Risk & Business Magazine Spectrum Insurance Magazine Fall 2017 | Page 7
STATE TAX RISK
Many businesses are aware of
their home state sales tax and
income tax filing requirements,
but they aren’t aware of the filing
requirements created by their
business activities in other states.
W
hen business owners
evaluate risk, they
think of many things:
product liability,
fire, natural disaster,
competition. And the list goes on and on.
Business owners take conscious steps to
eliminate risk by doing such things as
purchasing insurance, diversifying their
customer base, and diversifying product
offerings. One area of risk that business
owners often fail to anticipate and
proactively address is state tax risk.
State tax risk can encompass many
things and can generate significant
financial exposure to a business if
ignored. We often see state tax risk
rearing its head in the form of unmet
state sales tax and income tax filing
obligations. Many businesses are aware
of their home state sales tax and income
tax filing requirements, but they aren’t
aware of the filing requirements created
by their business activities in other
states. Efforts by businesses to expand
their market can create a nexus—an
in-state level of activity sufficient to
allow that state to compel the business
to register in the state, file state returns,
and remit state tax.
Determining when a business has a
nexus in a particular state can be both
frustrating and confusing, because the
activities that create a nexus vary both
from state to state and from tax type
to tax type. A nexus is often created
by some type of physical presence in a
state, including business locations in a
state, employees working within a state,
inventory stored in a state, and third
parties representing the taxpayer within
the state (think people like dealers,
brokers, and warranty providers).
States have also “upped the ante” by
implementing taxing structures that
require the filing of returns even if the
business has absolutely no physical
contact with a state beyond making
sales into the state. While some state tax
experts question the constitutionality of
these structures, most businesses have
neither the desire nor the “deep pockets”
necessary to challenge these laws.
What are the consequences of ignoring
state tax exposure? States will assess
the tax owed along with interest and
penalties. Wisconsin imposes interest
at a rate of 18 percent on nonfilers and
can impose negligence penalties of 25
percent of the tax owed. In addition, the
statute of limitations does not run on
the state’s ability to compel the filing
of returns. This means that a state
can compel the filing of returns for as
many years as the nexus existed. Finally,
buyers often use state tax exposure to
reduce the amount they are willing to
pay for a business.
While the specific complexities of a
state tax nexus are beyond the scope
of this discussion, the importance of
addressing the risk with knowledgeable
advisors is crucial to managing the risk.
Savvy business owners will continually
evaluate their business practices to
determine their state income tax and
sales tax exposures and will work
proactively with their tax advisor to
manage their state tax risk. +
Linda J. Feirn, CPA Partner
With over 19 years of public accounting
experience, Linda Feirn assists clients with
state and local tax compliance and planning.
She has assisted clients in managing their
sales and use tax audits, reviewing their sales
and use tax compliance and procedures, and
researching and structuring complex sales
and use tax transactions.
Linda also serves clients in the
manufacturing and distribution practice,
including the food products, agricultural,
metal fabrication, wood products, and
ethanol and biofuels industries. She can be
reached at 715-858-6661 or
email [email protected]
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