The State Taxes After Reform Partnership is expanding its scope to finance legal challenges to state treatment of Tax Cuts and Jobs Act provisions and to address business tax issues arising from the COVID-19 pandemic.
“We have begun in earnest to evaluate and support litigation at the state level,” Stephen P. Kranz of McDermott Will & Emery said in an interview with Tax Notes.
Council On State Taxation v. Nebraska Department of Revenue — the pending legal challenge to the DOR’s disallowance of the state’s dividends received deduction for section 965 deemed repatriations — is being funded by members of the partnership.
Formed shortly after the TCJA’s enactment, the partnership is a coalition of companies and industry trade organizations initially focused on state business tax issues raised by the federal tax law, including deferred foreign earnings, global intangible low-taxed income, foreign derived intangible income, expensing, interest expense limitations, and net operating loss limitations.
“We know that there will be other states where litigation is necessary,” Kranz said. “We have heard the other side of this debate encouraging state policymakers to go down the road of taxing 965 or GILTI, and somebody needs to be there to stand up to protect the constitutional rights of companies who will be implicated by such efforts. The group has decided to spend time and money on looking at where litigation is possible and supporting it.”
But the focus on financing TCJA-related legal challenges in the states is only one of the partnership’s high-level changes in scope. According to Joe Crosby of MultiState Associates, the partnership is also keeping close tabs on tax legislation being introduced in the states in response to the COVID-19 pandemic. Even the name of the group has changed to reflect its expanded focus: It is now called the State Taxes After Reform and Recession (STARR) Partnership.
Crosby said that from the start, the partnership’s purpose was to provide information to state lawmakers about what actions they could take in response to the TCJA to ensure a pro-growth, pro-jobs policy. Then the pandemic happened and “we went into this strange government-induced recession,” Crosby said. While going through this in 2020 and talking with state legislative leaders, the partnership’s members realized that “we’re essentially dealing with the same thing when it comes to the recession, which is that states have a variety of ways to react to it,” Crosby said.
The STARR Partnership recognizes that states have a need to raise revenue, Crosby said, adding that some of the ways that states react will be more detrimental to a pro-growth policy than others.
"So we expanded the scope of the partnership to address the continuing need for conformity action,” Crosby said. Not only will there be continuing questions regarding a state’s conformity to or decoupling from provisions of the Coronavirus Aid, Relief, and Economic Security Act, but there will probably be more federal action on tax issues in the new Congress, he said.
“There’s going to be continued need to provide states with guidance on what, from the business community’s perspective, they ought to do with regard to conformity, and more broadly with regard to tax policy actions that states consider as they navigate their current budget challenges,” Crosby said.
Put another way, in addition to CARES Act conformity issues, the STARR Partnership will be looking at any tax actions with business implications that states might take to generate revenue, including base changes, rate increases, or imposition of new taxes. For example, Kranz said that the partnership anticipates engaging state lawmakers not only on digital ads taxation but also on gross receipts taxation generally, and it will be proposing alternative forms of revenue raising.
“We thought that it was a group that would last maybe two years, and that we would see the states exhausting conformity questions,” Kranz said. “Well, the world has changed, and now there’s a whole host of additional conformity questions we’re expecting. There are other pro-business or pro-growth discussions that need to happen, and this group is perfectly situated to engage on those topics."