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Run-time: 04:48 If your company does business in multiple states, it’s critical to understand your obligations under each state’s tax code. Get a breakdown of how you can achieve compliance while minimizing your tax burden.
Doing business in multiple states? Companies with a multi-state tax presence have the unique challenge of ensuring compliance with tax laws and regulations that vary widely from state to state. Taxation is an area constantly in flux, so it is critically important for businesses to stay current with changes that can affect the bottom line.
Keeping up with this information can be difficult so business owners should rely on their CPA or tax advisor for guidance on how to navigate the multi-state taxation landscape. Businesses can avoid overpayment and ensure compliance across various states by considering the following issues with a tax professional.
- Review nexus to determine tax obligation. Tax advisors can help business owners review their nexus, which is key to establishing if a business has a tax presence in a certain state. Three factors can affect nexus: sales/revenue, property (fixed or leased assets as well as inventory), and payroll. A nexus review will determine tax obligations with the end goal of ensuring proper payment of state taxes and avoiding instances where unnecessary taxes are paid to states.
- Ensure company location and structure minimizes tax liability. Your CPA can also help you avoid high tax jurisdictions by ensuring no nexus is established in such zones. It is also important to review company structure, because different states may have different treatment of a particular entity structure. Tax professionals can help their clients determine how to structure their companies in various states for maximum benefit across all tax types.
- Get in compliance through voluntary disclosure programs. If a business has not been filing taxes in various states, it can be a source of concern. There are ways to come into compliance, and your CPA can guide you through the process. Most states have a voluntary disclosure program that allows companies to catch up on taxes and move forward in compliance. Generally with these types of programs, three to five years of back taxes can be submitted without penalties. If compliance is then continued for three to five years, a business can be absolved of prior tax liabilities.
- Respond appropriately to inquiries from states. Often times, states will contact businesses for information to determine which entities need to be paying state taxes. Whether it’s a request to conduct an audit, or to collect information about a particular tax type, it is critically important to seek the counsel of your CPA before responding. Since this communication could have serious tax ramifications, a tax professional can help you determine how to craft your response and what information to provide.
The goal for all business owners should be to fully understand tax responsibilities to ensure compliance and make sure no unnecessary taxes are paid. Your RKL tax advisor can be a valuable partner in that process, or you can reach out to one of our local offices for assistance or more information.
Contributed by J. Andrew Weidman, CPA, MST, a partner in RKL’s Tax Services Group and leader of the firm’s Real Estate Development & Construction Services Group. Andy has more than 30 years experience in tax planning, specializing in closely-held entities, the real estate industry and tax planning for mergers, acquisitions and sales of businesses.