What’s the Big Deal About Tax Conformity?

Virginia has employed retroactive fixed date tax conformity for many years now. While not the ideal model due to a part-time legislature that meets from January to March, it has worked out okay for the past few years at least with conformity legislation being among the first few bills to be passed and signed into law.

Recognizing the challenges of the current system, VSCPA members and staff worked closely with Sen. Walter Stosch, CPA, also a member, and the Virginia Department of Taxation (TAX) to develop an alternate approach for introduction in the 2010 General Assembly session. The result was SB 179, prefiled by Sen. Stosch and introduced on the first day of session, January 13, 2010. SB 179 advanced the fixed date of conformity by two years, through December 31, 2010, thus making it a prospective rather than retroactive date as has been done historically. Additionally, threshold exemptions were added to protect Virginia’s revenue against too much uncertainty. With TAX on board with this approach, we headed optimistically into session with high hopes that legislators would recognize the advantages of this model and the benefits it would provide to taxpayers and tax preparers.

Also prefiled and introduced on the first day of session were the traditional conformity bills, HB 614 and its Senate companion SB 545. These identical bills advanced the fixed date of conformity through December 31, 2009, in addition to adding three new exceptions to conformity. I attended the very first House Finance Committee meeting of the session, during which the Committee started to discuss the conformity bill. I naively expected that it would sail through as it had in previous years, so was dismayed when the bill was tabled for the day after the manufacturing community raised objections to the Section 199 deconformity introduced as a new exception. These objections continued to cause the bill to be passed by day after day, week after week.

In the meantime, we were working with Sen. Stosch to attempt to combine the two Senate conformity bills into one by rolling SB 545 into our bill, SB 179. It quickly became apparent that this was not going to happen, so we ultimately agreed to have our bill continued to 2011 and shifted our focus to getting the traditional conformity bills.

So what’s the big hold-up on the other two bills? The budget. From day one of the 2010 session, the budget has been at the heart of almost every discussion. Bills that have a negative impact on Virginia’s budget are dying left and right. Bills with a positive or no impact on the budget are proceeding unless they encounter opposition.

For tax conformity, the three new exceptions represent approximately $160 million dollars in tax revenues in the next biennium. According to TAX, deconforming with Section 199 makes up $30 million of that amount. However, unlike the other new exceptions, deconforming with Section 199 represents a shift in policy. Generally speaking, new exceptions to tax conformity result from changes to the tax code that occur in the calendar year preceding session. No new federal legislation passed in 2009 affecting Section 199. The proposed deconformity resulted from a planned increase in the deduction amount from 6% to 9% that was in the original legislation as it was passed when put into effect around 2004. As a result, this particular exception is being viewed by many as a tax increase. Also, this particular provision would have no impact on the 2009 tax filing season because it has an effective date of January 1, 2010.

Amendments were introduced in both the House and Senate Finance Committee just last week to strike the Section 199 exception from the bills. Both bills passed out of their respective finance committees. The Senate version then went to the Senate floor, where it ultimately passed unanimously. The House version was referred to House Appropriations after being passed in House Finance in order to address the $30 million shortfall created by amendment, and there it still sits. This essentially makes the House bill dead since crossover has now officially begun and the House can only take action on Senate bills from this point forward. Bottom line, the tax conformity bill (SB 545) is now being viewed by legislators as a revenue bill rather than a tax bill.

Where do we go from here? The VSCPA has been actively and aggressively lobbying on this issue since the beginning of session. Attendees at CPA Day at the General Assembly discussed it in their meetings with legislators. VSCPA President & CEO Stephanie R. Peters, CAE, and I, as well as the VSCPA’s legislative counsel, have been meeting with key legislators on the Finance and Appropriations committees to push for action. A Call to Action was sent to all VSCPA members with an interest in taxation to ask them to contact their legislators on this issue. The VSCPA has no position on whether or not the bill should be amended to remove the Section 199 provision. It simply believes the bill should pass expeditiously.

It’s not too late to get involved. Everything rests in the hands of the House Appropriations Committee at this point, but it will ultimately go to the House floor for a vote. Contact your delegate and encourage him or her to pass SB 545, with or without the amendment as soon as possible.