February 26, 2016 People in Tax

An Interview with Kevin Sullivan

By Tom Greenaway, KPMG LLP, Boston, MA
Kevin Sullivan

Kevin Sullivan has served as the Connecticut Commissioner of Revenue Services since 2011. He served as Lieutenant Governor from 2004-2007, and he served as a State Senator from 1986-2004. In June 2015, the Connecticut General Assembly passed a bill imposing mandatory unitary filing on many Connecticut businesses as well as sharply limiting the use of net operating loss carryforwards. This interview took place soon after a compromise bill passed the General Assembly in November 2015.

Q. Kevin, you've been in this role for a while now. What are your biggest challenges and opportunities right now as Commissioner?

A. The biggest challenges right now—and they have been since I took this job now almost five years ago—are not related to tax law; they're related to the capacity to do effective tax administration. Like many states, Connecticut has been challenged financially to support its agencies. Now, we're lucky: I spend my time making the case that we're a profit center and that has helped. But we are clearly in the business, as they say, of doing more with less. I have a workforce here that is quite senior. Many people in this agency are staying for 25, 28, 30 years and they remember a time when this agency was three to four times the size that it is today. The challenge is getting people to think differently about work, think differently about teaming across the agency, and think differently about using technology.

I think that the other major challenge has been around policy. When this job was offered to me by the Governor, he said, "It's always troubled me that somehow tax policy and economic policy have existed in bubbles for the State of Connecticut." Somehow tax policy and fiscal policy—which is even more amazing—have existed in bubbles in the State of Connecticut. The agency really does need to be at the table in those policy conversations while continuing to bring in the dollars in a fair, efficient way.

In my other life, before coming here, I cannot think of a circumstance where the Commissioner of Economic Development and the Commissioner of Revenue Services were together making presentations, were together having conversations, and were regularly working together. We now basically provide most of the legal support for the Economic Development Department when it has major issues. So that clearly is just one measure of it.

I understand the legislative process; I was part of that for many years.

We have just stepped up to say that we think there should be a conversation over the next year or so about whether the entity-based approach to business taxation that Connecticut has (a corporate income tax for C-corporations, a distributional income tax for non-Cs and then a business entity tax for everybody who has a certain level of business income) makes sense or whether we could find something more efficient, more effective, more thoughtful, that would be a single tax regime for the State of Connecticut. I'm not saying "gross receipts" because that can scare people; but something looking like a gross receipts tax, with reasonable adjustments, would save us a lot of money in tax administration. I think it would be welcome, depending on how it works out. So we'll take that lead.

We will not wait for the legislature to come and say: I wonder what kind of other system could work?  We will take that lead and we'll pull experts in from the community. We can do that without being a public forum, which is useful. The result is we've picked up that role considerably. We've actually done—I won't call it training because that would be cruel—we've actually done sort of a "Tax ABCs" for the legislature. Not everybody participated, but this is probably one of the weakest suits that most policymakers have. They tend to defer to experts and see tax as numbers, not as policy. So they either see it as a way to fill the budget—we need a billion dollars, or they see it as we don't understand taxes—can you tell us what to do?  So we've been trying to help the legislature be a little bit more policy-oriented on taxes.

Ultimately, the legislature is going to have to set the framework for any legal change of regime. I mean, we can't advise our way into a new tax system. The legislature has to take those steps. But to the extent that we can have conversations outside the political hubbub that lead people to some kind of consensus, it's much easier for the legislature to respond to that consensus. Let me give you an example: in moving to single sales factor apportionment, we've had an inside working group, business folks and folks from our agency, who've been discussing whether that made sense and for whom that made sense. Most people around the table, particularly Connecticut-based businesses, said, "Absolutely, you should have done it a long time ago."  Obviously, if you were an out-of-state retailer you weren't too happy about it. But I don't think Walmart is choosing not to do business in Connecticut as a consequence of either unitary or single factor taxes. The legislature might have said in other circumstances "What is this?  Why should we do this?"  Instead, for the most part they said, "Okay, so you've worked this out, you've set this up, you can explain, you've explained it to us well. We know why it's good policy in terms of exporting tax burden and importing tech business headquarters. Good enough."

Q. So the Department of Revenue Services can facilitate the building of that consensus with the affected communities and then help deliver that consensus to the legislature?

A. And to the Governor, quite frankly. Our job is to deliver it to the Governor and then the Governor gives the green light to deliver it to the legislature.

Q Then where do you go next?  Market sourcing?

A. Let's take it one step at a time. My vision had been that last summer, an inside/out, outside/in working group would sit down and make the case for going to unitary. Well, surprise, the legislature did it. They just did it at the last minute and—while it was the right decision—there was a lot of gnashing of teeth in the business community because a consensus had not been formulated around it or at least it hadn't come with warning and that's kind of important.

People do plan, and we were playing catch-up on that one. Now what I've said to the Tax Panel and the legislature and to the Governor's office—and I hope we get the go-ahead to do this—is that there is a probable consensus that we should go to a clear destination-based market sourcing. We have sort of this hodgepodge now. But with that change there will be winners and losers: people will be differently affected.

Rather than come back in February, which is when the legislature next returns, and throw yet another big issue at the world, I've suggested that the legislature and Governor just ask us to do a couple of things. One, put together the working group and, two, give us the authority to request pro forma filings for a year on an alternative sourcing model that hopefully would not be too burdensome for companies to respond to. And then we can provide better information to the legislature and the Governor, as we believe this is on balance the right way to go.

Q. You could ask real taxpayers to deliver pro forma returns that would show both your office and the legislature what the results of market sourcing reform would look like?

A. Yes, that's what Maryland did and what Rhode Island did when they moved to a single factor. One of my jobs, among many, is to help folks in this agency understand the consequences of what we do and advocate. Similarly, I think it is to help the legislature understand the consequences of what they may do or not do. It's still their decision, but at the end of the day, I wish we had had a chance on net operating losses to have that conversation with them. Because we might have said, "Hmm, imagine there's a company somewhere in Connecticut, just hypothetical, that has been selling off many of its business lines and making a great deal of money from that and was sort of planning on that for a while and was sort of planning to use their net operating losses to offset those gains. It might come as something of a surprise to them to find out they can't."  But we never had that opportunity. Now, if we have the earlier discussion, the legislature still makes the choice, but at least you know that there's a consequence, there's a potential consequence. The change to unitary was the right thing to do, but not overnight without warning. We've got $78 billion worth of cumulative NOLs out there, which is ridiculous.

Q. You said you have to work smarter and do more with less. How are you harnessing technology not just to administer your department, but to do a better job as a tax enforcement agency?

A. Probably the best example of that is the move we made to automated scoring with respect to collections. What that simply means is that it is possible to logarithmically establish criteria that will scan the cases you have and give you a sense of probability of success, probability of speed, and probability of maximum result.

We have reduced our accounts receivable. It has required a change of culture. It's okay not to pursue an uncollectible account to the end of time. It's going to be written off anyway because you're never going to collect it, so why spend years chasing that target and then write it off?  It's better to write it off early, if statistically we can establish that there is only a slim probability of ever getting it. Likewise, we have to be selective which cases to pursue. Don't sit with a pile of possibilities and do the $500,000 one, which is never going to be collected, when underneath it there's a $10 million one, which (because of the entity and a whole lot of reasons) can be readily cleared. Technology has given us that ability. I should say, technology has made that possible, combined with a greater willingness to do offers of compromise and settlements. The cultural philosophy has been to use the technology to guide the human decisions so that they are focused on the places where human interaction and judgment really becomes important and useful, not routine. That's probably the best example of where technology has been harnessed.

We have certainly used technology to give taxpayers the ability to both file and pay electronically. There was a little lesson in that, which I had to learn, and everybody else had to learn. That is this: we were originally set on this goal of universal electronic filing and universal electronic payment, which is still a great goal, except there are slices of the demography out there for whom this is simply not possible. We heard from them as we tried to push them too hard. We heard from the landscaper who describes his accounting system as this box that I think I owe and this box that I think is owed to me; I just throw stuff in there and occasionally I look at it. His response to electronic filing is: "You're asking me to do what online?"  Or when we backed off mandatory electronic estimated payments. Nonetheless, we have moved to well over 90% eFile and ePay in all major tax categories and that is one of the ways that we've been able to absorb having fewer people here. Less paper, less process.

Our next generation challenge: we are a state with a very antiquated principal tax platform. Payments get batched in the accounting system, but that entry then has to be transferred over to the tax record system. There are two stand-alone systems that are not automatically interrelated; they're not interconnected. We can't verify for several days whether we actually put a payment in the bank.

We have 70 bolt-ons to our current system to address problems. As a result, if we want good tax reports for policy analysis and for financial analysis, we have to go outside the main system to the data warehouse, create an independent inquiry, query the information, create a report and bring it back into the system. We cannot do it through the main integrated tax information system. This is expensive, a waste of time, and annoying. The system is ITAX. I kid people that ITAX is a swearword. We have $300,000 budgeted to retain the services of a provider who will help us write the business plan: then we'll have to go to the Governor and the legislature and fight for the capital funding to get that out. [Editor's note: KPMG is participating in that project.]

Q. But it seems obvious that any enterprise needs an enterprise resource planning system that works. It doesn't sound like you have that right now.

A. It's made to work as best it can. It could be more efficient; it could be more effective. It does sound obvious, but sometimes the obvious is hard, especially when it has a high price tag. Making this change is not going to be inexpensive. It's going to take a major capital budget, and it's going to take some selling, I think. Again, our rationale is that we bring in money:  for every dollar you spend here, you get many more dollars back.

There are two ways of looking at the job of a data-crunching agency. There's a traditional way of looking at that, which says that the agency doesn't create the systems that create the exceptions: the agency just deals with the exceptions, and everything ends up being an exception, everything is a case, everything is outside of what can be easily processed. I think getting our folks to think about that has been important, because it means recognizing that the result will be different than what they've done before. They're not going to be as often "in the weeds," trying to make sense of the big picture; instead, they will be getting some big picture systems that help them stay out of the weeds and operating hopefully at a more global level.

Q. So, to stay with the metaphor, the machine will be in the weeds and if the machine needs help, the machine will kick that "case" out for attention. Do you see that cultural change being complete in your tenure?

A. Not in my tenure, no. I think it will take time. But it is coming. I think we have to demonstrate to people that their days and their lives and their work will be smarter and easier this way than the alternative once we convince them that they're not at risk somehow because of the changes.

Q. Inside the agency there's a focus on this case, and this instance, and this year, and this taxpayer, and this issue. Certainly that is a common affliction. Tax practitioners often think of the tax system in terms of their particular clients, or their issues, or their industry. Do you have any advice for policymakers or anybody who's involved in the tax system to help them step back and see the rule, see the system?

A. You know, it's hard, I think, for practitioners, depending on how specialized they are and particularly if they are in-house corporate, because they do have a job. In a sense, their job is to advocate for their piece of the world. On the other hand, the tax code cannot become the summation of a series of anecdotes, which to some degree it is. The tax code really needs to speak more broadly than that. The risk is if people participate in a larger conversation about the tax system, they may consider themselves at risk of negotiating against their own interests. As long as they stay on their own piece of it, they can be more confident that they know whether they will win or lose.

We have this working group, which is a dozen or so people outside the agency, which was pulled together for the implementation of the conversion to unitary corporate filing. The rule is that participants may not raise issues that sound like hypotheticals but are, in fact, real client situations. Now, if the situation represents a broad swath of taxpayers, business taxpayers who may be affected, that's fine, it can be used as an example. But the working group is not here to make the tax system work for a particular participant or client: it's here to make it work for the State of Connecticut.

Q. Do you think that working group model has been effective at least at throwing off ideas?

A. Yes. It has helped us immensely. It has helped us build a case for changes that are needed. We use it whenever somebody out in the business world says "I don't understand or like this."  With the working group, we can say, "You don't have to take my word for it; let me have somebody over here from X Company talk to you about it. They can explain it to you." 

Unfortunately, when unitary filing was passed overnight, the newspapers, as you can imagine, brought it up as Connecticut's new unitary tax. So the main business association in the State of Connecticut was not pleased and was highly critical. That struck us as odd. On balance, Connecticut businesses should have been for it. What it really reflected was that the change to unitary came as a smack across the face rather than a pat on the back, or a conversation, or a handshake.

So I think these working groups are the way to go as long as everybody follows the rules. We'll follow that approach on whether and how Connecticut might move to a completely different business tax methodology.

Q. How do you work across state lines?

A. Well, luckily, we have the Federation of Tax Administrators. The FTA is a great resource both in terms of the information that it provides to all of us, but quite honestly, just the opportunity to talk with colleagues and learn from and share with colleagues. As we did the corporate income tax changes, we spent a lot of time talking with Rhode Island because they had the freshest experience. They've been through it recently, and we learned from that. We've just set up a major Tobacco Enforcement Unit, so we talked to New York and New Jersey because they have a lot of experience in policing tobacco. There's probably nothing that we're going through that another state hasn't been through. There's probably nothing another state is going through that we haven't thought about. By and large, these are significant issues. One of the things that has actually helped to rally the states to a large degree (with a few exceptions) has been to press the limits of economic nexus in the absence of federal action on it.

Q. Do you see the economic nexus issue in particular as one where states are collaborating?

A. By and large. I mean, there are exceptions. If you're in New Hampshire, you're not too interested in having this issue change. And that's understandable. But even if you're in New Hampshire, I think you probably, at the end of the day, understand that a legal regime that preferences one segment of the economy over another nationally, federally, is probably not a good idea.

On this one all of us listen to the arguments against clarifying the authority of the states and sometimes we just sort of roll our eyes when we hear about "the fledging online industry."  Right. Well, when we were negotiating with Amazon and before we reached agreement they'd say, "How are we going to know who bought what, when and how?"  And I said, "Look, I've used you. You know every day who bought what, where they bought it, where it's going, how much it was, how to tax it." So that's a place where states, I think, have rallied together around the principle that this is a place where the federal government ought not to be picking winners and losers. Let the marketplace pick the winners and losers, not the federal government.

Q. So we've been touching on some federal legislation—The Marketplace Fairness Act?

A. Among the states, we all are very pessimistic that the Marketplace Fairness Act is ever going to see the light of day. Certainly not as long as Congressman Goodlatte sits where he sits.1 The new Speaker is not a fan. The Majority Leader in the Senate is not a fan of the states.

Now the Tax Commissioners are in an odd spot. Some of us are political; some of us are not political. Some of us are elected; most of us are not elected. Who speaks for state tax policies is always an interesting question. I know I don't at the end of the day. My Governor does because I report to him. The head of FTA, Gale Garriott, is a former Commissioner from Arizona and a really good guy. We have this conversation because his experience was in Arizona, a different political culture where you cannot stand too tall because you immediately get your block knocked off. We all come from different places, and we don't speak to Congress. Luckily the Governors Association and the Multistate Tax Commission Executives are without exception on the same page. So we have very powerful groups, and we work through them.

And the states push the limit as much as we can until somebody says "stop" through litigation. Five or six years from now, we're going to find that litigation, and finally get back to the Supreme Court.

Q. There is currently a strategic litigation initiative coordinated across the states?

A. I would say that FTA has certainly had people in conversation with one another. We know who is pursuing what. We are all looking for the case. Now some of us are equally concerned about the wrong case going forward. It can't just be any case. It has to be the strongest possible case before the federal courts so that we can get a clear determination. What we want is a case that concludes that the Commerce Clause is not violated unless there is an impermissible burden on interstate commerce. And, p.s., this is not that: right now we have an impermissible burden on intrastate commerce. So we have a regime where there's an unlevel playing field. That is not what the Constitution or the framers had in mind. And then hopefully let Congress figure out what that means or, alternatively, let the states have the opportunity to fashion varying remedies. Yes, those conversations do take place.

Q. I'd like to spend a minute talking about how federal challenges with respect to tax administration affect you.

A. Very practical examples are that the IRS announces that its tax season will begin late and it would be kind of nice if all the states would wait. And we say, no, we're not going to do that. And why is the IRS waiting?  Well, they're waiting for their authorization. They don't have a budget yet. Clearly, some folks in Congress, harking back to Grover Norquist, say: "Starve the beast."  The IRS is the heart of the beast for those people. What better thing to do than make it extraordinarily difficult for the IRS to do its job?  And in fairness there have been points in the last two years when the IRS has had some issues in terms of tax administration which have fed this sort of paranoia.

How does it affect us?  We clearly rely a great deal on access to timely federal tax information. In a perfect world we ought to be doing much more collaboratively on fraud in a more timely way, not: "Here's some stuff we found last year in Washington. You ought to look at it now that you've already given those refunds out."  Real-time, return-season fraud data would be helpful. The more they're pushed away from real-time capacity, the more difficult it makes it for us.

I can't say this has been in any way crippling to us, but we do rely on their data. We don't necessarily rely on their guidance, but we do rely on their data. And if that data is not timely, if it's not real time, it makes our jobs harder. If the tax season is on two cycles, it makes our jobs harder. We were very excited a few weeks ago when it looked like some folks were going to be pressing the IRS to come up with a W-2 filing deadline that might have some meaning in terms of fraud evasion. So states, one by one, are setting earlier dates for employers to file that data. That shouldn't be the case. It ought to be just one rule nationwide for business purposes as to when you have to file that data. [Editor's note: After this interview, Congress moved the 2017 deadline for filing Forms W-2 and 1099 up to January 31, 2017.]

Q. And can the states really move that W-2 filing date up and demonstrate that it cuts down on fraud?

A. That's what we're going to find out. This will be the first year, but we believe that will be one more indicia that we can look at as we question suspicious filings. Just last year that was probably our biggest challenge: a credible spike in ostensible fraud, so much so that other parts of the collection activity and processing activity developed significant backlogs, from the people that we were pulling off to deal with what we perceived to be fraudulent claims. Now, did we create that problem to some degree?  Yes, because we toughened our filters. It's another area where technology helps, right?  When you're able to pre-filter automatically for certain issues, it's a lot easier to deal with fraud than it is looking at it on a case-by-case basis. But we intercepted probably $25 million more last tax season than we had the year before. I think it's a combination of there being more fraud and our being more vigilant about it. But this is a major challenge for all tax agencies now, and historically the resources have not been there to be proactive as opposed to reactive when trying to deal with tax fraud.

Q. Are there any deep-seated beliefs that surprised you when you came into the world of tax, ones that led you to shake your head? Do you think that most taxpayers want to do the right thing?

A. It's a very important distinction, not just attitudinally, but in terms of how you shape the agency. If you believe that most people will cheat, given the opportunity, then you structure an agency that is much like a traditional police force. You're constantly looking at individual violations and trying to correct them. If you believe what all the data says, that with good information and clear guidance, most people want to do the right thing and will do the right thing, it makes it a lot easier.

We're trying to get to that point. Not having that skepticism or cynicism about the vast majority of taxpayers and just instead knowing that they want to do the right thing if we can make it easier, faster, clearer for them. That might be as simple as looking at our communications. A standard letter from this agency would be, "This is to inform you that you're getting this letter because…."  The "because" is a list of sections of the Connecticut General Statutes which warrant the letter. Then the letter goes on to say, "If you do not respond to this letter you're going to be in serious trouble."  Now, let me tell you what the problem is. That's not a good communication. First of all, no one plows through that, and we've already pissed them off before they even get to the thing we need them to do. So there are some simple things like that we can do. That was just one thing, changing the internal attitude towards more communication, more conversation, more taxpayer assistance, more clarity, more help, more self-help, helping people craft their own payment plans.

Again, research is absolutely clear. If I tell you how much you have to pay on a payment plan, you will pay it once and stop because you never believed that you could do it. If you tell me and we negotiate over how much you think you can do, you'll stick to that payment plan, and you will not vary from it. These are the kinds of things that we can do differently. That's the internal part.

As to practitioners, even considering the worst tax departments, it's clear that people are not sitting there thinking about ways to make people's lives miserable or to take money out of the economy. So what we're trying to say to folks is that we can work together. We have fought to have a collaborative relationship. It's not necessarily adversarial. When we're in court, yeah, it's adversarial; but when we're here in the review process, it's not necessarily adversarial. We're not "gotcha" and the taxpayer isn't "get away with it."  If we approach it as "get away with it" and "gotcha," we're going to have a hard time getting to someplace that's good for both of us.

We were not communicative. We were not outgoing. We were not present in the world of taxpayers. We were just here in Hartford sending things to them and demanding things of them. Those are the two things that surprise me, I think. I probably shouldn't have been surprised by the second, but I think the first is an occupational hazard of people who deal often with people who have done something wrong. It starts to get easy to think that most people are doing things wrong.

Q. Any closing thoughts?

A. Let's go back to the policy role of tax agencies. If we're not in a position to advise governors and legislatures and the public at large, if we're not in a position to provide information and education, I don't know who is. So being hermetic, being focused on collection, not willing to speak, not willing to get out and say things and not getting out into the community, not getting in front of the legislature, is not serving anybody's purposes. The traditional view that all we do is collection and crunch data, and we don't like to talk to people about what we do; we want to keep a low profile and sort of hide out in the tax collection agency—it ain't working. It doesn't work for anybody, but it's certainly not working for tax agencies. ■


1Representative Bob Goodlatte (R-Va.) is the Chair of the House Judiciary Committee. Goodlatte has argued in the past for "tech neutrality," meaning that the same sales tax should apply to online and in-store purchases; but he has also expressed concerns that the Marketplace Fairness Act could allow states to 'regulate beyond their borders'. See, e.g., Goodlatte's Online Sales Tax Principles Review House Debate, Huffington Post (Sept. 18, 2013); Peter Fricke, Internet Tax Ban Passes House, But Could Stall In Senate, The Daily Caller (June 10, 2015).