Break-out Session 1A: State audit & controversy www.pwc.com Break-out Session 1A: State audit & controversy Tim Pratcshler, State and Local Tax Principal

Agenda State Controversy Trends Best Practices Other Considerations

The state of the states 31% of all state tax revenue comes from federal grant programs The federal government also plays an indirect role in supporting the states (e.g., exempting interest on state and local bonds, helping to cover borrowing costs) As Congress continues to discuss reform of the federal tax code, it will consider whether such support continues to make sense State tax collections by tax type: Sales Tax: 38.6% (Approximately $249 billion) Personal Income Tax: 53.8% (Approximately $347 billion) Corporate Income Tax: 7.6% (Approximately $49 billion)

State tax collections versus projections – 2013 DC AK HI ME RI VT NH MA NY CT PA NJ MD DE VA WV NC SC GA FL IL OH IN MI WI KY TN AL MS AR LA TX OK MO KS IA MN ND SD NE NM AZ CO UT WY MT WA OR ID NV CA Source – “The Fiscal Survey of States" The National Governors Association and The National Association of State Budget Officers. Spring 2013.

State tax collections versus projections – 2016 DC AK HI ME RI VT NH MA NY CT PA NJ MD DE VA WV NC SC GA FL IL OH IN MI WI KY TN AL MS AR LA TX OK MO KS IA MN ND SD NE NM AZ CO UT WY MT WA OR ID NV CA Source – “The Fiscal Survey of States" The National Governors Association and The National Association of State Budget Officers. Spring 2016.

Ways states have tried to expand the tax base & challenges associated with these changes Single Sales Factor Apportionment Weighting Distortion/alternative apportionment Market-Based Sourcing of Sales Other Than Tangible Personal Property Various ways states define market-based sourcing Benefit received vs. services received vs. services delivered vs. customer located Is this any different than cost of performance? Combined Reporting Composition of the group

State audit & controversy – Continuing trends Audits More assessments and less experienced auditors Auditors are becoming appeals officers States are not negotiating small assessments – states know they are too costly to fight Multistate Tax Commission audits Asking what positions are being taken on other states and looking for inconsistencies Information sharing Claims for Refund Retroactive law changes – get refund claims in early! Know the procedure Statute of limitations (e.g. Michigan)

State audit & controversy – Best practices Pre-audit – Advanced planning Creation of audit ready files concurrently with return preparation Consider federal items that impact the states (e.g. transfer pricing) Early identification of filing positions and other issues Audit Development of company policies on execution of waivers Consider that the federal waiver/RAR adjusments may keep SOL open for all state issues Manage scope Memorandum of understanding (as applicable) Involve state experts as applicable Written requests and responses to document issues Appeals Consider venue options Understand state’s settlement approach

State audit & controversy – Other considerations Date State audit & controversy – Other considerations Key Considerations: Expect more controversy – you will need to fight to win your major issues Consider filing returns to get the SOL running in states where claiming no nexus File timely refund claims on issues you know will likely be litigated Consider voluntary disclosure agreements or amnesty programs to stop interest accrual Reporting federal audit changes – ensure you owe tax before making payments to stop interest accruals as it may prove difficult to get money back https://www.pwc.com/us/en/state-local-tax/newsletters/salt-insights/assets/pwc-tax-haven-legislative-enactments-and-proposals.pdf

Thank you Tim Pratcshler, State and Local Tax Principal Detroit, Michigan (313) 394-6508 timothy.s.pratcshler@pwc.com This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US federal, state or local tax penalties. © 2016 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.