Tax compliance is often viewed as a routine administrative task. However, as an organization scales and capital expenditures increase, the boundary between administration and substantial tax savings, potentially leading to a high-stakes controversy, thins.
“When tax planning is treated as a reactive measure rather than a proactive strategy, companies often find themselves defending untenable positions during audits or forfeiting millions in overpaid taxes that are difficult to recover,” says Steven Dimengo, Partner and Chairman Emeritus, Taxation Group Chair at Buckingham, Doolittle & Burroughs LLC.
Smart Business spoke with Dimengo and Oliver Thomas, Associate, Taxation Practice Group at Buckingham, Doolittle & Burroughs LLC, about how treating tax risk as a foundational element of business operations can prevent manageable issues from becoming major assessments.
When does tax risk become a serious threat?
The transition toward significant risk often occurs during periods of high capital intensity. This can manifest during a startup’s initial build-out or when an established organization undergoes a significant expansion.
Catastrophic risk is often rooted in the failure to ask critical questions before a transaction is finalized. For instance, from an Ohio sales tax perspective, software taxability often depends on whether the product is customized or where the end-users are located. A company headquartered in Ohio might incorrectly pay tax on 100 percent of a software purchase despite having a significant portion of its users located outside the state, where different sourcing treatment or exemptions may apply. Similarly, in manufacturing, the way a production line is structured dictates whether expensive equipment like conveyors, palletizers and shrink-wrappers qualify for exemptions. When these nuances are ignored at the outset, the resulting tax assessments become substantial very quickly. There are parallel issues on the federal income tax front.
How does a lack of strategic tax planning create issues?
A case becomes difficult to win when an organization has spent years keeping a factual record around an incorrect or undeveloped theory. Controversy risk increases significantly when similar transactions are treated inconsistently across different departments or when the underlying facts of a transaction are never properly documented. If finance, operations and tax reporting teams drift apart, the organization may eventually find itself defending a position that was never intentionally developed or thought through. The audit or appeal process then becomes a defensive struggle against a frame that the company did not define.
The difficulty is compounded by the differing legal standards for tax assessments versus tax refunds. State departments of taxation generally apply more strenuous standards to refund claims than to assessments. This means it is often easier to defend against a bill for unpaid taxes than it is to recover money that has already been overpaid. When an organization lacks a formal methodology, it often results in a ‘ballpark’ approach where some taxes are underpaid and others are overpaid. That lack of discipline can force the organization into unnecessary and costly disputes to retrieve funds the government is reluctant to release. A strategic methodology ensures that the legal argument is always supported by how the business actually operates, creating a credible and persuasive position before an audit ever begins.
Why treat tax planning as a core business strategy?
Treating tax planning as a core business strategy directly influences profitability and risk management. Organizations that remain conscious of tax implications during capital-intensive periods are inherently more profitable than those that act only when a problem arises.
From a procedural standpoint, maintaining an organized document management system that supports specific tax exemptions enables companies to present a clear, factual story to an auditor. This increases the chances of resolving disputes more efficiently and reducing legal expenditures. Additionally, it’s best to have specialized legal expertise present those facts in a manner that tax departments understand and accept. ●
INSIGHTS Legal Affairs is brought to you by Buckingham, Doolittle & Burroughs LLC.
