States are aggressively looking for taxpayers that are doing business in their jurisdiction but not collecting and remitting tax.
Rather than waiting for your client to receive a notice, nexus questionnaire or other love letter from state taxing authorities, we recommend that you work with your clients on a regular basis to evaluate where they may be subject to state and local tax filing requirements. Once a state has contacted your client or determined they have nexus, the chances of negotiating a favorable outcome are greatly reduced.
If a state has determined your client has nexus, they have the right to enforce compliance back to the date the company began doing business in their state. This can be quite costly for the client, not only in taxes, but also in time spent resolving the matter.
- ABC Company has been selling taxable products in State Z for ten years and never registered, collected sales tax or filed returns.
- State Z determines ABC Company has nexus for sales tax purposes.
- State Z may require ABC Company to file sales tax returns for the past ten years (practically speaking, most states will go back six to eight years).
- Assume ABC Company had annual sales of $50,000 a year in State Z and they’re subject to an 8% sales tax rate.
- ABC Company could owe $40,000 in sales tax plus penalties and interest.
This liability could have been reduced to less than half that amount had this matter been identified and addressed proactively. To reduce or prevent the risk of state and local tax underpayments, it is important to determine whether your client is doing business in other states.
Start by asking them the following questions:
- Do you have sales in other states?
- Do you have locations in other states?
- Do you have employees or representatives that are residents of other states or making sales calls in other states?
- Do you send employees or subcontractors to make repairs or perform installations in other states?
- Do you have inventory, equipment or other assets in other states? If your client is using Fulfillment by Amazon services, they may likely have nexus in multiple states because their inventory could be held in Amazon fulfillment centers across the country.
If your client answered 'Yes' to any of the above questions, you should consider conducting a nexus study. A nexus study is a detailed review of sales and business activities by state to identify and quantify the risk of tax underpayment.
Once nexus with other states is determined, a proactive plan can be put in place to reduce the risk of potential unreported liability. However, this is only part of the value you can bring to your client in this area.
A plan should also be developed to ensure future compliance. This includes assessing whether your client has a policy for maintaining exempt sale documentation and determining the last time anyone reviewed this documentation.
Your client may also need assistance registering with state taxing authorities, determining the taxability of their products and services or implementing an automated sales tax compliance solution. Providing these services can help you manage your client’s potential state and local tax risk now and in the future.