If your company operates in more than one state, you will face differing tax codes in each of the states in which you operate. If you have a presence in all 50 states, the tax code implications can be overwhelming.
To make sure you stay in compliance, consult with a multistate tax adviser to assess where you stand.
“I would highly recommend that companies operating in more than one state have a state and local tax physical,” says Deborah Kovachick, CPA, MT, a director in the tax department at SS&G Financial Services, Inc. “You need to have someone come in, get up to speed on how and where you are operating and where you are filing, and then make a determination of where you stand.”
As states are getting more desperate for revenue, businesses are paying the price, Kovachick says.
“States are looking for revenue, and they’re getting more aggressive, which is having an impact on businesses,” she says. “Companies are getting audited more often and, with state discovery activities like nexus questionnaires, are being forced to become more aware of the tax laws in all the states in which they have customers.”
Smart Business spoke with Kovachick about how to assess your tax standing, how states’ changing tax practices are impacting business and what you can do to make sure you are in compliance.
As states continue to change tax laws to generate additional revenue, what should businesses be aware of?
Many states are requiring pass-through entities partnerships, S corps, trusts, etc. to withhold taxes on income that is payable to nonresident owners. For example, if you have a partnership operating in 10 states, but all the owners are located in Ohio, the nine other states may all require the pass-through entity to withhold and pay taxes on the income earned by those nonresidents. If you are not in compliance with the various withholding requirements, there can be penalty and interest charges.
States are also changing their tax regimes, moving from income-based taxes to gross-receipt-type taxes, so even if a company isn’t profitable, it is still subject to tax.
In addition, in the past, companies that have entities in a number of different states may have been structured so that income is shifted out of a state with a high tax rate to a state with a very low rate or no income taxes. To attack this, many states have changed their tax laws to require addbacks of related company expenses, or have started to require companies to file taxes on a combined basis instead of a separate entity basis.
Also, to generate revenue, many states are offering tax amnesty and voluntary disclosure programs to encourage nonfilers to come forward. States will abate penalties and may abate part or all of the interest charged on that tax. One of the most important benefits is that states also reduce the lookback period. For example, if someone has been doing business in the state for 10 years and they come in under the amnesty program, they may only have to file for the last three or four years and the state will forgive the rest.
What does a company need to look at when considering doing business in another state?
First, you need to figure out exactly which states you need to be in and why, and what type of presence you need to have in those states. You need to determine how your company should be structured and what types of transactions it is going to incur. Then, an adviser can help you understand all of your state and local tax filing requirements (i.e., income taxes, gross receipt taxes, sales and use taxes, property taxes, payroll taxes, etc.) and try to come up with an optimal structure to minimize the taxes you are subject to. You have to look individually at each state’s laws and each state’s requirements regarding taxes.
Keep in mind you do not want to let taxes dictate how you operate, but once you understand the best way for your company to operate, then you can determine what can be done to minimize your taxes and filing costs.
How do you determine how to minimize your taxes while remaining in compliance with different tax laws across multiple states?
Doing a state and local tax physical helps you make a determination that everything looks good and you’re filing where you should be filing. It can also help you assess if you are taking advantage of all the favorable filing opportunities that are available in a particular state. For example, maybe you’re apportioning too much income to a state and you have an opportunity to be apportioning less. Maybe you are not taking advantage of some credits and business incentives offered by the state.
On the down side, maybe you have some exposure you are unaware of or some places you should have been filing that you have not been. If that is the case, you need to understand what that exposure is and if it’s material. Then you have to decide, ‘Do I want to do something about it now? Do I want to try to enter into a voluntary disclosure agreement with the state and mitigate that exposure?’
Once you have done the physical, it’s a good idea to update it every year or two, especially if there has been a material change in your business, such as you’ve sold or discontinued part of your business, started operating in a new state or locality, or added another line of business.