, some states only require quarterly nonresident withholding if a cash payment is actually made to a shareholder. If states don’t require quarterly nonresident withholding, most, if not all states require annual nonresident withholding on “allocated income” whether a distribution is actually paid or not.

2) Is nonresident withholding required to be done for all nonresident shareholders regardless of the type of shareholder? Meaning, is withholding required for C corp, S corp, partnership, LLCs, individual and/or trust shareholders?

3) Does the state allow or have a mechanism for nonresident shareholders to obtain a waiver or exemption from nonresident withholding? Meaning, can a nonresident shareholder provide the pass-through entity or the state with a document to keep the pass-through entity from withholding on its share of the state’s source income?

4) Is the nonresident withholding required to be done on a quarterly basis? Or can it be paid one time a year?

5) In a multi-tiered pass-through entity structure, at what level is nonresident withholding required to be done? Meaning, is the lowest entity required to do the withholding or does the state only require the entity before the ultimate taxpayer to do the withholding? This is a key question, because if it is done at the wrong level, it can cause great confusion and an explosion of notices between the state and the taxpayer.

Some of the top “problem states” when dealing with nonresident withholding are: California, Colorado, Indiana, Iowa, and Kansas. These are just a few. As I stated earlier, in a multi-tiered structure, nonresident withholding is a “tracking nightmare” for both the taxpayer and the state. Obviously, it requires meticulous record keeping to get it right.

Brian Strahle is State and Local Tax Practice Leader at Baker Tilly Virchow Krause, LLP, in addition to being the Founder and Author of LeverageSALT, the State and Local Tax Blog at http://www.leveragestateandlocaltax.com/. He can be reached at brian.strahle@bakertilly.com.

The Massachusetts Department of Revenue (“the Department”) has recently announced the details of a two-month limited amnesty program which commenced on April 1st and will expire on June 1, 2010.  (See Massachusetts Technical Information Release (“TIR”) 10-5, Limited Amnesty For Taxpayers With Existing Business Tax Liabilities.)  This limited amnesty program applies to liabilities of “Eligible Tax Types” for taxable periods ending on or before December 31, 2009. Similar to the general amnesty programs of other states, the Massachusetts limited amnesty program grants a waiver of all applicable penalties to “Eligible Taxpayers” who pay the full amnesty liability by the close of the amnesty period.  However, unlike other general amnesty programs, participation in Massachusetts’ limited amnesty program is available only to specific “Eligible Taxpayers” who are offered the opportunity to participate.

Specifics for “Eligible Taxpayers” with Outstanding Sales Tax Liabilities

In general, the amnesty provisions define an “Eligible Taxpayer” as a taxpayer who has been issued a “Tax Amnesty Notice”, and (1) has an unpaid and previously self-assessed tax liability for an “Eligible Tax Type”, (2) has previously been assessed a tax liability for an “Eligible Tax Type” and is properly disputing the unpaid liability, or (3) is delinquent in paying the liability. 

There are several categories of business and trustee type taxes that qualify as an “Eligible Tax Type”.  However, the most significant categories covered under the limited amnesty are sales & use tax, sales tax on telecommunications, and materialman sales tax.  Incidentally, in a Press Release issued by the Department to further explain the amnesty, the Department revealed that nearly 36,000 taxpayers, whose combined tax liabilities are estimated at $408.8 million, are expected to receive a Tax Amnesty Notice. Of the $408.8 million, the most significant dollars owed are in the three categories of sales tax ($165.4 million, or approximately 41% of the total). 

Procedure

Thus, if you are one of the 36,000 targeted taxpayers with outstanding sales tax liabilities, you may soon (or may have already) found yourself in receipt of an Amnesty Tax Notice; the Department’s offer to participate.  However, once you know that you are one of the “chosen ones”, it is important to comply with the requirements of the amnesty in order to avail yourself of the benefits.  Within the Amnesty Tax Offer, you should expect to find an Amnesty Tax Coupon which will show the total dollar amount of the Amnesty Balance Due; in essence, the amount the Department expects to collect in full.  In accordance with the amnesty, the Amnesty Balance Due amount should include only the tax and interest with respect to previously filed returns or assessments, and thus, should exclude all potentially applicable penalties, as well as that portion of interest that was previously assessed on any penalty. The full amount of the Amnesty Balance Due must be remitted by the close of the amnesty period, even if a taxpayer does not agree with the balance shown on the Amnesty Tax Coupon.  If the full Amnesty Balance is not paid in full, an additional amnesty penalty of up to $500 may be imposed, which will be added to and become part of any outstanding balance which remains unpaid after the close of the amnesty period.  Note that payment of the full Amnesty Balance Due will not constitute a forfeiture of statutory rights of appeal or an admission of liability for the disputed assessment.

Concluding Thoughts

The Department has released several documents which explain the Limited Amnesty Program in greater detail, as well as Answers to Frequently Asked Questions (FAQs).  These include TIR 10-5, issued March 12, 2010, the Department’s Press Release dated March 26, 2010, and the Department’s Amnesty Frequently Asked Questions (FAQ’s).  The Department’s website also discusses various methods for remitting payment, including electronically through the Department’s Web Services for Business application. 

As the Department has noted that the largest percentage of outstanding tax liabilities it anticipates to collect is in the area of sales tax, taxpayers with outstanding sales tax liabilities will likely receive a Tax Amnesty Offer.  Therefore, taxpayers who are disputing or not in agreement with an assessment, such as those that may be subject to Massachusetts’ expansive rules on the taxability of telecommunications services, will need to carefully consider this offer.  Still, it appears that overall for eligible taxpayers who receive the amnesty offer, the amnesty provides an opportunity to become current on their sales tax liabilities and receive the benefit of complete penalty waiver while retaining their statutory rights of appeal. 

Sylvia F. Dion, MPA, CPA is an independent consultant specializing in providing SALT consultative services to multi-state organizations in all areas of state and local tax.  Previously, she has served as a SALT executive with a Big 4 and a national accounting firm and is an authority on Massachusetts SALT issues.   She is the creator, author and publisher of The State and Local Tax “Buzz” blog, which can be seen at http://www.thestateandlocaltaxbuzz.blogspot.com.  She can reached at sylviadion@verizon.net

In my last blog post,  I asked you how well you really know your clients and suggested that you take the time to deepen your rapport and relatedness with your clients to ensure client retention and enhance the enjoyment you derive from your work, too.  In this post, we’ll explore ideas to deepen your relationship with your clients and hopefully encourage you to post some of your own ideas, too!

To further your client relationships:

• Make your care and concern evident.  In client surveys, clients consistently tell us, “I wish my CPA would call me out of cycle – for no reason – to check in on me or my business.”  When busy season is over, consider calling your top 20 or 25 clients for no reason and just check in.  See if you can be of service.  Show that you care.

• Ask rapport building questions.  As I suggested in my last post, ask your clients questions like, “What is your most significant concern right now?” and “What would you most like to achieve in the coming year?” to understand their fears and dreams.  Study and read about their issues.  Send them links to interesting articles and information about things they’ve told you they care about – personally or professionally.  Illustrate that you understand them.

• Be accessible and responsive.  Clients know they are important when you make yourself available to them.  Establish a personal response commitment for e-mail and voice mail (typically by close of next business day or 24 hours) and discuss the importance of responsiveness with others on your team.  When clients need you, be accessible and available – make it easy for them to work with you.

• Keep your word and commitments.  When you make a commitment to a client, move heaven and earth to deliver it.  If you cannot, reset expectations ahead of time and establish a new commitment – then keep it.  Acknowledge missed commitments.  Apologize if you are unable to keep your word, ask if there is anything you can do to minimize the disruption and commit to do better next time.

• Make a difference and be different. Your clients want you to deliver real value.  When you understand your client’s life and business, you can provide them proactive advice and save them money and/or increase their peace of mind.  Clients don’t forget the difference you make for them when you deliver.

• Stay in front of your clients.  As competitors loom, communicate regularly with clients via e-mails, invitations, blog postings, newsletters and phone calls.  See or talk to every key client at least monthly.  Be as in touch with your clients as your competitors will be.

As we look to the coming summer months, there really is no more important activity you can undertake than deepening your client relationships.  Doing so will uncover new service opportunities and areas where you can improve, too.  What ideas or plans do you have for deepening your client relationships?  What challenges do you face?  Please post a comment and share your thoughts.  I’d love to hear from you!

Jennifer Wilson is a partner and co-founder of ConvergenceCoaching, LLC, a leadership and marketing consulting and coaching firm that specializes in helping CPA and IT firms achieve success.  Learn more about the company and its services at www.convergencecoaching.com.

(Note: This is a reprint of a news story that ran on WebCPA)

Fifteen of the largest U.S. states have forecast gains in tax revenue for 2011, ending a two-year slide in tax collections, while all 50 states expect to hike collections by about 3.5 percent.

According to Bloomberg, California gathered nearly 4 percent more in tax revenue since December than it had projected at the start of the year, while in New Jersey tax collections were running about 2 percent higher than the previous year - its first increase in 19 months. New York said it was running $129 million above state forecasts.

In 2009, states collected about $79 billion less in sales, income and corporate taxes in 2009 than in 2008, according to a U.S. Census Bureau report.

Collections of personal income and sales taxes fell by 17 percent and 7 percent, respectively, last year compared with 2008, according to the Census Bureau.  Corporate taxes increased 3.4 percent, to $9.1 billion in the fourth quarter after posting declines in seven of the previous nine quarters.

The states’ aggregate budget gaps will total $180 billion in fiscal 2011 and $120 billion in fiscal 2012.

We won’t know for a few years the total effects of the recession, but we do know that the gaming industry is definitely helping to offset state revenue shortfalls.

According to a recent article in the Washington Times, at least 18 states want to expand their gaming activities because of lower revenues – somewhere between 5 and 14 percent – in the money they collect from casinos, horse racing, lotteries or other gambling.

According to the article, “States are adamant that they don’t want to take advantage of anyone, but with budgets in free fall and tax increases a losing hand politically, lawmakers acknowledge they are dependent on gambling dollars.”

Although gambling and its related addiction is certainly a discussion topic, states still want to do what they can. Pennsylvania, for example, is among states now allowing table games, such as poker, blackjack, roulette and craps. New York is putting in 4,500 video lottery terminals at a racetrack in Queens, and the Connecticut governor wants to offer keno in restaurants so that people can gamble while they eat.

Bingo?

Efforts by Colorado to collect sales tax on Internet purchases have become very controversial – and the 800-pound Gorilla known as Amazon.com is fighting back.

In a story that ran on WebCPA, Editor-in-Chief Michael Cohn reports that Amazon.com cut off its affiliates in Colorado based on a new law requiring Web retailers to send a statement to their customers every year detailing the amount of tax they owe on purchases.

Amazon issued this statement via e-mail: “The regulations are burdensome and no other state has similar rules. The new regulations do not require online retailers to collect sales tax. Instead, they are clearly intended to increase the compliance burden to a point where online retailers will be induced to ‘voluntarily’ collect Colorado sales tax — a course we won’t take.”

According to the story, states like Colorado are making more of an effort to collect sales tax on online purchases to help make up for revenue shortfalls. Amazon also cut off ties with its affiliates in Rhode Island and North Carolina.
 
Colorado Governor Bill Ritter criticized Amazon’s decision: “Amazon has taken a disappointing — and completely unjustified — step of ending its relationship with associates. While Amazon is blaming a new state law for its action, the fact is that Amazon is simply trying to avoid compliance with Colorado law and is unfairly punishing Colorado businesses in the process.”

“Do You Want a Tax With That?” from Stateline.org is the latest in a series of articles discussing the effects of a sales tax on services. With so many states struggling to recoup lost revenues, these kinds of proposals are being taken very seriously – even in the most unlikely kinds of service professions.

According to the article, states such as Michigan and Pennsylvania are considering adding sales tax to 180 different services – from pet grooming and dating services to dental and legal. Of course, the proposals are strongly opposed by the business marketplace.

“There is little rhyme or reason why we tax some items or services and wholly exempt others, except that in years past someone lobbied to secure favored treatment for themselves at the expense of others,” says Pennsylvania Governor Edward Rendell.  Rendell unveiled a sweeping proposal to reduce the basic sales tax from 6 percent to 4 percent, but would apply it to 74 goods and services currently exempted. The package includes personal and business services, including funeral homes, advertising, accounting and plumbing.
 
“If you do your own laundry, the laundry detergent is subject to the sales tax. But if you have your laundry done, it’s sales-tax free,” says Rendell. “This defies logic.”

In the past, some states, including Arkansas, Connecticut, Ohio and Nebraska, levied sales taxes on various services, but these changes were mostly incremental – not on the scale of the proposed changes in Pennsylvania.

If I were to ask you to tell me all that you know about your clients, including where they’re from, what schools they went to, how long they’ve been in the area, how long they’ve worked at their company, and what they aspire to do next – how well could you answer?

This is the question I pose to many tax professionals I meet – and the response I get is usually lukewarm.  Something like “pretty well” or “it depends.” That’s why I’m writing this blog – because your answer to my title question – “How well do you know your clients?” really matters – especially in this economy! 

People want to do business with people they know, like and trust.  And strangely enough, clients feel they know you better when they believe you know them – and know them well.  If you want to retain your client, you have to take steps in every e-mail, phone and face-to-face interaction to deepen your rapport and know them better.

As elementary as it seems, deepening rapport and building the foundation of trust and partnership requires that you:
• Ask your client personal and professional rapport building questions
• Exhibit your genuine interest in your client’s responses by listening
• Seek and point out areas of common ground or interest
• Use the new information you gather to further clarify your goals and objectives in each engagement and interaction
• Remember what you learn about your client (which always means writing it in the client file or storing it in your contact management system) and referring to it in future client meetings

It saddens me to know that too many of the CPAs in my life don’t take the time to consistently build rapport with their clients, thereby missing real opportunities to develop long lasting friendships, find more meaning in their work, and make a deeper difference for the very real humans they encounter in their work.  We’re all seeking a deeper connection in life – why not in work, too?

In a future blog on this subject, I’ll share some additional ideas for deepening your client relationships.  In the meantime, seriously consider asking more non-tax related questions of your clients as you encounter them in the next several months.  And, if you have an opinion on this blog or rapport building ideas that have worked for you, please post your comments.  I’m interested!

Jennifer Wilson is a partner and co-founder of ConvergenceCoaching, LLC, a leadership and marketing consulting and coaching firm that specializes in helping CPA and IT firms achieve success.  Learn more about the company and its services at www.convergencecoaching.com.

According to a story on WebCPA, a lack of national solutions by Congress to build state revenue is pushing some states to desperate measures:

• In Illinois, lawmakers are discussing the idea of a 5 percent increase in the individual income tax rate, plus an even bigger 6.4 percent hike for corporate taxes.

• Washington State is considering a temporary hike in the state’s sales tax, an extra $1 per pack cigarette tax, and eliminating several personal income tax exemptions, including a break on the value of trade-in cars and an exemption for certain out-of-state purchases.

• In Arizona, where officials have already closed prisons, cut 300,000 recipients from the Medicaid program, and slashed wages to state employees by 5 percent, lawmakers are debating a new sales tax to close a $2.6 billion budget shortfall.

Where will this end? Stay tuned.

 The ongoing debate in collecting, and reporting on, sales tax, continues. According to an article in the Deseret News, Utah State Tax Commissioner R. Bruce Johnson told Congress that allowing states to tax only those businesses that have a physical presence within their boundaries doesn’t make sense now because many sales are made via the Internet.

Johnson’s testimony is related to H.R. 1083, requiring physical presence as a condition for collecting specific sales taxes.

“Reasonable nexus standards must take that into account,” Johnson said. “That is why the current nexus standard for sales tax collection, requiring a physical presence to justify taxation, is not appropriate in the new millennium for either sales taxes or income taxes. Economic presence, taking into account appropriate apportionment formulae, is the fair way to establish basis for collection and payment of tax.”

According to the article, Johnson urged Congress in general to empower states to decide for themselves how to tax businesses operating there.