In today’s national and global markets, many companies feel the need to expand beyond their home state. Not only do these new markets create additional sources of revenue; they also establish additional state and local tax considerations and pitfalls.
The following checklist may help identify areas where such opportunities, or exposure, may exist.
Do you have any representatives in states other than where you are currently filing returns?
Many taxpayers are aware that a sales person or employee in a state may cause some filing requirements in addition to withholding taxes. However, many businesses are not aware that the presence of a non-employee (agent, representative, etc.) performing any activity on their behalf may establish filing responsibilities in a state.
Do you have inventory (on consignment or otherwise) in any state in which you are not currently filing returns?
The mere storage of inventory in a state will normally trigger requirements for filing returns. Many taxpayers are under the impression that inventory on consignment with someone else, or that is stored in a public warehouse, is not considered in making this decision, because the property is in someone else’s possession. Inventory, or any other property, will trigger a filing requirement provided the taxpayer has title or lease rights.
Do you ship or deliver to states in which you do not file income tax returns?
If product is delivered by using the taxpayer’s own trucks, sales tax (and certain franchise tax) registration will normally be required in those states. Many states are also changing this historic exemption relating to net income taxes. The second issue involves certain states, which institute “throwback” rules. Most of these rules require sales to be “thrown back” to the shipping state (if the taxpayer is not taxable in the destination state) when calculating the portion of income taxable by that state.
Are you registered for sales as well as use taxes in your home state?
Many taxpayers are under the impression that since sales is exempt from tax, they do not have to register and file sales tax returns. The reality is states also have a tax on the use of property in their borders. Often there are no exemptions to exclude this property from taxation. Items used by the business, such as computers, software, furniture or carpeting may be bought “tax free” from an out-of-state vendor. It is the purchaser’s responsibility to report the purchases and pay use tax to the state in which the items will be used. If such returns are not filed, the state can assess the tax at any time no matter how long a period is.
Do you file returns in states in which your only activity is to solicit sales, using either an employee or other representative?
A federal statute protects businesses that deal in tangible personal property from taxes levied on net income in states in which they merely solicit orders. Orders must be accepted, shipped or delivered from outside the state. While this protection is substantial, it does not apply to service industries or taxes other than net income tax, most notably, sales taxes. Many businesses do not become aware of this liability until contacted by the state. Again, the state is not limited in the number of years it can assess back taxes.
Are you aware of, or concerned about, any exposure the business may face, but is not being addressed at this time?
Many taxpayers get caught in the “statute of limitations” trap. That governs how long after a return is filed, a state can assess additional tax, or the taxpayer can seek a refund. If a return is never filed, this period does not elapse, especially in the case of additional assessments.
Consider the taxpayer who realizes two years after it started business in State X that it had a responsibility to collect the sales tax. Perhaps the same taxpayer owes income tax to State X. If the problem is ignored, State X may compel the business to pay sales tax, which it can no longer recover from customers, or file income tax returns, when it can no longer amend its other state income tax returns to obtain a refund for the portion of income now taxed by State X.
There are remedies to stop this spiraling situation, including voluntary disclosure and amnesty programs, and other effective state and local tax planning. But the first step is to identify the problem. Perhaps an exemption or exclusion is available which may eliminate any exposure.
Inez M. Mello is director of state and local tax services for Carlin, Charron and Rosen. She is based in Glastonbury.
