Do you own or lease property outside
of your home state? Do you have a
stock of goods in another jurisdiction? Do your sales people travel to other
parts of the country or otherwise have a
home office in another part of the country?
If so, you could owe taxes in more than one
jurisdiction.
“A lot of times companies don’t realize
they’re subject to multistate taxation until
they’re audited,” says David C. Blum, partner at Levenfeld Pearlstein, LLC. “Companies should be proactive in understanding whether they are taxable in another
jurisdiction and take steps to minimize or
eliminate such liabilities.”
Smart Business spoke with Blum about
often overlooked multistate taxation issues
and why you should immediately start
working with a tax expert to determine if
you have liabilities in other jurisdictions,
especially since you may be able to minimize such liabilities or, even better, pass
that tax on to someone else.
Why is multistate taxation often misunderstood?
Many businesses are not focused on the
issue, some do not want to spend the time
or expense to figure out whether they have
liabilities and then have to comply with the
various accounting and filing requirements,
and some just assume that a tax would not
apply. Part of what makes this so complicated is that every state, county and city has
different tax laws.
What are the different types of multistate
taxes?
There are many different types of state
and local taxes. Three of the most common
are income tax, sales tax and use tax. These
types of taxes may have a different name
depending on the jurisdiction. An income
tax may be referred to as a franchise tax,
privilege tax or a business tax. Sales tax may
be referred to as a gross receipts tax, occupation tax or a transaction privilege tax.
These latter taxes can apply more broadly
than a traditional sales tax. Use tax is a complement to sales tax and generally applies to
the use or possession of property.
Why should companies proactively address
this issue?
Proactively addressing multistate taxation allows you planning opportunities. It’s
never good to find out you owe taxes due to
an audit. A government investigation has a
very high cost in terms of your personal
time spent dealing with the audit, reviewing
and retrieving records, and having to pay
lawyers and accountants to defend you.
Then you have to worry about actually paying the tax plus penalties and interest.
What’s worse, there is no statute of limitations on how far back a jurisdiction can go
if you never file a return for the applicable
tax. You could end up having to pay 10
years or more in back taxes to a jurisdiction
but be restricted in your ability to obtain a
refund from the jurisdictions(s) in which
you have already paid tax. That means
you’re paying tax twice!
Failing to collect and remit sales tax can
also have major consequences. If you don’t
charge your customers at the time of purchase or document a valid exemption, you
could end up paying a tax that they should
have paid.
How can companies determine if they have a
taxable presence?
Working with an accountant or attorney
that thoroughly understands multistate taxation is really the only way. Your advisers need
to understand your business operations and
where you have property and people
(employees, agents and independent contractors). These professionals can help you
determine whether you have ‘nexus’ (i.e., a
taxable presence) in other jurisdictions. The
threshold for creating nexus is generally low.
What determines whether companies will
need to allocate or apportion income tax to
other states?
A business is generally required to apportion income to any jurisdiction in which it
has nexus. Income is generally apportioned
based on a percentage of your activity in
that jurisdiction.
How can businesses know if what they’re
selling is subject to sales tax?
Sales tax differs in each jurisdiction. In general, however, sales of tangible personal
property are subject to sales tax, unless
specifically exempt. Conversely, services are
generally exempt unless specifically enumerated. Most businesses would be surprised to
know how may services are subject to sales
tax. Depending on the jurisdiction, taxable
services could include: data processing,
alarm monitoring, intellectual property
licensing, consulting and even construction
contracting.
How should companies move forward if they
realize they have additional tax liability?
Once they’ve worked with the right adviser, businesses might consider proactively
coming forward and voluntarily disclosing
their liability pursuant to either a tax
amnesty or voluntary disclosure program.
Under such programs, taxing authorities
will typically waive penalties and only seek
payment for a limited number of years.
DAVID C. BLUM is a partner at Levenfeld Pearlstein, LLC and specializes in federal, state and local tax law. Reach him at (312) 476-7557 or [email protected].