Let’s be honest; no one likes to pay any more taxes than absolutely necessary. Unfortunately, not paying proper attention to taxes can create some big impediments down the road.
As tax advisors, we know that many businesses are more cognizant of federal taxes than state taxes. However, it is important to recognize that every action your business takes can have a state tax consequence attached to it. Consider the following:
- Has your business recently expanded its sales force?
- Are you in the process of developing online capabilities to reach a broader customer base?
- Are you creating new distribution channels to deliver products more efficiently?
- Do you rely on independent contractors as sales representatives or to provide a platform for in-state warranty repairs?
If your business is performing any of these activities, there are state tax implications. Whether you are in the start-up phase, experiencing growth, or reaching maturation, it is essential to routinely assess your operations for potential state tax exposure.
The stories you may have heard about states becoming more aggressive and using new tactics to find non-compliant taxpayers are true. States are using a widening array of techniques to identify new or non-compliant taxpayers and they have become increasingly sophisticated in their approach, assessing maximum penalties and interest. Proper planning and regular reviews of your business activity are critical to highlight potential past, present, and future risks.
Think about where your company will be in three years. Will you still be running the company? Will the next generation be taking over? Will you be exiting the business and looking for a buyer? Being proactive in considering these future events will allow you to assess your potential exposure and make informed decisions about state tax filings that can adversely affect your business if left unattended.
This is especially important in the case of a sale. During the acquisition process, a buyer will usually conduct due diligence to assess any unpaid or underpaid taxes. Discovery of these items could result in an adjustment to the purchase price or possibly losing the buyer.
What if your business performs a review of operations and discovers exposure for state taxes? The good news is that states offer opportunities to resolve these oversights. The most common are voluntary disclosure and amnesty programs. Key features of these programs include limited look-back periods and penalty abatement. While they can be beneficial to fixing prior-year issues, you need to act quickly as there are time constraints and other qualifications for participation in these programs.
On the road of operating a business, state tax obligations can be a potential road block. Knowing your risks allows you to see what lies ahead and plan for it. Like driving at night, it is much easier to see what is in front of you with your headlights on.
Reed Brown is a Manager in Kreischer Miller’s State and Local Tax group. Contact him at Email.
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