When state and local tax has been overlooked or mismanaged, taxpayers benefit by efforts to lay the groundwork for a favorable state tax position.
Spending time upfront to understand where the business has an obligation to collect will reap hundreds of thousands of dollars in cost savings down the line for successful businesses. Here’s how.
- Understand business. Go beyond concepts and consider practically how business is getting done. From a state tax perspective, taxpayers should know where money is going, how customers find your business, how you serve your customers and how they are billed. This involves understanding marketing and sales all the way down to booking accounts receivable, invoicing, and delivery mechanisms (electronic vs. FedEx).
- If a business finds it is not in compliance with its multistate tax obligations, it is important to consider the value of pursuing a voluntary disclosure agreement (VDA), as well as opportunities to negotiate settlement agreements that might be outside the standard. Taxpayers can also pursue binding guidance from a state where tax policies are not clear when applied to a business’s unique industry. Although binding guidance doesn’t eliminate challenges entirely, it does offer a level of protection against class action lawsuits (known as QuiTam) or future tax audits.
- Avoid remediation entirely by getting on top of state and local tax from the beginning. Take the time, devote the resources and deal with state and local tax. At the end of the day, collecting sales taxes is a fiduciary duty; those dollars do not belong to the business or their customers. Often a businesses revenue sits in a handful of jurisdictions and those jurisdictions can be handily dealt with to avoid the costly business of remediation.
Taxpayers must consider their physical, marketing and Wayfair dollar thresholds and whether nexus is triggered in order to identify and address tax in those jurisdictions. Many business owners are reluctant to spend the time to get in front of their state tax obligations, but at some point, that avoidance will come at a substantial cost to the business during an M&A transaction, audits, Wayfair post enforcement inquiries or other tools states use to find delinquent taxpayers. Playing the audit lottery is a costly way to run one’s business.
If your business is successful–meaning you have achieved $1 million in annual sales, take on the short-term sacrifice to get state and local tax right upfront, but the result is greater certainty around one’s multistate tax risk.
Work with your TaxOps adviser to lay the groundwork for state and local tax compliance and avoid pricey penalties that cut into profits.