Blog Tax News Navigating Nexus. Multistate Business Operations Face a Wide Variety of State Taxes. - Page 2

Navigating Nexus. Multistate Business Operations Face a Wide Variety of State Taxes. - Page 2

Article Index
Navigating Nexus. Multistate Business Operations Face a Wide Variety of State Taxes.
Page 2
All Pages

CHARTING A COURSE

Ideally, the time to assess nexus is before a multistate business starts or expands its operations. But at any stage, companies should periodically perform a diagnostic “checkup” for their sales-and-use-tax-related processes. This checkup (see sidebar, “Sales-and-Use-Tax Diagnostic Checkup”) is a holistic exercise designed to look at other risk areas often associated with sales-and-use-tax processes. Companies suspecting their activities in various states may have created sales tax nexus—subjecting them to sales and/or use tax collection responsibilities—should consider performing a nexus study, which may be performed before or in conjunction with the diagnostic checkup. The study can be completed by a company’s internal tax professionals, or through a qualified CPA or tax consultant who understands the various state nexus requirements. The goal of a nexus study is to obtain a thorough understanding of a company’s potential nexus-creating activities in the various states, and evaluate these activities in light of each state’s laws, administrative guidance, recent court decisions and other rulings to determine a company’s nexus profile (for example, whether nexus is certain, probable or unlikely). See sidebar, “Nexus Study Overview and Checklist,” below.

REMEDIAL OPTIONS

Companies that discover as a result of a nexus study that they have nexus exposure of which they were unaware may wish to consider the following options.

Voluntary disclosure agreements. As stated earlier, taxpayers may realize only after the fact that they had nexus and thus a state tax delinquency. One option in such instances is to enter into a voluntary disclosure agreement (VDA), an agreement between a state and eligible taxpayer in which the taxpayer comes forward voluntarily and agrees to submit the delinquent returns and associated tax payments as specified in the VDA. In exchange for the taxpayer’s voluntary disclosure, the state grants the taxpayer certain benefits and protections, including the opportunity to resolve the taxpayer’s outstanding tax liabilities fully and completely.

Although the exact benefits offered vary from state to state and taxpayer to taxpayer (and all differ from the federal program by the same name), the most significant benefits include a limited lookback period and a waiver of all applicable penalties. The lookback period refers to the number of prior years or periods a taxpayer will be required to report and pay tax on, with 36 to 48 months being common for sales tax VDAs. Taxpayers are relieved from filing and paying the associated tax for all years prior to the beginning of the lookback period.

As most states allow a request to enter into a VDA to be made anonymously through a taxpayer representative, another significant benefit is the opportunity to review the conditions of the VDA and negotiate preferred terms before disclosing the taxpayer’s identity.

Although entering into a VDA can be beneficial, there are several issues to consider. One reason states offer voluntary disclosure—in addition to collecting tax liabilities that they might otherwise obtain only through extensive collection efforts—is that the program brings new taxpayers onto the state’s tax rolls. A typical VDA eligibility requirement is that the taxpayer not already be registered for the tax involved in the VDA. In addition, a state may require that the taxpayer come forward for all taxes for which the taxpayer has nexus, or that the taxpayer make an affirmative statement that no other nexus exists. However, a taxpayer may not realize that its activities in a state have created nexus for other taxes. The state also may require completion of additional documents, such as a nexus questionnaire. The taxpayer’s responses on the nexus questionnaire could lead the state to determine that the taxpayer has nexus for other taxes, thereby creating a situation where the taxpayer would have to file these other taxes outside of the protection offered through a VDA.

Once a taxpayer has been accepted into the program, the phases of the process must also be completed within the state’s strict deadlines. For instance, once taxpayers have come forward, been accepted into the program, and disclosed their identity, they may have only 30 or 60 days to prepare and file all delinquent returns and pay all money owed to the state. Care should be taken to fulfill a VDA’s requirements and time frames, as failure to do so could mean losing the benefits and protections offered.

Amnesty programs. Similar to a voluntary disclosure program, a tax amnesty program allows a delinquent taxpayer to come forward voluntarily and pay delinquent taxes. As an enticement, states will typically offer an abatement of all applicable penalties and may offer an abatement of all or a portion of the applicable interest.

Unlike state voluntary disclosure programs, tax amnesty programs must be approved by the legislature, occur only periodically and run for a limited time. In addition, a tax amnesty program typically does not offer the benefit of a limited lookback period or the opportunity to negotiate preferred terms. A taxpayer wishing to obtain the benefits of filing during a tax amnesty period must file and pay all delinquent taxes as far back as the liability extends. If a taxpayer with nexus has never filed in the state, the statute of limitations never begins to run. As a result, the state has the authority to go back and assess tax for as many years as the state determines the taxpayer should have been filing.

To assess the feasibility of a VDA or amnesty, companies can take the following steps:

Prepare an exposure analysis. This analysis will capture the anticipated exposure estimates by state for the entire period of the liability. In addition to providing an estimate for increasing amounts booked to reserves, the analysis also can be used to prioritize liabilities by their level of urgency and materiality.

Prepare a VDA or amnesty analysis. With the prioritized liabilities identified in the exposure analysis, try estimating a proposed VDA exposure or probable amnesty outcome for the states. Consider the different eligibility requirements and, for a VDA, the different lookback periods, as well as whether the state has announced or is anticipated to announce an amnesty program. It is important to also capture a position on other tax-type nexus and exposure at this part of the process.

Proceed with a VDA request or tax amnesty filing and prepare to negotiate with the state(s). After deciding to move forward with a VDA request, identify an appropriate advocate to negotiate optimal terms with the states having exposure. Many CPAs and consulting firms offer this service; be sure to use resources with experience in the state in question, both in terms of the state’s nexus requirements and with representing clients in the VDA process. Also, when engaging a CPA firm to serve as tax advocate, consider that the AICPA, SEC and PCAOB independence rules limit the types of activities that a tax advocate can perform without impairing independence.

While many states have similar procedures, the states will expect the negotiator to adhere to all policies and procedures of the VDA program. Negotiation is not generally part of filing within a tax amnesty, so the taxpayer advocate should also be experienced in dealing with tax amnesties. The filing of delinquent returns and payment of outstanding liabilities must be performed within the tax amnesty’s limited time frame to obtain the amnesty benefits. Also consider that filing within an amnesty period may mean waiving any right to claim a refund, protest or initiate any administrative proceeding that challenges any assessment.

Register as a sales tax vendor and begin collections and filings with the state(s). Registration for new taxpayers is often handled as part of the voluntary disclosure process. In some cases, the taxpayer may need to complete this step before negotiation. Whether the registration is handled during the voluntary disclosure process by the taxpayer advocate or by internal resources, this step should be performed in accordance with the state’s policies and procedures.

Maintain good standard procedures to minimize future exposure and liability. If business processes need to be changed, be sure to have a plan to facilitate accurate accounting and reporting.

ARRIVING AT THE DESTINATION

States are looking for new revenue sources, and companies are looking for ways to help their bottom lines. Thus it’s more important than ever to take preventive action to anticipate nexus issues and smart remedial action once it is unexpectedly discovered.

 

by Journal of Accountancy

 



Thanks to Sales Tax Accountants our company was able to avoid an expensive audit and save tens of thousands
James Turner - Retail Supply Services

How To Contact Us

twitter facebook google

Contact Us Today!

CPA Atlanta   ,   Atlanta Tax Resolution   ,   State Sitemap   ,   County Sitemap   ,   Atlanta SEO & Web Design