States are intensifying theirefforts to confront the challenge of winnowing down budget shortfalls by raising sales tax rates, increasing the number of items taxed, and more aggressively asserting nexus.

"States are facing huge shortfalls, with 2011 predicted to be even worse," said Carla Yrjanson, vice president of tax research and content for indirect tax at Thomson Reuters. "They need to do things they can control, and one of these is to expand the definition of nexus, and who needs to pay. The other is to increase taxes, and there is a lot of activity in that area."

Consumer taxes for retail sales items, gas and cigarettes all continue to climb, according to an annual survey of consumption taxes by CCH. "From the increases in consumer taxes, it's evident that many states are trying to shore up revenue shortfalls," said CCH senior state tax analyst Daniel Schibley. "Many other states have not yet increased taxes, but may do so." (For more on what states are doing in the areas of personal and business income tax, see "Digging deeper," page 10.)

Sabrix, the sales and use technology provider of Thomson Reuters, reports that there were a total of 131 changes in sales and use tax in the second quarter of 2010, with 91.6 percent of them increases or new taxes. There are typically over 1,000 changes per year, with the majority occurring in January and July.

The last quarter was the first quarter in a year-and-a-half in which overall revenue increased, she noted. "It's not because of the economy picking up, but because of additional revenue from tax increases," she said.

Nexus, the minimal constitutional level of activity that would allow a state to assert taxing authority over an out-of-state entity, is a sticking point.

NEW LEGISLATION AND THE SST

The Main Street Fairness Act, introduced in July by Rep. Bill Delahunt, D-Mass., is a proposed solution. It attempts to put local brick-and-mortar retailers on an equal footing with remote retailers while helping states collect the billions they consider are owed them.

"Sales tax revenues comprise up to a third of most state budgets," said Delahunt. "This year, an estimated $18.6 billion will go uncollected; by 2012, the states will be losing at least $23 billion annually, based on conservative estimates. From 2009 to 2012, this amounts to a low of approximately $55 billion. In some cases, these revenue losses can comprise up to one half of a state's budget shortfall."

The Main Street Fairness Act would provide congressional authority for the Streamlined Sales Tax Agreement to take effect. It does not compel any state to join, but those that have adopted this system, or choose to in the future, would then be able to require online retailers to collect and remit sales taxes.

The Streamlined Sales Tax Agreement was created by the National Governors Association a decade ago in response to the U.S. Supreme Court holding in Quill that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state.

The court ruled that the existing system was too complicated to impose on a business that did not have a physical presence in the state, but said that Congress has the authority to allow the states to require remote sellers to collect tax. The purpose of the SST Agreement is to simplify and modernize sales and use tax administration in the hopes that Congress would pass legislation allowing them to collect sales tax from remote sellers.

"The Main Street Fairness Act is directly tied to the SST Agreement," explained Diane Yetter, of Chicago-based Yetter Consulting. "It references the agreement and incorporates key provisions."

However, she observed, the proposed legislation struggles with certain issues. "The bill does not define whether vendor compensation [to collect the tax] is paid to all registrants or only voluntary registrants," she said. "We would have hoped that there would be a clearer nod that it would apply to all registrants. Likewise, it fails to define 'small business' for purposes of the small-business exception."

"This would not be a new tax, or an increase in taxes," Yetter emphasized. "It is a mechanism that grants the states the power to require vendors to collect the tax. With budget crises the way they are, there is potentially a chance."

"Most people are aware that governments are hungry for revenue, and income tax to fund revenue is not a popular remedy," said David Lahey, executive vice president at sales tax automation vendor SpeedTax. "The Main Street Fairness Act will help drive the movement toward SST."

Several states have gone their own way toward establishing sales tax nexus, according to BNA research. "Cash-strapped states are aggressively pursuing new theories for establishing nexus and enforcing tax obligations against online vendors," said George Farrah, executive editor at BNA Tax & Accounting.

MORE STATES FINDING NEXUS

"While New York, North Carolina and Rhode Island have each enacted laws explicitly stating their sales tax nexus policy with respect to online vendors, it seems other states may be taking a more subtle approach. The fact that 14 additional states said that they would find nexus for in-state affiliates suggests that these jurisdictions may believe that the Amazon law approach fits within their sales tax nexus policy."

Colorado's approach has been to require notification by remote vendors of the obligation of in-state purchasers to pay use tax, according to Steven Roll, a senior tax analyst at BNA. The vendor is also required to report total sales of each purchaser at the end of the year both to the purchaser and the state.

"There is a cost to not collecting the tax," he said. "There's a question of whether they are making the reporting requirement so cumbersome that it becomes easier to simply collect the tax."

CCH's Schibley agreed. "They're not saying you have to collect the tax, but simply report the purchases," he said. "The idea is that it will become so burdensome that the remote retailer will start collecting, rather than reporting."

Some form of the Main Street Fairness Act has been introduced intermittently since 2003, reported Joe Hatfield, senior tax manager in the state and local tax group at BDO USA. "It's never been voted on or even made it out of committee," he said. "There are not enough states that are part of the SST Agreement that have modified their laws to make it come into play. With Texas, California and New York not conforming, the feeling is that it will never happen."

"SST requires one return to be filed per state," observed Hatfield. "Colorado has filings at the state, county and city level, so for them to participate they would have to reconfigure their whole process and the local jurisdictions don't want to do this. Other states are changing definitions of laws but still have cities with separate taxes. They are 'advisory states' within SST. They have done some modification to their system but not enough to be in full conformance."

Another recently introduced bill, the Digital Goods and Services Tax Fairness Act, may have a better chance at becoming law, according to Kelley Miller, tax associate at the Philadelphia office of Reed Smith LLP.

The bill, introduced by Reps. Rick Boucher, D-Va., and Lamar Smith, R-Texas, would establish a uniform national framework for the taxation of digital goods and services.

"The existing sales and use tax laws are inadequate and ill-equipped to address today's digital economy," said Boucher. "The borderless marketplace and complex nature of digital transactions create new problems that must be addressed uniformly and on a national level."

"The intent is to ensure certainty in the taxation of digital goods and services," said Miller. "They want to make sure that the tax imposed on items such as iTunes, e-books, and other digital downloads are in the same realm as if you purchased them at a brick-and-mortar store. They will impose limits on the way states can actually tax these."

"States are all over the map when it comes to taxing digital products and services," she added. "So much of our commerce is not only digital but wireless. Some states, such as Washington, have been very proactive in imposing sales and use taxes on digital goods and services. Other states have just not picked up on this trend as quickly."

46 STATES FACING SHORTFALLS

States are searching desperately for ways to come up with revenue, echoed Randy W. Donald, co-practice leader of the transaction tax practice at Ryan Inc. "They have $120 billion in budgetary shortfalls, and they're running out of federal aid," he said.

The Center on Budget and Policy Priorities estimates that at least 46 states had shortfalls when adopting budgets for the current fiscal year (FY 2011, which began July 1 in most states). "Fiscal year 2011 gaps - addressed with spending cuts and revenue increases by most states - totaled $121 billion, or 19 percent of budgets in 46 states," it stated.

"The issue of whether a retailer is responsible to collect tax on the states' behalf has been around a long time, but the Internet has made it worse," said Donald. "The problem with state budgets is that they rely on transaction taxes and income taxes to generate revenue. If people aren't spending or working, it's hard to make revenue grow." AT

With four of the nation's top regional firms announcing mergers last month, profession-watchers say that the latest flurry of unions between larger CPA practices sets the stage for more enterprise-level firm marriages over the next several months.

Just a month after Boston-based Caturano and Co. was purchased by RSM McGladrey, Minneapolis-based LarsonAllen revealed that it was merging with LeMaster Daniels of Spokane, Wash., while two of the New York area's top regionals, Eisner and Amper Politziner & Mattia, announced their combination in mid-August.

"A lot of these mergers are between firms that have deep histories together, like belonging to the same associations, and common alliances," explained Allan Koltin, chief executive officer of Chicago consultancy PDI Global Inc., and one of the top brokers of CPA firm mergers. Koltin likened the recent accounting consolidation to what happened in the legal profession when many of the country's largest law firms unveiled mergers in recent years. "I think there's going to be more [of them]."

"Top 100 firms have an insatiable appetite for merging in firms," added Marc Rosenberg, principal of Rosenberg & Associates in Wilmette, Ill. "They know from experience of merging in many other firms that mergers work and are profitable - if you do them right. And because these firms have done so many mergers, they know how to do them right. They know how to manage a CPA firm and make good money at it."

LARSON AND LEMASTER

The merger between LarsonAllen and LeMaster Daniels will become effective November 1.

LarsonAllen chief executive Gordy Viere said that the union with LeMaster Daniels provides an avenue to extend the firm's industry specialization to the Pacific Northwest. "We've long known and respected our counterparts at LeMaster Daniels, and we share common business and cultural practices," he said. "Like us, they have both a metropolitan and a rural presence and deliver a mix of talent, warmth and familiarity. It's a perfect match that will help us serve this part of the country with depth."

LarsonAllen has approximately 1,500 people and $230 million in annual revenues. The firm ranked No. 18 on Accounting Today's 2010 list of the Top 100 Firms.

The union with LeMaster Daniels marks LarsonAllen's sixth merger since May 2009.

Meanwhile, LeMaster Daniels has 12 offices, 26 owners and nearly 300 employees with annual revenues of approximately $40 million. LeMaster Daniels ranked No. 75 on the Top 100 Firms list, with $41.73 million in annual revenues.

"We had actively been looking for Northwest firms to fold into the LeMaster Daniels brand as part of our overall growth strategy," said LeMaster Daniels chief executive Scott Dietzen. "An upward combination wasn't initially on our minds, but LarsonAllen's success in developing strong industry specialization was very attractive. Bringing that niche focus to our firm will benefit our clients and employees immensely, and that's something that we would never say 'no' to. We pursued this emphatically for all the opportunities it presents."

Both firms serve a wide range of businesses, from large corporations to small and midsized privately held companies and community-based nonprofits.

LarsonAllen provides services to clients in health care, nonprofit, government, banking, manufacturing, construction, real estate, dealerships, agriculture and other sectors.

"This is an interesting one because up until today no 'mega-regional' has come to the Northwest, essentially allowing Moss Adams to be the only 'big' regional in the area," said Koltin. "[LarsonAllen] does an excellent job on the merger integration side, so I think it will have some effect on the market, especially in specialized niches. Having said that, in addition to Moss Adams, Seattle has some strong local firms like Peterson Sullivan and Clark Nuber. So it will be interesting to watch how it unfolds."

EISNERAMPER

The combination of New York-based Eisner and Amper of Edison, N.J., creates an entity with 1,200 employees, including 170 partners, and more than $250 million in revenue. Going forward, the firm will be known as EisnerAmper.

Eisner ranked No. 24 on the 2010 list of Top 100 Firms, with $133.25 million in revenue; Amper earned the No. 26 spot, generating nearly $120 million in annual revenues.

The heads of the two firms, Eisner managing partner Charles Weinstein and Amper managing partner and CEO Howard Cohen, began talking about a merger last September. "As members of Baker Tilly and competing in the New York market, we've known each other for a long time," said Weinstein, who is now the CEO of the combined firm. "After some casual conversations, we decided to put together a breakfast meeting to see if there really were going to be some opportunities for us to combine."

The first meeting took place on Sept. 2, 2009, which coincidentally turned out to be the birthday of Amper Politziner founders Phil Politziner and Monroe Amper. "There's a lot of karma in that," Weinstein said.

Shortly after Amper merged in 2008 with Goldenberg Rosenthal, Amper had created a strategic plan for the next two to three years. "Our main focus was getting larger in New York City," said Cohen, who is now chairman of the combined firm. Meanwhile, New York-based Eisner wanted to expand to Philadelphia, where Amper has a large presence.

Cohen and Weinstein see the combined firm as becoming a dominant and pre-eminent firm in the Northeast. Both firms have mostly grown organically over the years, in part by hiring from the Big Four and other national firms. But Eisner has not merged with another firm in over 20 years, according to Cohen, and Amper has only done two mergers in the last 45 years.

Prior to the mid-August merger announcement, the two firms worked quietly on merging their practices for three months. They formed an integration oversight committee, as well as integration teams in areas such as audit, tax, consulting, litigation, finance, human resources and marketing. They had their first partner vote in May and the final partner vote in the second week of August. The merger was structured as a combination of equals.

"I watched how they dealt with issues such as firm name, chairman vs. CEO, etc., and on every issue, leadership checked their egos at the door," said Koltin, who consulted with both firms on the merger. "Sometimes with very successful firms, they get blinded by their press clippings and have a 'Don't screw up a good thing' mentality. In this case, leadership challenged the troops to put personal agendas and fears aside and see if something truly incredible could be created. This is the biggest merger of two U.S.-based accounting firms in the 21st century, and I think it will be a trend that we will see continue for the next couple of years."

In the future, the two leaders plan to expand the firm as far north as Boston and as far south as Washington, D.C., but they said that they do not plan to make it a national firm with offices around the country. However, they do see themselves doing more business servicing mid-market international companies, and Eisner already has an office in the Cayman Islands that is mainly used for financial services and insurance industry clients.

The firm expects to retain all of its current employees, and has been recruiting on college campuses for entry-level hires as well. It has also been reaching out through social networking sites, such as Facebook, Twitter and LinkedIn, as well as YouTube, to market its services.

"It's rare that two firms of this size can come together and have so much in common," said Koltin, who has consulted with both firms. "For Amper, growing New York City was a major strategic initiative, and by combining with Eisner they achieve that goal the day after. For Eisner, they pick up some exceptional niches from Amper and will also be able to take some of their niches into the New Jersey and Philadelphia markets." AT

- Bill Carlino and Michael Cohn contribued to this story.

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