Alan: Welcome back, I’m here today with Kathleen Wright she is a CPA and a lawyer and teaches at the School of Taxation at the Golden Gate University here in the San Francisco Bay Area. Welcome to today's show.
Kitty: Thank you Alan, it's great to be here and yes I do teach at Golden Gate University and I’m the Director of their state and local tax program. Which we've set up with, I think more classes in the state local area than any other university in the country. So, it's been a very exciting opportunity for me to come back to the Bay Area after having spent a couple of years down in Southern California, so great to be back. Obviously my area of practice in the field of tax is state and local where I have been practicing for a long, long time. And currently do a lot of things, client representation publishing and most recently, I’m one of the co-authors on the expert treatus series on state and local tax, published by commerce clearinghouse. Which is an exhaustive account of all of the major areas of state and local from both corporate to flow-through entities to individuals. And has been a wonderful experience for me, and my two co-authors are just outstanding Ben Miller and Chris Whitney. So, that's been my other big project of recent vintage so to speak. In addition to this, same as yourself Alan, practicing, doing tax returns and representing clients.
Alan: You know I should mention that years ago I had, you were my professor.
Kitty: Oh my goodness, that does go back years and years ago Alan. Alan and I met first at Cal State University East Bay where I think I was just starting out in teaching. I had previously been with KPMG and then Citibank in New York and had recently relocated out here with Citibank from New York City and was trying to understand California and started teaching. And found actually Alan, there’s a little bit more of a story to that. I had started teaching having left Citibank thinking I would set up my own practice and ultimately I did. But I enjoy teaching so much that here I am 40 some odd years later, still involved with the profession.
Alan: So you know, when we talk about the practice of tax, you’ve been focusing on California taxation, that’s not an easy topic, is it?
Kitty: No it isn't Alan. And the problem with state and local tax is, going back over the years, in the state and local area the rates were low and the enforcement was not very aggressive. In other words, the department of revenues across the nation at the state level were much less focused on audits and compliance and so forth. And so bottom line it was important, but it wasn't all that important, because the big dollars were always at the federal level. That's not true anymore, the rates at the state level have gone up significantly and the enforcement, particularly in states like California and New York, has become very aggressive. And so now state and local is a very prominent part of the overall tax liability of most of your clients. Further, to add to the complexity is the obvious, there's 50 of them so at the federal level where you're dealing with one statute, which is difficult enough to understand, at the state and local level you're dealing with at a minimum 50 different statutes. And in the area of sales and use tax where the rates are not only set up by state but also by city and county, there are 9500 different sales tax schemes, so to speak, in the country. That if you are a retail seller you would have to comply, potentially comply, with 9500 different sets of rules which makes the practice of state and local pretty difficult.
Alan: Well there’s a lot there. What do we have to think about this next year, I guess with state taxes, it, they just recently did some changes?
Kitty: They did and there’s a couple of things for me to mention in that area. First off here in California, last year by proposition Alan, we the people voted to temporarily increase the income tax rates both in the sales tax area as well as in the personal income tax area making our rates the highest in the nation and in fact very high. I mean 12.3% is the maximum statutory rate, and that could be 13.3 if taxable income over $1 million. So, that's a lot of money and a significant increase from what it was before which was basically 9.3%.
Alan: Kitty we need to take a quick break but I want to get back on this topic after the break of living in the highest tax rate of all the states in the union. So we need to take a quick break, we’ll be right back after these messages. I'm here with Kathleen Wright, she’s a CPA and an attorney and Director of Taxation at Golden Gate University's School of Taxation, we will be right back after these messages.
Alan: Welcome back, I’m here today with Kathleen Wright. She’s a CPA and an attorney and teaches at the School of Taxation at Golden Gate University, in San Francisco. Kathleen, before the break we were talking about, by democracy of popular vote we became, we voted ourselves to pay the most tax of any other state in the union. If you make over 1 million a year, 13.3%. Now, I've heard comments back from individuals in this bracket, I’m just going to take my business and move out of the state, easier said than done?
Kitty: Easier said than done and we can talk about that a little bit. Oh the exodus of wealthy, higher middle income and higher income taxpayers out of California seems to be now much, well it seems to be something on the order of an exodus. In other words, CPAs like yourself are frequently getting calls from their clients saying what would this involve, how would I do it. And the destination states, and this doesn't help California, are frequently Nevada, Washington, Texas, these are states with no income tax and not that far from California. And particularly if your business involves Internet-based activity, where it's pretty easy for you to do what you do just about anywhere. What would, how, what would it take for you to go to your CPA, Allen as an example, and say what do I need to do? Well extracting yourself from the long arm of the California statute is easy enough if you do what, I mean there's no sophisticated tax advice here, what I tell clients is if you're going to move, move. You call the moving van, you pack everything up you sell your house you get on that truck or car and away you go.
Alan: You mean I can’t just rent an apartment in another state and say I've moved?
Kitty: Well that's the whole point, California does have one thing going for it even though the business climate might not be it at the moment, and that is the scenery, the beauty, the weather, friends and so forth and so on. And so leaving half of your life behind is where you will get into trouble and let me tell you how this gets picked up by the franchise tax board. The way we report on our tax return is, in the year of the move, would be that you’re filing, you would be filing as a part year resident. Well the part year resident filing process requires that you report your worldwide income, then we’re going to compute your tax on your worldwide income and then prorate the portion of that, that relates to your California, the time you were in California. So if you move at any point, other than December 31 at the end of the year, you're going to have this prorated computation on your tax return. So the franchise tax board will know that you've left because you're telling them, your filing as a part year resident and that doesn't automatically mean that you would be audited but what would most assuredly, result in yourself falling into the audit bucket as if there is large amounts of income in the non-California timeframe. In other words, you move today May the 28 and then, very large amounts of income coming after that point and then the FTB will scrutinize. And when I say scrutinize, that's an intensive factually based audit. We want all your records, we want you to prove where you were on every single day during the audit period. And, if I went through the laundry list of things we’re going to be looking at, many of your clients would say boy, this is an intense review so to speak, and possibly even go so far as to assert privacy concerns related to all the information they're going to want.
Alan: So, I guess a person moving out of state, the point being to save tax, really needs to move. They can't leave a leg in here, a piece of property and say go back and forth, it has to really pick up and go.
Kitty: Right, and there are certainly limited amounts of activity that would be permissible, so to speak. I go to the extreme because that's what you want is the easiest cut off that you possibly can have. But rental property is okay, keeping a second home where you come back frequently to visit children that live in the area, that’s going to be the red flag, so to speak.
Alan: I'm visiting here today with Kathleen Wright, she’s a CPA and an attorney teaching at the School of Taxation, Golden Gate University in San Francisco. We need to take a quick break I’d like to come back after these messages and talk about Amazon and the Gillette case and what's going on in the business world today between the multi-states. We’ll be right back after these messages.
Alan: Welcome back, I’m here today with Kathleen Wright, she’s a CPA and an attorney and teaches that the School of Taxation at Golden Gate University. And we’ve been talking about California tax, that we live in the highest tax state in the union by democracy we voted ourselves that privilege and the last thing we talked about, some people moving out of the state really need to move. But I want to turn the page here and talk about current developments there was recently an area of, talking about businesses that are in the state of California and there's something called the Gillette decision? And maybe you can queue this up, and what the Gillette decision means to companies doing business in California?
Kitty: Yes indeed, Gillette was probably the biggest state and local case last year that came down, that came down through the courts. In brief, two things have happened in the big developments in the area of state and local, over the course of the last three or four years. And that is a significant expansion of the concept of doing business in the state. So now, a lot of your clients might be doing business in California or one of the other 49, through no more than having customers in that particular state. And that would very definitely be true in California. So, once you find that you are doing business and it no longer requires property and people in a state that historically was the way it worked, and that's just not true anymore. So now, you find that your clients in fact are multistate, and doing business in maybe four or five different places. With the expansion of this concept, that an economic presence of just having sales into the state could be enough to create, quote, “nexus”, is this magic word. And then they go, then what? Well, then you have to file a tax return. And you go well what I put on it, because I didn't do everything in that other state, most of it is in my home state? Well you apportion, and apportionment is a process of computing three percentages, historically at least, and they were your property, your payroll and your sales in that particular state, divided by your worldwide property, payroll and sales. And those three percentages were added up, divided by three and that was your overall apportionment percentage.
Alan: I’ve got a question here, so let’s say that I go online and I see, I find this website back in Florida and I say I want to get this computer gadget in, so I order the gadget and the company says, fine, you pay for the shipping and then we’ll send it out. Now, does that computer company in Florida have a sale in California if I’m paying shipping?
Kitty: Yes, yea the sales are sourced for sales of tangible property where the buyer is going to use the merchandise.
Alan: Interesting, so it’s no longer the cut off of the transfer to the title to the property, it’s just wherever the property is used.
Kitty: Not in California, in some states title transfer is the rule but in California, as a result of litigation in Bobby McDonnell Douglas, we went to a different rule in 99% of the cases. Where title transfers and where you’re going to use the merchandise is probably all one and the same. But nonetheless, that sale would be sourced to California. Now there’s more to it than that, there is an exception by federal law which I’m not going to get into in this short, shortened timeframe, but it could very well be that that Florida company if they had more than $500,000 worth of sales to California buyers, could find themselves doing business in California. And then the first thing that we’d kick in would be the, believe it or not, the income tax filing requirement. And then you get saddled with the process of having to comply with apportionment rules. Now Gillette is not a California Corporation, Gillette is the Gillette that everyone knows about, this is not a small little company, this is the Gillette. And they are not a California Corporation and they are arguing that because of the way the rules were developed in California, that our law allows them to use a, the three factor apportionment formula I talked about a moment ago: property, payroll and sales with each one of those weighted equally. Now California by its own statute says no, we’re changing, we’ve changed this formula a couple of times and we changed it last year, again, believe it or not by proposition. This was prop 39, that now requires in 2013 that multistate corporations use only a single sales factor. That's deadly for out-of-state corporations that make money because all they got in California is sales. They don’t have property, they don't have payroll so their apportionment percentages went way up and that's why Gillette is arguing that our law actually continues to allow the three use of this three factor formula. And Alan they’re winning, Court of Appeals decision goes for Gillette. Said this could have major ramifications on the whole apportionment formula and computational process, course the FTB has appealed, but we’ll wait-and-see.
Alan: All right well we’ll stay tuned to this, so the Gillette decision on appeal is gone towards Gillette, and those of you who are doing business across the borders which you know, you want to pay attention to this. So Kathleen, were out of time but I enjoyed having you today on today’s show, you know, will you come back in and give us the update on Gillette?
Kitty: Oh I will, Alan we didn't get to the Amazon discussion so we still got Amazon left to go.
Alan: Alright, we’ll be right back after these messages.
Alan: Welcome back I’m here today with Kathleen Wright, she’s a CPA and an attorney teaching at the School of Taxation at the Golden Gate University. Her specialization is sales and use tax. Before the break we were talking about the Gillette decision. Tung-twist here, but I want to turn the page into what, what happen with Amazon.
Kitty: Well, what happened with Amazon, probably all of your, yourself Allen and all of your audiences have had the experience of buying tangible property over the Internet, and paying only the cost of shipping and not having to pay the sales tax. Which for a whole host of reasons, probably a lower price and convenience and all the rest, have resulted in many of us changing our shopping habits. And now shopping for certain products exclusively over the Internet and other products from time to time. The result of all of this has been a problem for the states because if the seller does not collect the sales tax, then the buyer, by operation of law, is supposed to pay the use tax. And if you are a retailer and you are buying over the Internet, you probably do pay the use tax because the likelihood that you could get audited would be pretty high. But Alan, have you ever been audited for the sales tax yourself personally?
Alan: I just got those funny form letters in the mail.
Kitty: Yea, the funny form letters, that's one way to phrase it. While most of us that are individuals, where our use tax liability that most of us are not paying, and that's no big surprise, is relatively small, but you add it up for all of the volume of Internet purchases and it becomes relatively large. And the states are still desperate for money, not as desperate as they were, but desperate nonetheless. So attacking this problem has meant that the states have come to the realization that the only way to collect the sales taxes is if the retailer collects it, before they send, out of the purchase price, and then remits. However, the sellers are not required to do that to comply with the state's law, if they're not doing business in that particular state. And bear in mind, for the sales tax, the doing business requirements are somewhat different than they are under the income tax. So under the sales tax we are, as a state, looking for a link to the state in the legal sense, an agent or an agency relationship with someone working on your behalf in the state. And the states, starting with New York have stretched this to the limit and said to Amazon because, and let me pause for a moment and just comment. Amazon, in my view I think is the one retailer the states want to get. If they get Amazon, I’m not so sure they care about all the others which are much, much smaller. Amazon's the largest retailer in the world, and so the bottom line is, through a number of arguments that these affiliates that post a link to Amazon's website are working on behalf of Amazon in the state, and that's going to be enough to create nexus. And require Amazon to start collecting the sales tax has been an argument that the courts have gone along with, and in New York, who pioneered this idea, the litigation has gone in favor of the state saying that these affiliate relationships are not just advertising they involve a little bit more. Because advertising does not mean you're doing business in a state. And that's a very thin line to draw between the relationships that Amazon has with these local businesses in posting the Amazon link, versus just simply running an ad in the LA Times.
Alan: Kathleen, we’re out of time today but this Amazon issue is something that is affecting everyone here who has ever bought online. If someone wanted to contact you for more information, do you have an email address or how do they reach you?
Kitty: Yea, Kwright@GGU.edu, that’s kwright@GGU.edu, GGU stands for Golden Gate University.EDU.
Alan: Kathleen, thanks for being on today’s show.
About Kathleen Wright:
Kathleen K. Wright, CPA, has 40 years of experience in tax in a number of different venues including a Big 4 accounting firm, a large publicly traded corporation and for the last 25 years as a professor in the California State University system. She also teaches regularly for the California CPA Society and conducts in-house presentations for various firms. Her field of specialization is State and Local Tax.
Kathleen is published frequently, most recently as an author of the CCH Expert Treatise Series on State and Local tax, and as a correspondent for the State Tax Notes, published by Tax Analysts in Washington, DC.