Multistate Tax Filing Enforcement Intensifies
Posted 11-9-2010 | Download Article
With many states facing budget deficits, enforcement of multistate tax filing is becoming even more aggressive. If your company has property, payroll, or performs activities in more than one state, it is time to review your business, income and sales tax obligations. Noncompliance can result in steep nondeductible penalties, unlimited statute of limitations periods, non-creditable income taxes, and paying uncollected sales taxes.
With differing rules and regulations in each state, compliance and determining nexus can be complicated; however, the extra effort is necessary as states continue to increase audit efforts. Nexus is the degree of business activity in a state that must be present before a taxing jurisdiction can impose a tax.
If your company is audited and is not in compliance with multistate tax filing requirements, the state can go back indefinitely and assess taxes and penalties. If you participate in voluntary disclosure or amnesty programs these may reduce or waive penalties and limit the look-back period to three or four years. The key is being proactive, because once a state identifies a noncompliant company; voluntary disclosure and amnesty may no longer be available and penalties may increase.
In many states “physical presence” may no longer be required to establish nexus. For example, the state of Washington recently adopted “economic nexus” in which certain classifications do not require “physical presence”; New York’s “Amazon.com” ruling requires out-of-state retailers to collect state sales tax if the retailer has someone in that state directly or indirectly referring customers to the retailer; and Colorado adopted a new law on “informational reporting.”
If you are an S corporation, LLC, or partnership which passes income through to the individual owners, be mindful that the statute of limitations period remains open in many states unless a tax return is filed. Individuals generally pay income tax on all of their income from all sources in their state of residence, and then receive a credit for income tax paid to other states on the same income, in the same year, preventing income from being taxed twice. However, if noncompliance with multistate filing is discovered and the amended return time period in the state of residence is expired, income may be taxed twice.
HLB Tautges Redpath helps clients research and identify company nexus, calculate company exposure, communicate requirements and prepare necessary returns. If you’d like assistance or more information, please contact Jared Weiskopf, CPA, at jweiskopf@hlbtr.com or Teri Grahn, CMI, at tgrahn@hlbtr.com.