Mitigate multi-state tax liabilities Featured

6:03am EDT September 22, 2006
Profit and growth are top-of-mind most days for business owners. Tax time — that’s a burden most of us choose to bury under daily paperwork, operations or matters that help us earn, not spend, money.

“State taxes and the resulting liabilities tend to be found at the bottom of the priority list until the state comes knocking,” says Tim Dudek, director of the Tax Strategies Group for Kreischer Miller.

Perhaps you fully understand your financial responsibility to pay taxes in the state where your headquarters are based — the state where you live, work and employ most of your staff.

But what about other states where you do business? If you sell, manufacture or distribute products and services in other states, you are liable to pay their taxes.

You can reduce costs and avoid paying exorbitant fees by planning around high-tax rate states, using voluntary disclosure programs and consulting with a state tax expert who can steer you toward viable solutions.

Smart Business spoke to Dudek on what it means to “do business” in a state, and how you can protect your bottom line from a costly, unexpected collection notice.

How complex are multi-state taxes, and what is most important for business owners to understand about their liabilities?
Some states have up to 20 different types of taxes they impose on businesses, vendors and/or consumers. Add to this the additional taxes imposed by counties, cities and transit districts within each state, and you have a very large tax compliance process and resulting tax liability. The complexity of these taxes is overwhelming and they revolve around the concept of ‘doing business.’

What does ‘doing business’ constitute?
It is precisely that: the amount of activity or business your company conducts in a given state. Federal guidelines measure how much activity is enough to be taxed. This is why bringing in a state tax consultant can relieve headaches.

Keep in mind, sales tax is among the various taxes that states impose. So whether your salespersons are employees or independent representatives, they may contribute to the company’s sales tax liability. What’s more, if the salesperson is doing more than soliciting sales — such as checking orders, approving credit or taking back bad product — the company may be subject to a corporate net income tax and franchise tax in states where the sales person operates.

How can business owners plan smart with multi-state taxes?
Understanding which states are more forgiving can help you make smart decisions about where you grow your business. Knowing that one state imposes an 8 percent income tax and another imposes 3.5 percent or none at all, where would you build a warehouse? Another example: One state may impose an annual property tax on the value of your inventory while a bordering state may not.

What can business owners do if they realize they have not paid various state taxes for past years?
Most states provide a voluntary disclosure program. Say a business owner discovers through his state tax consultant that he owes 20 years of back pay in state taxes. Because he realized it before the state, he has the ability to enter into an agreement with a state to go back only three years (on average) and pay back taxes. This program usually involves a full abatement of all penalties and maybe partial abatement of interest.

The ability to avoid five, 10 or 15 years of back taxes is a gift states offer business owners. It lifts a tremendous burden. Meanwhile, states are happy to offer such a break, because then they can enroll another business on their tax roll for future collection purposes.

However, if the state finds out first, the 20-year-old bill will be due in full. If you suspect you owe multi-state taxes, get to the bottom of it before a collections bill wipes out your bottom line.

What about opportunities to recoup money if business owners have overpaid sales taxes in a given state?
Companies may inadvertently overpay state taxes, so there could be money left on the table. This is why business owners should take a pro-active approach to examining what they paid in the past to see whether they should seek cash refunds. This is called a reverse-sales-tax audit. It’s better to do this as soon as possible, because once statutes expire, so does the ability to secure a refund.

When businesses take steps to turn multi-state taxes into opportunities to grow smart, they can end up adding to their bottom line rather than watching it drop.

TIM DUDEK is director of the Tax Strategies Group for Kreischer Miller in Horsham, Pa. Reach him at tdudek@kmco.com.