by Ned Lenhart, President, Interstate Tax Strategies, P.C.
As I’m sure you’re aware, most states are suffering budget shortfalls due to the financial crisis, ensuing recession, loss of tax collections, etc. In response, the states are trying to cut back on services (which taxpayers don’t like) and trying to increase tax collections (which taxpayers really don’t like.) States are increasing revenue by expanding the tax base and by increasing the enforcement of existing tax laws.
So, the states are in a quandary. They have all sorts of pension, bond and other unfunded obligations coming due, and they must get sources of income to pay for them. Enter the state sales and use tax.
State sales tax seems to be the tax of choice to increase revenue by expanding of the tax base and by increasing enforcement. States are hiring more auditors (Georgia recently doubled their number) to audit existing taxpayers and to find companies that are not currently registered. The risk is very high for unregistered businesses because there is generally no statute of limitations for audits. For example, California usually goes back 8 years for tax if they find companies that are not registered but should been. In addition to the back tax, states will routinely impose interest and penalties. To make matters even worse, auditors are aggressively pushing the envelope with their interpretations of the sales tax law and in their audit sampling methods.
Many Vistage members’ companies are vulnerable to this ‘state sales tax time bomb’ and will be shocked to realize the potential liabilities, including penalties, they may face. Many CPA firms, are unaware of the rules that may require their clients to register for sales tax in multiple states and the other factors governing the assessment of state sales and use taxes. Many financial auditors miss this area entirely during their audits because they are not keyed into looking at these issues.
For example, in the retail sector according to Internet Retailer, e-commerce rose 14.8% in 2010, creating a golden opportunity to help states supplement their income. More and more businesses are hearing the word “nexus” brought into play. Regardless of the industry, companies with customers in multiple states should carefully evaluate the tax filing requirements and the tax rules where their customers are located. The rules for nexus determination will be outlined in a later article.
Depending on the size and kind of business, the number of states in which it operates, and the method of invoicing a customer, the sales tax issues facing a business can be significant and create possible liabilities for companies ranging from the tens of thousands to multi-million dollars. Common multistate problems range anywhere from unidentified historical obligations to register and collect tax, to failure to have proper documentation to support nontaxable sales made to clients in other states.
The good news: there is a huge potential value for being proactive. Proactively addressing the sales tax time bomb issue can often limit liability, and minimize future obligations. Conducting a review of products and services offered by a business can develop accurate tax rules and invoices, and a pre-audit risk assessment can avoid issues all together. The only time you can address these issues from a point of control is prior to an auditor contacting your business. Once that happens, your options are very limited.
This is the first in a series of articles that will address various aspects of this “tax time bomb” situation.
Prior to starting Interstate Tax Strategies, P.C., Ned Lenhart served as Director of Multistate Tax Services for Deloitte’s Atlanta office. He served as Director of the Missouri Department of Revenue’s Compliance Division and led civil and criminal tax enforcement efforts; and served as Deputy Director of the Missouri Division of Taxation. Ned is a licensed CPA in multiple states and an active member in AICPA and GSCPA.