By Mark Loftis, Director of State and Local Tax, Crosslin
1. Rapid expansion of operations into a new state(s).
Businesses will sometimes expand into a new state with rapid growth in plant, equipment or inventory all for good business reasons, but they don’t fully realize the tax implications of doing business in new state and local jurisdictions. Physical presence in any state will require registration and adherence to that state’s tax laws.
2. Employees or non-employee agents of your company entering into new states doing business.
When sending employees, or your agents, into other state and local jurisdictions (even with no other physical presence in that state) to do business, there is a great likelihood that taxes in those states will now apply to your company. Some states are even moving to more aggressive definitions of when their taxes apply – where by a mere sales dollar amount, the company is being asked to pay their tax.
3. Failure to self-assess use tax on purchases made where the appropriate sales tax was not charged by a vendor.
Most times when a state audits a business they will find unknown tax liabilities on items the business purchased from vendors who are either not registered or not required to charge your home state and local sales tax. When this happens, each taxpayer is required to self-assess a “use tax” (same as if the sales tax was charged) and report and pay that tax to your home state.
4. Failure to charge the correct sales tax rate on taxable sales.
In the U.S. there are now just fewer than 10,000 different state and local tax jurisdictions, all with different tax rates which change constantly. It is therefore easy to see how a company that makes sales in multiple jurisdictions can lose track of the appropriate sales tax rates it should be charging its customers. The taxpayer is held liable for any of these under or over charges of tax.
5. Failure to obtain the correct or properly dated exemption certificates on exempt items you sell.
When under audit by a taxing jurisdiction, the auditor will review your customer exemption certificate file, which is your proof and documentation that you are required to have on hand to exempt your customers from collection of sales tax. If you do not have the proper documentation on file the state and local jurisdiction can assess you that tax plus any penalty and interest.
6. Acquiring a business with unknown back state tax liabilities that you are now responsible for.
When purchasing a company that operates in multiple states the acquiring company should always do its due diligence in seeing if that company has any state and local tax liabilities that will only be found in future audits by state and local jurisdictions.
7. Making sales into new states via the internet or through Amazon (FBA – Fulfillment by Amazon).
Selling product over the internet into states where a company may not have thought it had physical presence may lead to potential state and local tax liabilities. For example, participating in Amazon’s Fulfillment by Amazon program allows Amazon to warehouse product the company still owns in its distributions warehouse facilities across the U.S. and to transfer this product between its facilities as needed. Therefore, a company using this service may unknowingly have nexus in states that it did not realize creating an obligation to collect that states sales tax for example. It could also lead to having other taxes apply depending on the state and the circumstances.
8. Taking items out of inventory for your own use.
When companies that buy items it incorporates into the product it sells, it can in most cases buy that item exempt from sales tax as an item it will resale. However, if that company decides to subsequently take such items out of inventory for its own use and, will not in fact be reselling the item, then the company must self-assess use tax on the items it removes from inventory for its own use. This is therefore easy to overlook until the state audits the company’s records.
If you are in any of these situations, have a state and local tax professional review your situation prior to you being contacted by a state or local tax jurisdiction so you are prepared for a state audit that is likely to come.
Mark Loftis serves as the director of state and local tax with Crosslin, bringing nearly 35 years of state and local tax experience to the firm. Contact him at firstname.lastname@example.org or call 615-320-5500 x 472.