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SEATA Sales Use Tax Section Working Together
Audit Resolution July 15, 2008
Anita Degumbia Georgia Department of Revenue Joe
Neff RSM McGladrey Sandy Rowe Hunton
Williams Tim Winks PricewaterhouseCoopers
LLP
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• This document was not intended or written to be
  used, and it cannot be used, for the purpose of
  avoiding U.S. federal, state or local tax
  penalties.

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Your Panelists

• Anita DeGumbia is the Audit Administrator with
  the Georgia Department of Revenue with overall
  responsibility for the areas of Corporate Income
  Tax, Sales/Use Tax, Withholding Tax, Personal
  Income Tax and other miscellaneous taxes. Prior
  to joining the Department, she was a Director in
  the State Tax Consulting Group of a Big 4 public
  accounting firm. She has over 25 years in state
  and local taxes predominately with Fortune 500
  companies. She was also instrumental in drafting
  the federal preemption for digital satellite
  television which became part of the Telecom Act
  of 1996. Anita is a graduate of the University
  of LaVerne.
• Contact information email
  anita.degumbia_at_dor.ga.gov, office phone (404)
  417-6436
• Joseph Neff is the National Managing Director of
  RSM McGladreys State and Local Tax practice,
  based in the firms Los Angeles office. He is a
  retired Partner with a Big Four firm, where he
  was responsible for their National State Tax
  Consulting Practice for the Middle Market and
  West Region Partner in Charge of the SALT
  practice. Joe received his undergraduate degree
  at Brigham Young University and his Juris
  Doctorate at Drake University / Southwestern
  University.
• Contact information email joe.neff_at_rsmi.com,
  office phone [phone]
• William L.S. (Sandy) Rowe is a Partner with
  Hunton Williams in Richmond, Virginia whose
  practice focuses on taxation with emphasis on
  state and local tax controversy, including
  administrative appeals and litigation involving
  all major taxes in Virginia and various state and
  local taxes throughout the United States. He
  received his J.D. from the University of Virginia
  and his B.A., cum laude, from Washington Lee
  University. Sandy is the former chair of the Tax
  Policy Committee of the Virginia Chamber of
  Commerce and is Special Tax Counsel to the
  Taxation Committee of the Virginia Manufacturers
  Association. Contact information email
  wrowe_at_hunton.com, office phone [phone]
• Tim Winks is a Managing Director with the State
  and Local Tax group of PricewaterhouseCoopers LLP
  in McLean, Virginia whose practice focuses
  heavily on sales and use tax consulting and tax
  controversies in Virginia and other mid-Atlantic
  and Southeastern states. Prior to joining PwC in
  1995, he spent almost 15 years with the Virginia
  Department of Taxation where he rose from an
  entry-level tax examiner to Assistant
  Commissioner for Tax Policy. Tim currently
  chairs the Tax Policy Committee of the Virginia
  Chamber of Commerce and SEATAs Industry Council.
  He is a graduate of the University of Richmond.
  Contact information email tim.winks_at_us.pwc.co
  m, office phone [phone]

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Current Observations

• Auditors know more about the businesses theyre
  auditing
• Corporate websites and news coverage
• Past audits, audits of other companies in same
  industry, etc.
• Important to ensure everybody keeps an open mind
  dont let preconceived notions obscure the actual
  facts
• Aging state workforce new auditors appeals
  arriving on the scene
• Private-sector view loss of institutional
  knowledge creates concerns
• Public-sector view new people offer fresh
  perspectives loss of institutional knowledge on
  corporate side creates concerns too
• Tighter resources everywhere everybody is
  trying to do more with less
• Audits stacking up and backing up
• States and companies both left wondering why
  things cant get done more efficiently

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More Observations

• Corporate record retention and fact/data
  gathering challenges
• Longer audit and appeal cycles
• Greater merger and acquisition activity places
  premium on records retention
• Vendors/customers go out of business or get
  acquired
• Facility closures
• More transient workforce means less institutional
  knowledge
• Public-sector view we still need the
  information to do our audit
• Changing corporate reporting landscape
• Potential FAS 5 changes
• Southeastern states still generally want to do
  the right thing
• Southern charm and friendliness still go a long
  ways ?

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Establishing an Effective Working Relationship

• Why its critically important
• Auditor develops the factual record that will
  follow the audit through supervisory review and
  administrative appeal
• Auditors often have wide latitude on what to
  include or exclude from the audit and its
  generally much easier to deal with an issue at
  the audit level, rather than on administrative
  appeal or in litigation

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Effective Auditor Relationship

• Dealing with the auditor
• Establish a pre-audit routine so you can be ready
  when the auditor arrives
• Establish single point of contact, ideally within
  tax department
• Reach early consensus on scope of audit (period,
  items covered, sampling methodology, etc.) so the
  process of pulling records can begin quickly
• Honest exchange on reasonableness of records
  request in terms of availability, accessibility,
  and volume
• Discuss your rights and obligations regarding
  statute waivers and the timing of the audit

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Effective Auditor Relationship

• Information Requests
• Explain any data or system constraints up-front
  and come to consensus early on what constitutes a
  reasonable information request
• Be responsive to information requests and if you
  cant respond timely, explain why and set a new
  timeline
• If resource or time-constrained, consider
  splitting the audit into segments to help space
  out information gathering over a reasonable
  period of time
• Stay in regular contact and exchange status
  reports (avoid surprises)

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Effective Auditor Relationship

• Once the audit gets rolling
• Deal with factual misconceptions quickly dont
  let them fester
• If facts are in dispute, provide access to people
  within the organization who know the facts
• Document agreements reached with the auditor
  regarding sampling, taxability, etc. (in case
  there are questions later)
• Regular status updates on both sides (avoid
  multi-month lapses)

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Effective Auditor Relationship

• If the audit gets contentious
• Consider adding new player(s) to the mix, e.g.,
  audit supervisor, outside advisor (consultant,
  trade organization, etc.), who can work
  constructively to get the audit back on track
• Once around the table, the parties may still
  agree to disagree on some points, but the
  objective should be to resolve most issues at the
  audit level
• And where possible, make sure both sides at least
  agree on the facts
• If an appeal must occur, ideally it should be
  limited to material areas of disagreement or true
  policy issues (work out the more routine issues
  or factual issues at the auditor level wherever
  possible)

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Options to Fast-Track Audits (or maybe avoid them
altogether)

• Managed Audits
• Managed Compliance Agreements (formula-based
  reporting)
• Audit in a Box (standardized audit format for
  every state)
• Bring an existing audit current
• For uncertain tax issues
• Voluntary Disclosure Agreements
• Private Letter Rulings
• Offers in Compromise

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Voluntary Disclosures

• VDA may be the ultimate fast-track option often
  no audit at all (but states reserve the right to
  audit)
• Many states allow VDAs even if the company is
  already registered
• But the company generally cannot be under audit
  (or even notified of an audit or examination)
• Provides an opportunity to resolve potential
  exposures without penalty (and interest relief on
  rare occasions)
• Also may provide an opportunity to raise
  uncertain issues on a no-name basis and
  potentially reach a settlement for less than 100
  of the tax and interest (depending upon just how
  uncertain the issue may be)
• Increasing activity in this area due to FIN48,
  SOX, etc.
• Proposed FAS 5 standards may also have impact

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VDAs Likes and Dislikes from the States
Standpoint

• Incomplete facts may stall or negate the process
• Complete facts
• Type of business conducted (a brief description)
• Type of tax(es) you wish to disclose
• If a sales tax VDA only, explain why youre not
  requesting an income tax VDA (or vice versa)
• Type of entity (C-corp, S-corp, etc.)
• Approximate liability
• Statement that taxpayer has had no inquiries from
  the state
• Statement whether liability relates to sales tax
  collected but not remitted
• Special issues
• What constitutes an inquiry? What if an
  affiliate has been contacted?
• Tax collected but not remitted? Lookback periods
  may not apply penalty waiver may be more
  difficult to achieve

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VDAs Other Tips

• States developing new compliance systems and
  tools so get to the state before it gets to
  you!
• Visit state websites for information on how to
  enter into a VDA
• Dont forget about the Multistate Tax Commission
  VDA program provides ability to deal with
  multiple states at once
• Dont forget about Streamlined Sales Tax Amnesty
  in SST associate member states
• Prospective-only compliance on sales tax
  collection
• But it requires company to register in all SST
  member states
• Some states may even offer SST-type terms in
  exchange for voluntary collection on a
  prospective basis

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Private Letter Rulings

• Know the states rules
• Will the state issue a ruling on a no-name basis?
  Like Virginia
• Or does it require disclosure of the companys
  name? Like Georgia
• In disclosure states, one option may be to obtain
  a voluntary disclosure agreement first, then seek
  a named ruling on the uncertain issue
• Dont be stingy with the facts
• Insufficient facts can lead to state failing to
  honor the ruling later on
• Or revoking it outright
• Dont just ask the question articulate why your
  position is correct
• Passive approach can produced unintended (i.e.,
  bad) results
• If the position is ill-supported technically, may
  want to re-think requesting a ruling (do you
  really want an unfavorable ruling?)
• Remember -- bad facts generally make for bad
  policy!

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Managing Taxing Authority Notices

• Notices include nexus questionnaires, desk audit
  inquiries, tax levies/liens, and other compliance
  or collection notices
• Unlike audits, notices generally have very short
  fuses many deadlines are statutory Rule 1
  take notices seriously Rule 1a dont let them
  sit
• Failure to respond can have dire consequences
  (liens, set-off of vendor payments, revocation of
  permits or licenses, tax sales, etc.)
• If you cant respond immediately, contact the
  taxing authority and obtain an extension (some
  action is better than no action)
• Tell the whole story -- simply answering yes and
  no may not give the state the complete picture of
  your facts or situation
• Try to establish an ongoing contact person at the
  taxing authority so you dont talk to a different
  person each time you call

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Presenting an Effective Appeal

• Just like a ruling request, articulate your
  position
• Complete factual description (facts may be more
  important than the law)
• Cite statutes, regs, published rulings, etc.
• Distinguish your facts from adverse precedents
• Dont count on the state to do your homework for
  you its up to you
• Use your full arsenal of weapons --
  administrative forums often offer opportunity to
  argue equitable issues you cant argue as easily
  in court
• Raise all the issues, including issues and
  documentation that may not have been presented
  during the audit
• DOR may not always like to see new issues or
  documentation for the first time on appeal, but
  sometimes its unavoidable and it may be your
  last chance to raise the issue

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What Is Fair Game to Argue?

• Law What does it really mean? What was the
  legislative intent?
• Regulations / Rulings Has the audit been
  conducted consistent with states precedents?
• Facts Do the facts justify the audit result?
  Were the facts misunderstood? Are the facts
  different from those in precedents relied upon by
  the state?
• Audit Procedure Did the auditor follow the
  rules? Was the assessment issued timely? Were
  waivers obtained timely?
• Sampling Was the sample representative? Were
  sampling procedures statistically valid?
• Previous informal state guidance / Inconsistent
  application of state policy
• Other Equitable Issues, e.g., long-standing
  industry understanding, reliance on prior
  audits, reliance on prior state representations,
  etc.

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Appeal Strategy

• Easier for both sides to resolve issues at the
  administrative level
• Approach it as if the administrative appeal is
  your last resort and not just a prelude to
  litigation
• Be practical, but thorough in presentation a
  minimalist approach to arguing the facts and
  issues doesnt serve you well
• Take opportunities to gauge how the DOR feels
  about your case schedule face-to-face meetings,
  follow-up regularly with appeals representative,
  encourage questions, and follow-up promptly with
  answers
• If the appeal determination comes down adversely,
  explore opportunities to request reconsideration
  and/or settlement

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Adverse Decision Doesnt Necessarily Mean
Litigation

• Pursue settlement opportunities where appropriate
• Offer in compromise or other settlement
  opportunities may exist based on hazards of
  litigation/doubtful legality, without actually
  going to court
• Settlement may be particularly attractive in
  situations where issues do not have significant
  ongoing impact for the company or the state
• Or where there are equitable considerations that
  favor the taxpayer
• Or where the issue is truly borderline
• Legislation may also provide an effective
  long-term solution
• DOR may feel it lacks statutory authority to
  provide the necessary relief but may not be
  opposed to changing the law

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Questions