Give & Take

Click here to download the complete results for the 2007 State Tax Survey.

You know the pitch:
Move your business to our state and we'll give you economic-development funds and juicy tax breaks. Maybe we'll throw in a free buckeye tree or some Texas rib-eyes.

Yet just down the hall from where the state's marketing folks are designing these offers, the state revenue department may well be short-circuiting those efforts, enforcing new revenue-based gross-receipts taxes, for example, and stepping up state audit efforts. The conflict is brewing even in some states generally known for being business-friendly, like Ohio and Texas.

It's no wonder corporate tax directors don't know which way to turn.

"Clearly, states and businesses continue to be in very adversarial roles," says Joe Crosby, legislative director for the Council on State Taxation (COST), a nonprofit association of businesses with multistate operations. Many states have restored the health of their coffers, which were drained by the dot-com bust and the post-9/11 slowdown. Treasuries are swelling, thanks to the income-tax revenues that improved corporate earnings have produced. Still, many state revenue departments are designing strategies as if they fear the prospect of future downturns. Further, says Crosby, "administrators continue to believe that there is a lot of abusive activity going on, which leads to more-difficult and more-costly audits and more fishing expeditions."

All about Audits
This year's edition of CFO's state tax survey, last conducted in 2004, underscores the confusion that corporate finance chiefs feel about these trends. The tax director's biggest headaches now include "inconsistency in treatment," along with "the limited knowledge of state officials of the changes in the laws that they enforce." Not far behind: "dealing with the states' aggressiveness in obtaining additional revenue."

State revenue departments, which were under pressure to close loopholes and scare up tax dollars at the troubled dawn of the new millennium, did make progress in improving their collection abilities. They have recruited MBAs and CPAs in their efforts to improve their processes and run their departments more efficiently. Most have moved into the black, and corporate income-tax collections showed a 10.4 percent year-to-year increase in the September quarter, according to the Nelson A. Rockefeller Institute of Government.

This improved efficiency on the states' side is a double-edged sword for companies. Richard Skeen, tax director at HealthTronics, an Austin, Texas-based medical-testing service provider, says that the state of Texas has improved the quality of its auditing team. That doesn't make his job any easier, though. "It seems to me that they're more knowledgeable," he says, "but they also seem to be more aggressive because they know the issues they're supposed to go after." HealthTronics has seen an increase in correspondence from the Department of Revenue, including inquiry letters and requests for more information on various issues. Still, Skeen notes that the state's representatives are more interested in understanding his thinking about tax decisions and less likely to reject his explanations out of hand.

Few other respondents to the survey have anything positive to say about their state-government interactions. Some finance executives call state auditors "unreasonably antagonistic," "arbitrary," or "out of control," and one laments auditors "who think any income they can't tax must be because of tax cheating."

States are broadening their reach, increasingly taking advantage of their own improvements in technology and pooling corporate tax information with other states. This makes it easier to track down businesses that may have minimal — but potentially taxable — contact with their jurisdictions.

"You can have an auditor for the state of Pennsylvania share information with auditors in New York, New Jersey, and Maryland, and those states may not have even realized that the company in question had a business connection to their state," says Pat Pelino, a tax consultant with Vertex, a tax software and services provider. As a result, tax directors are fielding an increasing number of nexus questionnaires, often from surprising places. States can also search information from their neighbors to pick up clues about a company's level of compliance. A company that filed in California as part of the state's voluntary tax-amnesty program, for example, might have its returns flagged for a closer look in other states. So much for amnesty.

In with the New
In addition to conducting increasingly wide-ranging and aggressive audits, states are introducing new taxes to help shore up their revenue base. Many survey respondents cited the constant stream of tax changes as a leading concern. "It's a really daunting task to make sure you're on top of all the things that are potentially occurring so that you can try to minimize your tax burden before you learn that, effective last month, you have a tax bill in Montana," says Joe Levanduski, CFO of Hawk Corp., a Cleveland-based industrial-component maker.

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