Businesses today face a number of challenges in managing state and local taxes. States are struggling to meet budgets and are aggressively looking to find tax dollars by auditing, asserting nexus (filing requirements), or interpreting statutes/regulations in their favor, creating a risky environment for businesses, says John Trippier, director of multistate tax in the Multistate Tax Practice at McDonald Hopkins LLC.
“Businesses are at the highest risk ever of being contacted by state or local governments, yet their tax/accounting departments are being asked to do more with fewer people,” says Trippier.
Smart Business spoke with Trippier about what businesses can do to meet multistate and local tax challenges by focusing on the past, present and future.
What can businesses do about their past state and local taxes?
Businesses should analyze their activities and compliance in the past to determine if they are entitled to refunds or have potential exposure.
Businesses often overpay tax because tax laws are so complex, are constantly changing and are not uniform among states. Adding to that complexity, business personnel are often not adequately trained or equipped with the tools necessary to accurately make taxability decisions. Tax types commonly overpaid include sales/use, commercial activity, real/personal property and income/franchise. For example, most states have numerous exemptions from sales/use tax on purchases that are just plain missed.
Businesses should also analyze their past compliance to determine if they have underpaid tax. One common challenge for businesses is creating nexus in a state but not paying taxes to that state. In most states, no statute of limitations is running, so the state can go back to as far as when business activity began. Nexus exposure can also impact the sale of a business because a prospective purchaser does not want to assume this tax exposure.
Another common challenge is use tax. Businesses are subject to use tax if they do not properly pay sales tax on taxable transactions and must remit the use tax directly to the state. Keep in mind that not all vendors/suppliers are required to collect sales tax, thus creating a use tax liability for the purchaser. If you have not filed use tax, the statute of limitations may not be running and the state can go back to as far as when business activity began.
To mitigate potential tax liability, be proactive by filing a voluntary disclosure or participating in amnesty programs, if available. Most states will negotiate a favorable settlement of past exposure by allowing participation in these types of programs. States are becoming more aggressive and sophisticated with identifying audit targets. Audit leads are developed by using data mining to review tax-filing history to determine if a taxpayer was filing for one tax and not others.
If a business has been contacted for or is currently under audit, managing the audit process is the key to minimizing the potential liability and the disruption caused by the audit. Negotiating sample periods for what is to be sampled, determining whether to use statistical sampling, keeping the auditor focused and timely, determining taxability, negotiating tax issues, and analyzing auditor findings are all factors that need to be addressed when managing the audit process.
Some states, including Ohio, have implemented managed/participatory audit programs, which allow the business to conduct part of the audit to gain a better understanding of the tax issues and eliminate penalties and possibly interest. The states benefit because the business has a better understanding as to what is taxable for future compliance and the state has more time to audit other businesses. Businesses are approaching states to proactively request a managed/participatory audit when they are in a refund position, constantly being audited, or have never been audited.
Keep in mind that businesses should always review for overpayments when an audit is being conducted, because the state typically does not look for or calculate overpayments as part of its audit.
What can businesses do about their present state and local taxes?
Businesses should take the results of their analysis of the past and create compliance tools that help assist tax/accounting/purchasing department personnel with making accurate compliance decisions. The compliance tools can help limit the overpayments and underpayments and put businesses in substantial tax compliance. For example, a company could develop a matrix for the purchasing department so it knows the taxability of its purchases. A company may also consider setting up quarterly meetings with the sales department to ensure it knows where it is selling the products/services and what new products/services it is creating.
What can businesses do about their future state and local taxes?
As businesses are created and grow, the impact of state and local taxes on business operations is rarely considered. Businesses should consider whether their current operations can be restructured to put them in an optimal state and local tax position. Tax types commonly considered for tax planning include sales, use, commercial activity, income and franchise. Keep in mind that while the tax planning idea is important, the keys to any tax planning are actually implementing the strategy and monitoring the business activity to ensure continued tax savings. Businesses considering expansion or development of new products/delivery models should analyze the state and local tax impact of these activities to ensure proper future compliance. Additionally, businesses may be able to negotiate state and local tax credits or incentives for expanding or relocating operations in a particular location. Comparing potential locations and having the state and local jurisdictions compete for the expansion/relocation will often maximize the credits or incentives.
John Trippier, a non-attorney professional, is Director, Multistate Tax Practice, at McDonald Hopkins LLC. Reach him at (614) 458-0025 or [email protected].
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