Things that we should be doing are often overshadowed by the activities that we are currently performing and that seem to be working for us. Given the Equifax breach, we should have considered identify theft protections before our information was compromised; however, being included in the information breach highlights the risk we were taking. That risk always seems much greater on the back end of the decision than it did on the front end before anything happened. This is often how companies feel about multi-state taxation.
As companies continue to expand their sales across the country, a growing company may not realize the required tax filings needed in the various states. Oftentimes, it may take a state a few years to catch up with a new taxpayer…but eventually they need to pay the piper.
The states have been becoming more aggressive as the desire and need to collect more revenue grows. As state technologies advance, locating noncompliant taxpayers becomes easier than ever before. For example, states are locating trucking companies based on the company International Fuel Tax Agreement (IFTA) filings. The states are able to see the IFTA report of miles driven in a given state and often check to see if the company is filing income/franchise tax returns in the state. If no tax returns are discovered a letter to the company is often sent inquiring whether they have “nexus” in their state for tax filing purposes. Additionally, states are able to match up their own state filings. For example, if a company is registered and remitting paying unemployment tax or withholding tax in a state, but no other tax filings, this would likely result in correspondence to the company to identify if the company has the needed connection or “nexus” for the state to impose its income tax filing requirement on that company. How about when a company for legal reasons decides to register with the Secretary of State to transact business in the state as a foreign corporation, but files no other tax returns in a state. Often times the letter will be sent asking the company to explain why they are registered with the Secretary of State to transact business, but not filing any tax returns.
States also find non-filers through audits of companies that are currently filing in the state. If your customer is going through a sales and use tax audit, the state may see an invoice with your company name on it, or if you are driving a company vehicle through the state, an auditor may see your logo and look up your filing record with the state. Likewise, if your company is involved with a trade association or business group—for example, a construction management association local branch, the state may see this and be prompted to investigate further.
Once a state has a company’s name, they are able to go to a company website. This website, while many times geared toward a customer’s use, can be used as a road map for an auditor. Many times, a website boasts maintenance services that will be provided across the country and to every customer. In addition, the website may state customer testimonials with actual company information. To a customer this is appealing, to an auditor this is revealing a nexus creating activity which gives rise to a filing requirement in these states.
Some companies are required to meet certain criteria in order to hold a license for operating their specific business in a state. For example, one of the requirements to be a dealer of vehicles in a state may be to have a storefront with a sign indicating the location of the business. To meet this requirement, some companies will rent a small amount of space out of a local storefront in the state in which they want to operate. While this meets the requirement for the dealer license in the state, it also unwittingly created nexus for that company in the state since the company then has a “business location” in the state. There are many activities that make sense from a business perspective, but also have state tax filing ramifications.
Companies beware, as your business continues to expand, your tax exposure is likely expanding as well. It is highly recommended to have a nexus study performed to verify you have all of your necessary states covered from a tax filing perspective. Once a nexus study is conducted it should not be a one and done event. It should be done on an ongoing basis because companies can change over time, including product sales and market channels. Keep in mind while some companies have gone 10 to 20 years flying under the state’s radar, the next year could be the year that a state’s technology advances are just enough to catch up. Much like everything else in life that catches up to you…it is often painful when the state comes calling.