Has your company expanded operations and/or sales into multiple states over the years? If your answer is yes, then there is another important question you need to answer.
Are you confident you are filing the appropriate state and local sales/use and income/franchise tax returns in the appropriate jurisdictions?
Some companies may think that the answer to the above question is obvious and others may not have given it much thought. With the various complicated requirements and ever expanding reach for additional revenue by many state and local governments, the question may not be so easy to answer without some help from a state and local tax professional. In many cases for those companies who chose to “assume everything is ok” or “ignore” these different requirements, there is more likely than not an unpleasant visit, and subsequent assessment for tax, penalty and interest, from a state auditor in your future.
What is Nexus? The term “nexus” simply means a company has “sufficient presence or contact” in a jurisdiction that allows that jurisdiction to require the filing of tax returns and therefore impose that jurisdiction’s taxes. Traditionally, sufficient presence or contact is usually caused by actual physical presence within the jurisdiction. This would be having property like offices or warehouses and even resident employees working within the jurisdiction. In this ever evolving digital age, states are continuing to push and expand the definition of nexus on many fronts including such concepts as “Economic Nexus,” “Affiliated Nexus,” and “Click Through & Web Nexus,” just to name a few. These expansions extend the concept of nexus beyond the traditional physical presence in a jurisdiction to other activities and contact with a jurisdiction. And, of course, there is little uniformity of these rules between the states and treatment can be different depending on the type of tax and what you are selling. For example, for state income tax purposes there are federal mandated safe harbors that protect a company from having to file income tax returns under specific circumstances but those safe harbors do not extend to the sales tax. So it is very likely for companies who sell (ship goods) into multiple states that it may not have a state income tax reporting responsibility in some states, but may very well still have a sales tax reporting responsibility.
Voluntary Disclosure Agreements: When a company determines where it has nexus and where it has prior exposures, there are ways to limit the exposure through approved processes in each state called voluntary disclosure agreements (VDAs). These are provisions within each state’s law that allows taxpayers, usually through a third party, to come forward and agree to report and pay any back taxes. The benefit to the taxpayer is that in exchange for a company coming forward, the state will generally agree to limit the look-back period (usually to 3 or 4 years) and will waive any penalty due on the liability. This can be a huge benefit to a taxpayer because if the taxpayer has failed to file the required returns over a period of time and the state on audit finds the exposure, legally the statute of limitations has not run because no returns have been filed. Therefore, the state could conceivably go back as far as the date the company started doing business in the state and collect unreported taxes from that time and add on significant penalties and interest charges.
How We Can Help: The state and local tax group at Crosslin performs nexus studies for clients that will determine where nexus exists and ensure that the client is filing in the appropriate taxing jurisdictions. If it is determined there is a past liability issue, we also can assist our clients with the quantification of the liability and the voluntary disclosure (VDA) process in each state, which can significantly limit the exposure.
As the saying goes, “an ounce of prevention is worth a pound of cure,” so it can also be said of companies who may be unsure of where they are required to file the various types of state and local tax returns. For more information on nexus studies and voluntary disclosure agreements, please contact Mark Loftis with Crosslin at (615) 320-5500 or email at firstname.lastname@example.org.