Transcript: Secretary of Finance Aubrey Layne

VSCPA President & CEO Stephanie Peters, CAE, had a question-and-answer session with Virginia Sec. of Finance Aubrey Layne, CPA to discuss the tax situation in Virginia following the coronavirus pandemic. Here is the transcript.

Find the full video here on the VSCPA's YouTube channel.

Stephanie: So what is the overall message that you'd like for your peers, the CPAs, here in Virginia to hear from you about this unusual circumstance that we're in?

Aubrey: Well, Stephanie, as you know, this virus has brought us unprecedented challenges that we haven't even seen in generations. And it's caused quite a bit of disruption not only in state government and our lives and in society in general, and what makes it so difficult is if things continue to evolve very quickly. And we really don't know where we're going to end up when this is all over with. Part of our immediate efforts have been in supporting the public health crisis here in the Commonwealth. And our latest estimates show that the peak of the impacts of the virus from a health perspective still may be four or five weeks away. And of course, that's going to require more of the same self-isolation and some disruptions to our lives that we've seen. So I understand that it's challenging for everybody. But our main effort has been on how we can continue government and to support this public health crisis. Now, the problem with all this is, when we before we entered this, we were having a great economy. Our state revenues were very robust. And the budget we made was based on that. But of course now, here it is, just 45 days later. I looked the other day, and I think 45 days ago was the height of the stock market apex. And of course, that's a lot different now. What's not [unintelligible] our economy, it does impact what we do here at the state. So this COVID-19 has put a significant fiscal blow on the Commonwealth. We're projected as a minimum, and I say that as a minimum because we really don't know, at least a couple billion dollars out of our next year, biennial budget, a billion dollars a year. And my guess is, that's probably going to be a lot more. And of course, unfortunately, it's going to happen so quickly in the current fiscal year, which ends June the 30th, it's going to be impacted also. So we're going to have to make sure that all the available resources, we spend them as wisely as possible, and try to mitigate these impacts on everyone and the governor's been working with the General Assembly on this and hopefully, we'll come to a good solution that tries to help everyone concerned, knowing that there are different constituents and impacted in different ways.

Stephanie: So what do you see is the biggest financial issue that the Commonwealth is facing in light of this pandemic right now?

Aubrey: Well, it gets back to the loss of revenues, particularly in the short run, and they've happened so quickly, the loss of revenues. I don't know, last week there were over 112,000 new unemployment claims. And we're anticipating have more than that this week. That is directly related to the Commonwealth's revenues. As you know, we're heavily dependent upon individual income taxes or taxes through the withholding and their payment, other returns and sales taxes. And with unemployment and with the reduction in economic activity, those are significantly impacted. In the short term, we lay out three months in this fiscal year. So with the loss of revenue, unfortunately, that restricts us significantly in that we don't have a budget after June 30. So that's really been on our minds and how we can stand up a constitutional issue by not having a deficit at the end of the year, which would require significant cuts in the state budget, which may limit the effectiveness we are to this public health [crisis]. So that's really the most in the short term ... it's how we're going to deal with this significant loss of revenue. Hopefully, the federal stimulus will be helpful. But sadly, so far, it can only be used on direct costs for the causes of the virus. So you can't replace the loss revenues, just like many of the businesses can, although I have some hope that small businesses with the SBA program and direct payments to individuals will be helped in that. But that's not going to be very beneficial to the state revenues, and so we want to make sure, again, that we're using those monies wisely.

Stephanie: So what risks are we seeing as far as what services would be in jeopardy in Virginia, if we weren't able to get this revenue?

Aubrey: Well, in the short term, if we were to have a deficit in the current year, that would trigger automatic reductions in state agency budgets. And depending on the amount of it, it could be very severe. The governor has authority, and he can go up to a 15 percent cut. The problem with that is, as we know, we're responding to this public health crisis, something that all state government is focused on. So what we're trying to do is make sure we keep the personnel focused on that without having to deal with constitutional issues related to cutting agency budgets by a significant amount. And even borrowing doesn't help us in that. Deficits are defined by the amount of expenditures over ongoing revenue. So even if we borrowed money, it doesn't keep us out of this constitutional issue of having to cut based on a deficit that we receive. So that really takes a lot of our leeway from us and managing through this because it has to be expenditures versus revenues.

Stephanie: And how does the rainy day fund play into this? Can that be used at all?

Aubrey: It can be. But there's two parts to our cash reserves. The rainy day fund can only be accessed once we've had a reduction in revenues. So it's not a perspective looking. We can't draw in it unless the governor has had a call for our reforecast and there is a 2 percent reduction in forecasted revenues. Now our cash reserves are a little more flexible. We have to work with the General Assembly. And of course, we're fortunate when we went into this, we had a pullover of about a billion six in those two reserve funds. We were planning to put more in. So we do have some cash available to us. So they will be very helpful as we work our way through this. The problem is though, we don't know how long this is going to last. And so, again, the real key for us will be to prioritize spending and only focus on those items that are necessary for the public health, our core operations, until we get to a point where we have a better idea of where things are going to end up.

Stephanie: So let's talk about the steps that the Commonwealth has taken to provide tax relief to our taxpayers.

Aubrey: Yes, the first thing I would point out is that there is a difference between the filing date and the payment date. I think that has caused some confusion. The filing date most people believe in Virginia is May the first and that's what most traditionally people use. But all filers, individual filers, have the option to extend for six months. No paperwork is necessary. No extensions. So the actual due date for filing purposes, is November the first. So if you are doing a refund or you don't have a liability in the current year, you don't have to worry about this until November, the end of October/November 1st. Now, the payment date has also been May the first, and of course, I know that the federal authorities have now moved the payment and filing date to July 15. I will point out a couple of things, Stephanie. One: That is still in their current fiscal year. The federal fiscal year is September 30, so they are still in the same fiscal year. Unlike if we were to move it to July 15, we would not be in the same fiscal year. Two other important items that relate to the federal authorities is that, one, they can have a deficit. They do have deficits as we all know, and they're not constrained by that. But also they have much more liquidity than we do, because as you well know, that they can print money where the Commonwealth can't. So they did extend it out, but unlike us, they weren't dealing with some of the constraints. So in Virginia, what we have done is we have moved the payment date now to June the first for state taxes and we've waived all the penalties associated from May the first to June the first with that. That includes late payment penalties, underestimated payment penalties also if you've underestimated your tax. Now at all goes from July the first. We would have eliminated all the interest but we don't have that ability. We require General Assembly approval and so we will ask the General Assembly during this next budget cycle to give the tax commissioner the authority to abate interest offset. So where that puts us is that as of June the first, taxpayers in Virginia, if you have a state liability, need to pay by June the first. I do understand that is 45 days in advance of the federal authorities. You don't have to file your return, you just need to make your best estimate of what is owed to Virginia. And you can file with no penalties up and through the end of October for the filing. Again, we would have loved to push it further than that. Our estimates were in a normal year. And of course, this is not a normal year, Stephanie, but unfortunately, about $2 billion comes in during the end of April beginning of May related to Virginia returns. If we were to delay that until July 15, that would have put us into a deficit. As I mentioned before, we couldn't borrow money, money that has to do with ongoing revenues versus expenditures, that would require the governor to immediately call for a reforecast and then reduced state government in a time when we're trying to deal with this public health crisis. So that is the reason why we couldn't push it any further. Now the tax commissioner is going to be lenient in terms of looking at penalties. And I want to say we hope to abate interest even over and above past June the first, but we're trying to be mindful of our taxpayers, and we understand we're stewards of their money. But on the other side of that, it's not just about state government continuity. Many of those go to support schools, other localities across the Commonwealth, every time we delay those, then we can't put those monies back out and it causes them to have physical distress. So it's a balancing act. And what we tried to do is push them back as far as we could, without generating either a constitutional issue through a deficit or hurting localities more so than we have to so they can respond. Stephanie, just moving it back one month, we estimate at least $100 million won't come in this fiscal year that would have normally come in. So it's not without impact, and we've done this, but we're trying again to balance the constituencies that the state serves.

Stephanie: Now, I understand we've talked about penalties. And I think there's been some confusion. So I just wanted to kind of reiterate this a little bit. I understand that there are three different penalties related to the state income taxes: failure to file, failure to pay and an extension penalty. That's correct. Can you explain these and how you're attempting to treat these penalties right now?

Aubrey: Yes. The first one you mentioned is the failure to file. Again, there are no filing penalties in the Commonwealth until we get to November the first. So if you don't file even regardless of this year we're in, if you file your return by October 31, there are no filing penalties associated with that. Now there are, if you file past that time in there, but up until that there's not. Now, the late payment penalty now was assessed from May first is now June first, and that is 6 percent of the tax due per month. That has been abated up until June the first. On top of that, the tax commissioner will take a liberal view of those penalties going forward. If people have made an honest attempt, looking through his discretion, we are not trying to get people not to ... we're not looking to make money off the penalty. It is strictly a matter of making sure we don't end up in a fiscal crisis regarded to a deficit. So he will be liberal in that. And the reason we didn't totally abate it, is because quite frankly, we do like people to pay, because otherwise, if you abated it at all, paying later still gets us in the same fiscal crisis that we would be in there to begin with. So that's that. Then there's a late payment, a late filing penalty, and this would be after November 1, that's 6 percent of the tax due per month, and it can be up to 30 percent total. But either payment or filing penalty applies each month. So again, the filing won't start until the beginning of November, if you do that. Now there's one more: There's an extension penalty, that's 2 percent of the tax due per month up to a total of 12 percent. But again, that doesn't apply as long as you're not late in filing and asking for an extension in that regard. So, hopefully that clarifies it. We will be liberal in our application of the penalties this year. We do know it's extraordinary circumstances.

Stephanie: Right. Okay. Well, let's talk about the interest then. Our understanding is that it has to do with the code and the requirements of, you know what that interest is, and it has to have legislative change. Can you explain how can we make a difference and getting the interest abated as well? Is it possible?

Aubrey: Yes, and this is one of the things I think we can work very well together on and advocate for the General Assembly members and we will do the same, to allow in times the fiscal stress or in times of emergency, the same latitude to abate interest that tax commissioner has to abate penalties. So that is one thing that we will be asking the General Assembly to do. We have talked with members of the General Assembly, let them know that we want that to happen this year, to abate those interest, and so I asked your members to help advocate along with us in that. So, giving the tax commissioner the same authority that he would have to abate penalties, or she depending on who's in that position.

Stephanie:  All right. I know you talked you covered this, but just wanted to kind of put a firm point on this. The automatic extension really requires no action. It truly is an automatic extension. If you don't file by May 1.

Aubrey: That is correct. As long as you file by November the first, you don't have to tell the state of Virginia anything, but it's different than the payment date. So the payment date now has been moved to July 1. You need to make the best estimate that you can and try to make a good faith estimate paying us by that time. Of course, if you're doing a refund, I would encourage you to file as soon as possible to get your money back from the Commonwealth. One other point I should make: You can file your Virginia taxes without filing your federal return. I know a lot of people say well, I have to file my federal first ...  we don't require that. We know a lot of people may like that from an estimating standpoint, and knowing how they're going to work out, but we don't have to have to follow Virginia verification that you filed your federal return. Another point that's come up, Stephanie, as I've talked to some practitioners across the Commonwealth, your members, is that you know with these times of restricted movement, they're having tough ability to get with their clients. First of all, I would mention that tax preparation is considered essential business, so you are not under the stay-at-home, 24-hour rule because it is deemed essential. Now that doesn't take into effect that maybe there are some that are concerned about the physical proximity. Of course, we have encouraged you ... I am a 65-year-old learning to deal with email and texting and Zoom and all in terms of that, and challenging, but that is obviously available ... certainly overnight mails, a telephone, all that. But I did want to point out that you are an essential business and you are not impacted by any of the orders the governor has  put in place.

Stephanie: Thank you for for reminding us of that. We appreciate that. What advice do have for the clients of our members who may be unable to pay by June 1.

Aubrey: Yes. You know, probably if they're not able to pay by June 1 they may not be able to pay by July 15, either. Those are personal decisions that people would have to make. I certainly understand and you know, we're not fooling ourselves, we know there are going to be quite a few people in that position. Now, hopefully, some of the federal stimulus will be in their hands before that time. Small businesses, the small business loan program, speaking of that, I know a lot of that's administered through the local banks. But Stephanie, I think it's a tough time for lots of people that are going to be impacted, as I mentioned, the 112,000 people filing for unemployment. We certainly know we're not looking to pile on at all in that regard, but it's going to be a consequence, unfortunately, of this rapid and very pervasive shutdown of the economy so quickly. So we have similar problems here at the Commonwealth, in terms of many of the localities have debt payments coming up and different things; we're just going to have to find a way to work through it. But we certainly recognize, and I don't want people to think I'm not empathetic or sympathetic to what's going on. But we're trying to balance that between what we have to do for all the other constituents that depend on the Commonwealth for services.

Stephanie: So do you have any final thoughts that you'd like to share where we've come to the end of our prepared questions for you?

Aubrey: Well, yes, and thank you again for having me, Stephanie, but quite frankly, when you get in situations like this, there are people or persons or entities that are either part of the solution or part of the problem and I want to thank the Virginia state society for being part of the of the solution. You guys, I get an email once a week or so talking about how CPAs make people's lives better. And I think no other time than now, can the CPA license and that in the industry really step up to help our citizens migrate through when it's going to be dire financial circumstances. Whether it's helping them get the right amount of taxes back or filed or helping them work through a difficult situation with their business or as you mentioned earlier, personally with dealing with a cash flow situation. I think that now more than ever, CPAs can be a big help, a valued business and personal partner to many people in the Commonwealth. I'm proud to be one and I'm glad to be part of the Society and working together as we go through these very significant and perilous times. So thank you for all that you and your industry do.