From accepting signatures and documents electronically to clarifying nexus and domicile issues, former state and local revenue officials would like their onetime employers to address four issues creating uncertainty for taxpayers and their advisers amid the COVID-19 pandemic.
State tax offices have ways to ease the impact of the virus pandemic on taxpayers and advisers. (AP)
The global outbreak of the novel coronavirus, which causes the respiratory disease COVID-19, has affected state tax administration in profound ways. A system that relied heavily on deadlines, penned signatures, certified mail and in-person audit meetings is upended as many of those things are delayed or impossible. But according to tax professionals who worked previously in state and local tax agencies, there are things those agencies could do without tremendous difficulty to ease the effects of the pandemic on revenue departments and taxpayers alike.
Here, Law360 presents four things that former state and local revenue officials would like tax agencies to address during this crisis.
Moving Everything Online
State tax officials have long relied on a so-called wet signature, the traditional way of getting taxpayers to sign returns and other documents in ink. They have also sent key notices through the mail, often to comply with statute. In light of the pandemic, as lawyers and others are working from home instead of the office, these practices should be temporarily halted or at least modified, said Joe Garrett, a managing director in the multistate tax group at
Deloitte LLP.
Garrett, formerly deputy commissioner of the
Alabama Department of Revenue, where he worked for 17 years, noted that both the
Internal Revenue Service and states have had paper copy policies as one way of combating identity theft, an issue he worked on intensely at the department. But Garrett said the tax agencies have other tools available to do that, and he urged them to accept as much electronically as they possibly can during the pandemic.
"E-filing the return is one thing, but even for e-filed returns, oftentimes you have to have the authorization to e-file; it has to be an original signature on that authorization," Garrett said. "That's a challenge, getting that wet signature now. Rethinking those original signature requirements, accepting electronic signatures, would be a big boost for us."
Mail is another place to move online as much as possible, Garrett said. Tax agencies likely will not have a home address for the business person they are trying to reach with a notice, and so will send notices to the office. Amid the pandemic, it could be weeks or months before the taxpayer ever sees it, making it likely he or she could miss a key deadline for submitting a response.
Garrett noted that as with the requirement for wet signatures, sending notices by mail may be statutory, and thus at times the tax agency's hands may be tied. He asked in those instances for some flexibility from tax departments, such as sending both an email and a mailed notice so taxpayers are not caught unaware.
Such issues are really the heart of state tax administration, Garrett said. He noted that to a state tax lawyer, constitutional issues or high-dollar audits seem central in practice, but being a revenue official teaches an additional lesson, he said.
"Those things are important, but really they're secondary to the basics," Garrett said. "At the Department of Revenue, things that are really important are processing returns and issuing refunds, and if you can't do those, other things don't matter so much."
Clarity on Nexus and Domicile
Amid the pandemic, whether states can and will assert nexus on businesses whose employees are working remotely at home
has emerged as a top concern among state tax professionals. In response, a handful of states have issued explicit guidance saying that the presence of an employee in their state — if that employee is there solely to comply with a government stay-at-home order — will not cause the state to assert nexus. Meanwhile, a representative of the
Federation of Tax Administrators has told Law360 that
no state intends to assert nexus on an employer because an employee is working remotely due to a stay-at-home order.
Those are encouraging signs, but the situation in many states remains open to question unless the state provides guidance, said Zal Kumar, a state and local tax partner at
Mayer Brown LLP. Kumar, previously the director of business tax services for the New York City Department of Finance, said that could be particularly relevant if a state has a "convenience of the employer" rule, whereby days worked from home count for nexus unless the employee is at home of necessity.
"I think we would all agree that we're not working from home because it's convenient; we're under government mandate," Kumar said. "But some affirmative statements to that effect would be important in determining how our clients are filing and thinking through their positions."
Kumar said tax agencies should also be clear on how they will treat employees who may be spending time at second homes, or staying with relatives to help out, or who previously had a robust travel schedule but are now at home.
"There are a lot of people who traditionally travel and spend large chunks of the year on the road," Kumar said. "And it's not clear how departments are going to handle that kind of individual who is now working from home — where that person is going to be treated [by the tax agency] as being located."
Continue Working on Outstanding Audits and Controversies
Before the pandemic, audits may have been conducted on site, controversies dealt with across a table. Those activities have been suspended, and some tax agencies have even decided not to commence new audits for now. But they can still make progress on older matters, said DeAndré Morrow of
Reed Smith LLP.
State tax agencies should determine what they can resolve using electronic means, said Morrow, formerly a tax attorney for the revenue administration division of the
Comptroller of Maryland.
"I think this is a great time for departments to focus on closing out old audits and to really consider working with taxpayers to do so," Morrow said.
Stephen Kranz of
McDermott Will & Emery LLP agreed, saying that having to deal with old matters post-pandemic will add to hardship and uncertainty faced by taxpayers, as well as tax agencies, as they transition.
"Let's be reasonable," said Kranz, who spent two years as chief counsel for the District of Columbia's Office of Tax and Revenue. "The state needs money. The taxpayer needs a break. This is the time to do that. If I were still an administrator, I would send out a signal that I was open to resolving audits, controversies and litigation as efficiently as possible."
Explore What Is Possible
The pandemic has created situations that are new to everyone. Tax agencies may not be familiar with everything in their statutory authority, simply because they have never had the occasion to use it until now. For example, Morrow said, do revenue departments have the authority to waive certain collection efforts for now? Some research to find out would help taxpayers a lot, he said.
"It's not fair to expect them to know everything; this has never happened before," Morrow said. "But if they could do their due diligence, do some exploring to see what authority they may have that they never had to use before."
States have most notably done that as they have extended their own deadlines for filing returns and making payments this year. A majority of states have issued guidance to indicate that in conformity with the IRS, state returns and payments are now due July 15.
But questions remain, said Stephanie Lipinski Galland of
Williams Mullen, and tax departments should dig a little deeper into which processes can be extended and which cannot.
For example, she said, the announced extensions provide information about filing returns, but not about appeals.
"Let's say [the limitations period] is statutory," said Lipinski Galland, once an attorney in the tax policy division of the
Virginia Department of Taxation. "Give us some guidance on that stuff. Let us know: Can you waive the statutory time limit or not?"
--Editing by Tim Ruel and John Oudens.
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