Harley Duncan: The Salt Of The State And Local Tax (SALT) Earth

by Doug Sheppard

Tax Notes State recognizes Harley Duncan of KPMG LLP as its person of the year.

In addition to his current position as a managing director at KPMG, Duncan’s lengthy and distinguished career includes stints as secretary of the Kansas Department of Revenue from 1983 to 1988 and as executive director of the Federation of Tax Administrators from 1988 to 2008.

Following his graduation from South Dakota State University in 1972, Duncan began working on South Dakota’s Citizens Commission on Executive Reorganization led by Director Dan R. Bucks. Bucks became a pivotal figure as executive director of the Multistate Tax Commission for 17 years and then as director of the Montana Department of Revenue for eight years — among other positions — before settling into semi-retirement. 

Duncan equaled his colleague in stature with his positions in Kansas, the FTA and, most recently, at KPMG since July 2008. And at the end of 2021, Duncan’s long run in state and local tax will be coming to an end with retirement.

“It’s just personal timing,” Duncan said. “I’m 71 years old, and I’ve been doing tax administration work since 1983 and other work before that. I’d like to have some more time to myself with my wife and grandkids and do some relaxing things, and as well, increase the amount of time I have for some volunteer activity that I’m engaged in. That’s the bulk of it.”

The first association of Bucks and research assistant Duncan (who grew up in Highmore, South Dakota) on the commission seemed to be a good omen for the future, as the effort resulted in the successful 1973 implementation of a constitutional amendment requiring that all executive agencies be reorganized into not more than 20 separate agencies. 

Duncan then followed his colleague in 1974 when Bucks became commissioner of the State Planning Bureau, which acted as a staff arm to the governor’s office for various policy works. After two years as deputy commissioner of planning for then-Gov. Richard Kneip, the state’s last elected Democratic governor, Duncan went back to school in 1976 at the LBJ School of Public Affairs at the University of Texas at Austin.

Upon earning his Master of Public Affairs from the LBJ School in 1978, Duncan landed a job in Washington as a fellow with the Advisory Commission on Intergovernmental Relations. While his time with the commission was short (approximately a year and a half), he found its deep dives into all manner of policy issues related to tax and revenue beneficial.

“I did most of my work with the tax and finance group,” Duncan recalled. “The commission was really well known and well respected up through the Reagan administration, then sometime in the late ’80s or early ’90s, the federal government funding was withdrawn, and the commission closed up shop.”

The research experience proved beneficial when Duncan became a senior associate with the National Governors Association’s State Services Organization in 1980.

Similar to the commission, the NGA organization examined the effects of federal tax issues on states, state taxes in general, and finance. And according to Duncan, it did a “significant amount of work with new governors when they were elected to make contact with them, and identify some things that they were concerned with and that they’d like to have some technical assistance with.”

The latter included site visits with Govs. William Winter of Mississippi and Dave Treen of Louisiana, which Duncan described as “a lot of fun.”

More importantly, Duncan’s NGA job reunited him with an old South Dakota colleague from the Kneip administration, Lynn Muchmore, then residing in North Carolina.

The two collaborated on some of the state visits, and when Muchmore landed the position of director of the Kansas Division of Budget under then-Gov. John Carlin in 1981, Duncan also moved back to the Midwest. As the division’s deputy director, Duncan researched topics such as how to fund transportation and how to control Medicaid costs.

By 1983 he landed his first high-profile job as director of the Kansas DOR. With the state emerging from a significant recession, the position would test the knowledge Duncan had attained over the past decade and bring new challenges as well — such as implementing a severance tax on oil and gas production enacted in 1983. 

Likewise, he contended with his agency’s unfavorable image (more on that in a moment) among taxpayers, using the diplomatic skills that would earn him the respect of the SALT world in later years.

Being revenue director also put Duncan in a position of interacting with other state officials and practitioners in organizations like the FTA, MTC, and the Committee (now Council) On State Taxation. In addition to regularly attending the MTC meetings, Duncan said he visited with COST representatives to “deal with foreign dividends and some of our audit policies, and the like.”

“That’s when I began to be introduced really to the multistate tax administration organizations,” Duncan said.

The Kansas DOR also benefited from products conceived by the FTA, which would provide Duncan with his next — and perhaps most well-known — position in July 1988. With the retirement of Leon Rothenberg, who had been executive director since 1975 and with the organization for nearly 50 years, Duncan was hired as the new executive director.

Over the next 20 years, the FTA would expand from a staff of four to 10, increase its flow of information to states and taxpayers, and become more involved in advocacy on federal tax matters affecting states.

Duncan then moved on to KPMG, which is where his story will end and our interview will begin.

Doug Sheppard: When you became Kansas’s revenue director in 1983, how did you deal with its bad reputation — justified or not — in the business community?

Harley Duncan: Some of it was deserved; some I think not. The deserved part would be that we were behind on the automation side and anything that could be done to simplify things in that regard. So it was really paperwork-driven, and it took us a long time to process returns and the like.

We did have a significant audit component, particularly on the corporate side, and we’d moved to combined reporting. That was still when combined reporting was a bit of a hot-button issue, so that probably generated some irritation.

The other issue that we drove through audit a lot was taxation of foreign income — particularly foreign dividends of multinational oil companies. That was controversial.

So we took on controversial issues, and I think that got interpreted and tagged in some of those surveys as: “They’re hard to deal with.” It was also probably fair to say that we were not the most transparent organization in the country.

Sheppard: During your tenure with Kansas, the SALT community was also a lot smaller.

Duncan: It really was a small community. The variety of law firms handling it was not nearly what it is now. Accounting firms generally had not opened up their state practices or really begun to focus on state and local.

Most of the people that we saw — as far as representing clients — were handling things in-house. They may use a local lawyer if they were looking for somebody that dealt with people in the state revenue department.

The LLM programs that began to focus on state and local were just beginning; we had a couple of attorneys going to the University of Missouri at Kansas City. Your national conferences for that sort of information sharing and discussion of issues were not really there.

Sheppard: And yet ironically, the U.S. Supreme Court was taking far more state tax cases then.

Duncan: They did take some significant issues on the reach of state jurisdiction regarding multistate companies. There were unitary cases: What’s a unitary business? The question of combined reporting: Is that a legitimate exercise of authority both as applied to domestic and foreign-based companies?

A few interstate transportation or sales taxation questions: Bellas Hess was in place, but by ’92, the Quill case was before the court, Jefferson Lines, a sales tax case, and then Geoffrey came along. There were also some very interesting discrimination cases such as Bacchus, Texas Monthly, and Arkansas Writers.

Then all of a sudden, the Court said: “We said what we’re going to say in Quill; we’re not going to say anything regarding physical presence for income taxes. We’ve ruled on combined reporting; we’ve said we’re not going to look at all the individual apportionment cases.”

On the one hand, you can see where they certainly didn’t want to take every apportionment case, and they’re not going to say, “Well, is one person enough, or is a teleworker enough for physical presence?” So, the Court really did go dormant, no pun intended.

That both caused uncertainty, it caused friction between taxpayers and tax administrators when the state pursued what was viewed as a new policy that the taxpayer didn’t agree with. Those issues would go through an internal hearing process, and then through a state administrative and state court system, and taxpayers certainly believed they were the victims of “home cooking.” States would say, “That’s the process we have.” If they were upheld, they’d pretty much dig in.

So it was pretty easy to get polarized — to use an overused term — because the ways toward resolution weren’t particularly satisfactory in the taxpayers’ eyes, and there probably was not as concerted an effort on the state side to try to deal with it.

That began to change slowly. With the efforts of the Multistate Tax Commission, further work in the remote sales area with Streamlined Sales Tax and some of our other favorite exercises, there began to be certain cooperative efforts.

But I do think the mind-set is really quite a bit different now. I think the MTC certainly plays a lead role, as does the FTA — particularly on the filing, administrative simplification, and what can be done just on administrative things: protest periods, regulations on record retention, and consistency in filing. You also have the motor fuel area, in which there’s some small number of large taxpayers filing everywhere, but there’s got to be a way to make things much more consistent.

Likewise, the Council On State Taxation from the taxpayer side has also been really significant in terms of trying to work with groups on behalf of its membership.

Rather than just continual policy fight after policy fight (and there are plenty that have to be contested) there really has been a focus on: “We’ve got to be concerned about administrative burden, because it’s bottom-line costs to the company which are of growing importance with staffing going down, and the like.”

So there’s really a different mindset. Both taxpayer and tax administration interstate organizations have focused on trying to improve the system as a whole, driven in part by the fact that the Court’s not going to take many issues, and it’s really difficult to get Congress to deal with issues, and when it does, the states often find the results to be unsatisfactory, shall we say.

So I think a variety of things spurred the move toward greater cooperation on, but a lot of it’s been the importance of these multistate organizations, and the value that everybody — states and companies — have put on it. Administrative cost savings are real cost savings. So yeah, we could battle on the policy issues, but we can work together on a variety of things as well.

Sheppard: How did the FTA evolve in your 20 years at the helm? What are some of your proudest accomplishments?

Duncan: I think there are probably three things that I am most proud of. The first is, I think we really made some strides in making the federation involved in federal policy matters from the state perspective.

For Congress to even consider these things, they must have information on what the states are doing, what the facts on the ground are, and the near-term and long-term implications for states. You need to present that in an evenhanded fashion when you’re doing the education phase.

And then in the advocacy phase, yes, you’re probably not going to be as evenhanded. I think we really expanded our efforts there, particularly in the education area, which caused some in Congress to often slow down and reconsider, and I’m proud of that.

The second thing we did that I’m particularly proud of is in the simplification and uniformity areas I’ve ticked off — whether it’s tobacco, motor fuel, or electronic filing.

Some of these administrative areas, both technology-related but broader than that, were areas of significant progress in terms of trying to bring some uniformity, make it so that we can improve the efficiency for the taxpayer, as well as at the tax agency.

If you as a state do things in the same way as other states, so that the poor taxpayer doesn’t have to deal with 50 different ways of doing it, it can pay real rewards to both sides.

There was some real laboring in the vineyards in this area that was done by the staff in particular, as well as lots of people at the state level and at the taxpayer level saying, “This is what we’re going to need for information.” The taxpayers said, “This is what we have and the way we can provide it.” And part of that was the coordination with IRS, which I think we expanded a lot as well so that individual taxpayers — as well as corporate taxpayers — filing returns are much more seamless.

The third thing is we were able, I think, to increase the flow of communication and information going to the states and among the states. It’s always fine to say, “Well, we’ve promoted interstate cooperation and information sharing.” That’s really hard to do; the first thing a state thinks of is not, “Well, I need to share this with this other states.”

And I think we really made some strides there — not sharing taxpayer information, but practices and programs that have worked well in individual states, and we created a variety of vehicles to share that information. Part of our culture was, “No good idea goes unstolen.”

Sheppard: In 2008 you joined KPMG. Did the fact that you’d been in the public sector for so long give you a leg up in dealing with government and advising clients and colleagues on how to do so?

Duncan: Yeah, absolutely. It surely did, and I think what it brought home is that look, particularly when you have a client issue with a state or whether that’s technical tax law or administrative, a controversy of any sort, it’s really a problem-solving issue. Everybody wants to get to an answer.

What I tried to bring to the table was a good sense of how the government is viewing it and what they need to be able to do their job. You also have the client advising you and saying, “This is what our issue is. This is how we see it.” Or: “This is the challenge we’re having in trying to comply with this.”

So having both perspectives and some background in each — particularly on the government side — eases the resolution of some of these issues. It’s Henry Kissinger-level work, but you really see how the pieces can fit together and what the state needs to have a win and what the client needs to have a win, and bring it to closure successfully.

The other thing, I think, was that in having significant exposure to individual states and state administrators, as well as COST, the Tax Executives Institute — clients are certainly involved with these groups — made it possible to leverage some of those multistate groups into looking at things a little bit more holistically. So I think having been on the government side makes a whole world of difference.

Now, the challenge is that never having been on the private side since I worked at the local newspaper in high school, I really did not understand business models very well, how businesses are organized, or how they go about their business. I didn’t understand the back-office part of clients, such as in how they go from point-of-sale collection to filing a return.

There’s a terrific amount of complexity to the operation of the business that you are trying to understand. For that, you have to rely on clients and your colleagues. Sometimes they are probably wondering, “Why do I have to explain this to you?” But, fortunately, most people, especially my colleagues at the firm, were very tolerant and patient.

That was a challenge for sure. Probably the most fun I had at KPMG, beyond the quality of the people I work with, was the range of issues I was able to be involved in being part of National Tax. I think particularly about all the technological changes that have affected how businesses operate that have evolved in the time I have been at KPMG.

You can never expect state tax law to keep pace with that much change. So trying to see how the change may or may not fit with the law — and whether there may be some ways to approach it that make sense — is a large part of what I’ve done since I’ve been at the firm. It has been a great opportunity to work with states and with clients in trying to work through those types of matters.

Sheppard: Are there any misconceptions that businesspeople have about how to deal with states that you had to assist them with or correct them on? What about government misconceptions about the private sector?

Duncan: There’s a little bit on both sides. The misconception on the business side is that the state is always going to take the position that generates the most money; the reason they take the position is it generates money. And the reason they can’t exhibit any flexibility is because it would reduce taxes.

The way I would try to explain it is, “Look, first of all, they’re applying the law to the set of facts as they see it. If they’re misunderstanding the facts, that’s an obligation and opportunity you have. If they’re misapplying the law, then there’s a reasoned conversation that can be had over that, but the reason they’re doing it is not just because it increases revenue.”

State administrators need to be concerned about the impact a decision will have on other taxpayers. And, they really do have a responsibility to the state fisc, at least in part.

If the tax agency says, “This approach is OK in our voluntary compliance system” — that’s highly unlikely to ever be raised again. So, if there’s significant uncertainty, there really is some obligation on the part of the administrator to raise the issue so that the legislature and the courts can deal with it.

Now, on the other side, tax administrators’ primary misconception is that taxpayers are only interested in reducing their tax cost. All the work you do for clients is to reduce the amount of tax they pay. And I think that’s off the mark significantly as well.

Certainly there’s planning and assessing whether one approach might lead to a higher tax cost than another, but most of the work that we get involved in is: What’s the right answer? What guidance has the state provided? What should I do to comply? Do I collect tax? Do I not collect tax?

If it is a sales or transaction tax, a company does not want the tax to become their cost, but neither do they want to over-collect from their customers. On the income tax side, clients are looking for certainty and stability in their tax obligations and to ensure their affairs are in order.

I always tell the states: “You know what? Go back through your files. See how many VDAs [voluntary disclosure agreements] we’ve filed with you.” A number of them are for people that, despite their best efforts, simply got it wrong and are looking for how to get it right — ideally without suffering significant penalties and long, drawn-out audits.

The other area is new taxpayers — often after acquisitions. After an acquisition, we often file VDAs to get the acquired company going forward correctly. A lot of effort goes into the compliance side, and I think that sometimes gets lost in the issues we deal with.

Sheppard: You’ve seen quite a bit in 40 years in the SALT arena.

Duncan: I certainly have, and it has been a great run. The type of work I’ve gotten to do, as well as the growth of the state and local tax community, and this greater emphasis on trying to deal with issues in a cooperative fashion has been terrific, and I’ve made so many friends.

One thing we haven’t discussed is the Streamlined Sales and Use Tax Agreement. I know it has stalled out at 20-some states, but I’m proud of the role FTA and I were able to play in working with Gov. Mike Leavitt, key state legislators, and others to try to get that off the ground — and to provide some both administrative and intellectual horsepower support of that group.

I think that as far as a single, individual initiative, it’s one of the exemplary ones that started out of whole cloth. People tend to give it short shrift, but the principles it embodies are pretty sound. It didn’t go as far as I would have liked with some policy changes that need to be made in the sales tax, but it’s a hell of an effort in my estimation.

Sheppard: I think the Streamlined Sales and Use Tax Agreement probably also had an impact on the Wayfair decision. It perhaps showed that states could get together and achieve the uniformity that they said they could — and that opponents said would never happen.

Duncan: I think that’s right. And I think also the technology solution, the CSP [certified service provider] solution, had a role in terms of some of Justice Anthony Kennedy’s thinking. I do think it showed a good-faith effort on the part of the states and business to try to deal with uniformity; it showed that it could be done. So yeah, I agree 100 percent.

This article was first published in Tax Notes on December 16, 2021.