THIS ARTICLE IS THE FIRST IN OUR SERIES REGARDING HOW to achieve optimal results in resolving certain types of state tax and incentive disputes. Because of a new E-Verify push by the Nebraska Department of Revenue, we are dedicating Part 1 of this series towards this issue. State Tax & Incentive Defense Protocol In resolving any state tax and incentive dispute, we follow a certain protocol developed over many years, going back to principles learned from one of our founders—tax and litigation attorney Jack North. This is to help ensure that we have considered all potential defenses and taken other actions that help achieve successful resolution of the dispute. The main components of this protocol are included on page 24 of this issue. Certain parts of this protocol are specifically illustrated below for the E-Verify R&D Credit audits and appeals we are seeing. Application of Protocol to E-Verify R&D Credit Audits & Appeals In 2009, the Nebraska Legislature passed a law requiring companies to electronically verify the work eligibility status of new employees to receive incentives for hiring those employees (such as under the 2005 Nebraska Advantage Act and other incentives). In addition, the law included a requirement that companies must electronically verify the work eligibility status of new employees to claim the R&D Refundable Credit under the Nebraska Advantage Research and Development Act (R&D Act). Specifically, the statute stated: “The Tax Commissioner shall not approve or grant to any person any tax incentive under the Nebraska Advantage Research and Development Act unless the taxpayer provides evidence satisfactory to the Tax Commissioner that the taxpayer electronically verified the work eligibility status of all newly hired employees employed in Nebraska.” The statute is broad, vague, and imprecise. The Department of Revenue has interpreted this to mean that the failure to, promptly after hire, verify even one new Nebraska employee in a year will cause a company to lose all its R&D credits under the R&D Act for that full year (which we call the “One Strike and You’re Out Rule”). We’ve recently seen several disputes initiated by the Department of Revenue in which the department has claimed that the company did not meet the electronic verification requirements of this law. In interpreting this law, the department unilaterally imposed its own (various) interpretations of this law (also published in a Revenue Ruling) and has claimed that companies must complete verification through the federal E-Verify system within a very short time after a new employee is hired. The department has been imposing various deadlines by which to E-Verify (e.g., 3 days, 14 days, a year) and has tried to impose its interpretations on companies through the issuance of a number of assessments. As we work with companies and their CPAs to file (or amend) protests to the department’s assessments, we have developed a number of defenses to the department’s interpretations. While space does not permit us to cite case law and other legal support for these, nor to cover all the potential defenses in this article, we still want to review several of the defenses—based on what this statute gives us and doesn’t give us. Because of the vagueness of the statute, these defenses (which have not yet been defended in court for the R&D Credit) include the following: The E-Verify Fully Occurred. Of course, start here. Press to demonstrate that E-Verify was promptly and fully achieved. If someone was missed, don’t concede that year or the case. Look to other defense positions. R&D Credit Disallowance Isn’t Authorized. What the statute says and doesn’t say is critical. The statute only says the tax commissioner “shall not approve or grant” the R&D Credit to any person. However, approval or granting is not needed. It is obtained by a company requesting it on its tax return. The statute does not give the tax commissioner the authority to disallow it. The Department Is Overstating the R&D Penalty. The penalty for any noncompliance with the electronic verification requirement under the Nebraska Advantage Research and STATE TAX BRIEFING RESOLVING STATE TAX & INCENTIVE DISPUTES PART 1: RESOLVING E-VERIFY R&D CREDIT AUDITS & APPEALS BY NICK NIEMANN & MATT OTTEMANN, MCGRATH NORTH LAW FIRM 22 Nebraska CPA
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