Where Potential Liabilities May Exist And How To Identify Them
Examining your business ’ s nexus footprint can help you understand your potential liability and will assist you in getting ahead of an issue that may cost you penalties . You might discover that your business has exposure for certain liabilities . Knowing this will allow you to make informed decisions moving forward while allowing you to maintain compliance . Knowledge is the first step in preventing your business from facing unnecessary expenses and liability , and it can also save you a lot of time – and worry !
So , what can you do to determine where your liabilities lie in this ever-increasing world of nexus ?
• Start by looking inward and consider doing a state and local tax ( SALT ) nexus and Risk Assessment study . Do you truly have a solid grasp on all the areas where you do business ? A nexus study can help you evaluate every aspect of your tax situation and uncover areas of potential tax exposure . Rea ’ s SALT experts regularly perform nexus and Risk Assessment studies to help identify client exposure .
• Keep good exemption certificate records for any transactions with wholesalers or exempt purchasers ( i . e . manufacturers ). Determine if your customers have an exemption for their use of your product or service in their state . If so , keep good records of those exemption certificates . Many states have rigid requirements on what constitutes a valid certificate .
• Break out your invoice price to contain the risk associated with things that are actually taxable as many states fully tax mixed transactions . You should always discuss this with a SALT expert .
• Make sure your software can accurately calculate sales by state , county , etc . This includes properly sourcing sales and generating the correct tax rate and determining taxable and nontaxable sales . Some types of businesses may encounter very complex taxing situations in which sales tax software is the only way to manage .
• In states where your tax exposure may be high , consider whether you should register going forward and pursue a voluntary disclosure . If you choose not to take action in states where you have nexus , determine whether your audit team is required to add a disclosure to your financial statements or if you need to consider an accrual for sales tax . Additionally , if you are considering selling your business in the future , you may need to address these issues sooner rather than later . It is a hot topic under any quality due diligence process .
• Consider your staff . It ’ s estimated that as many as 30 percent of all remote employees have worked or currently work out-of-state from their home office . If your business hired talent that works across state lines , you could face extra costs and liabilities . For example , states generally require employers to obtain workers ’ compensation insurance for employees in the state where they work . Your business would need to either incur the additional fees to protect your out-ofstate employees or face the penalties associated with legal noncompliance , which can be even more costly .
• Examine business practices on a state-by-state basis . While nearly all U . S . states have already adopted , or plan to adopt , nexus standards for businesses that vary based upon the types of taxes , these standards are not universal . Examine which states you specifically operate within , no matter the capacity , and consider how their specific nexus standards could affect your business .
With so many considerations to examine surrounding nexus , it can be difficult to determine how they will impact your business specifically . If you believe that your business is at risk or you have concerns about the implications of outof-state operations , our SALT team can help . Not only can we determine if nexus exists , we can recommend a strategy that will help you defend against those problems and safeguard your business for years to come .
By Kathy LaMonica , Vertex ® Certified Professional and Avalara ® Certified Implementation Partner , principal , SALT technology & consulting , kathy . lamonica @ reacpa . com ( Cleveland office )