As companies grow and find increased
opportunities to conduct business in
other states, they should be well informed as to their tax liability in each state.
States are becoming more aggressive and
sophisticated in collecting taxes. These growing enforcement efforts are part of a strategy
that maximizes tax revenue and addresses
declining revenue bases and increased government spending.
“You could be doing business in a state and
not even realize that you owe tax. You can
accumulate years and years of liability,” says
Thomas M. Zaino, JD, CPA, chair of the
Multistate Tax Practice Group and member
in charge of the Columbus office of
McDonald Hopkins LLC.
Zaino cautions companies not to simply
assume they are protected by federal public
law 86-272 from being taxed in most states.
“PL 86-272 offers some protections, but
they are very limited,” he says. “Basically, it
only protects against taxes based on or measured by income. Plus, it is not applicable to
the sale of services. In any case, it’s best to
check with your tax adviser.”
Smart Business spoke with Zaino about
the importance of properly calculating and
paying state taxes — and what happens
when you don’t.
Are state and local taxes really significant
when compared with federal taxes?
State income taxes are typically about one-third of the federal income tax, but when all
the different types of state and local taxes are
added up (e.g., sales and use, property, and
gross receipts taxes) the burden is about the
same as the federal liability. Add 15 to 25 percent in penalties and above-market interest,
and the potential exposure is very significant.
State and local taxes are significant to most
businesses, and the company’s leaders need
to protect the business from unexpected liabilities that can hurt its financial prospects.
What do states do to identify companies that
should be registered to pay tax in their state?
There are many tools states use to identify
companies that have not been complying.
These include information-sharing agreements with the IRS and other states; review
of federal information, such as 1099s and
Schedule Ks; examination of cross-tax registrations; and comparing vendor lists of current taxpayers with registered taxpayers.
There are also people who monitor activities
of companies in their own states, which may
include searching the Internet and examining
public information on Web sites.
Don’t most states have a statute of limitations that limits how far back they may
assess a company’s delinquent taxes?
No. Most companies assume there is a
three- or four-year statute of limitations, but
this is incorrect. The statute of limitations
applies only if the company has been filing
returns with the state. Otherwise, the state
can go back decades. I’ve seen situations
where the state goes back 12 to 15 years.
What mistakes do companies often make
when dealing with state and local taxes?
Failing to invest the time to plan ahead and
make sure transactions are structured in a
way to minimize the state tax impact; not
fully understanding the actual activities of the
business in each state, perhaps due to rapid growth; failing to educate personnel operating in other states so as to prevent unintended tax consequences associated with their
activities; and assuming that if the company
is not generating taxable income that there is
no state or local tax liability, when in fact,
many types of taxes are accruing (sales tax,
property tax, and gross receipts tax), which
have nothing to do with taxable income.
If a company is contacted by a state regarding whether it owes tax, what should the
company do?
If the company receives a Nexus Questionnaire, company officials should seek
counsel from a state tax adviser before
responding. These questionnaires ask broad
‘yes and no’ questions, when there may be no
simple ‘yes or no’ answers. The letter doesn’t
say so, but you can attach explanations for
your answers rather than answering just yes
or no. If you receive the questionnaire, take
an inventory of your dealings in the specific
state by talking with your sales staff and field
personnel. Work with your tax adviser to calculate your potential exposure and how to
respond to the questionnaire.
What if the company owes back state taxes?
Most states will allow you the opportunity
to come forward voluntarily and anonymously to explain your situation and, as a
result, limit the number of years you would
need to comply to avoid penalties. Your tax
adviser can assist you with a Voluntary
Disclosure Agreement (VDA). Going this
route, you can usually get the number of
years of back tax reduced to three or four
with no penalties, just tax and interest. Some
states also offer periodic amnesty programs.
VDAs and amnesty programs are not available to companies that have already received
Nexus Questionnaires, so it’s prudent to be
proactive and take an inventory of your historical and present activities now.
THOMAS M. ZAINO, JD, CPA, is chair of the Multistate Tax
Practice Group and member in charge of the Columbus office of
McDonald Hopkins LLC. Reach him at (614) 458-0030 or
[email protected].
