To Register Or Not To Register...Written By Shawn M. Kane, CPA
Article Date: 09-01-2005
Copyright (C) 2005 Associated Equipment Distributors. All Rights Reserved.
While it is advisable to become compliant, don't do so without covering all the bases.
It’s no secret cities and states have been struggling with budgetary shortfalls for a few years. As a result, many states have taken steps to increase revenue. However, this has not been easy in light of the bad press that typically results from raising taxes. States have had to become creative in order to raise more revenue. Some of the methods states have used include unclaimed property audits, repeal of credits and incentives, de-coupling from newly enacted federal income tax provisions, closing tax loopholes, amnesty programs for non-filers, voluntary compliance for taxpayers taking advantage of listed or reportable transactions, and increased audit activity. Increased audit activity has been felt by many industries, but none more than equipment dealers.
Equipment dealerships are an easy target for assessments by states. Many dealers sell new or used high-dollar equipment and provide equipment rentals and service. The taxability of these transactions varies by state, which often leads to unintentional errors by taxpayers. In addition, many dealers are mid-sized companies and attract state tax audits because they provide the auditor with the ability to quickly turn around the audits.
Also, dealers often have their operations in specific states, while their customers and services may cross other state borders. These “cross border” activities often result in questions to tax practitioners, such as does a dealer have to file a return:
The answer to these questions will vary by state and type of tax, but many of these activities will create a filing responsibility. An unexpected tax assessment could have dire consequences for dealers. Knowing a little about how to determine if you have a filing responsibility, and the approach to take, can be the first line of defense.
- If the only connection to a state is through a rental customer that has the equipment in that state
- If service occurs within a state on an infrequent basis
- If the dealer delivered equipment into a state or used a common carrier.
Most companies are aware and comply with the tax filings imposed in the states in which they are commercially domiciled. In addition, most companies comply with employment taxes (i.e. federal/state withholding, and federal and state unemployment) in jurisdictions where they have employees. The taxes that generally raise the most questions and likewise generate tax assessments are franchise/net worth taxes, sales and use taxes, and income taxes.
The biggest misconception is that if you register for one type of tax, you have to register for all taxes and obtain a certificate of authority to transact business within the state, thereby creating a franchise tax filing.
When a taxpayer has a filing responsibility, they are said to be “doing business” or to have nexus with the state. What many taxpayers don’t realize is that the threshold for “doing business” may vary depending on the type of tax. For instance, it is not uncommon for a taxpayer to have nexus for sales and use tax purposes but not for income tax. In some states, merely owning real or tangible personal property may not be considered “transacting business” for franchise tax purposes; it may be sufficient to create a sales and use tax filing responsibility.
The first step for any company is to assess the types of activities occurring within the respective states, the frequency of those activities, the regularity of those activities, and the duration for which they have been occurring.
Companies that are considered to be “transacting business” within a particular state for franchise tax purposes are typically required to obtain a certificate of authority to do business with that state. There are usually legal ramifications to obtaining a certificate of authority so companies should consult legal counsel.
State and local tax advisors can usually opine on whether a company’s activities constitute nexus for sales and use or income taxes. Once a nexus determination is made the next step is to determine how long these activities have been occurring.
Companies are often hesitant to start filing in a particular jurisdiction when their activities constitute nexus. Tax practitioners are often told by companies that they have been conducting the same activities for more than 20 years and have never been caught.
Unfortunately, there are two problems with this approach. Not getting caught is not a defendable position in the event you are caught and states are employing more sophisticated techniques to determine who is doing business there. For example, several states have had auditors write down company names displayed on trucks on their highways. Other states obtain customer or vendor lists from companies under audit. The states then check these lists with current filers.
Companies that have nexus but are not filing should consider that until they file a tax return the statute of limitations for imposing an assessment never begins. Alternatively, if a company files a “zero” return the statute of limitations starts.
There are usually several ways companies wishing to become compliant with their filings can start filing returns.
VDAs are not without pitfalls. For example, one type of VDA program is a multi-state VDA, which is usually administered by a state organization. Taxpayers should keep in mind that the members of these organizations are states and while a taxpayer may only want to register with select states, there is nothing to prevent the organization from sharing the taxpayer’s information with other states.
- If a company’s activities are a new development, the choice is usually to register for the particular tax and commence filing. The difficulty usually arises when the activities have been going on for some time.
- Many states have programs to assist taxpayers that are trying to become compliant. States usually allow taxpayers to enter into a Voluntary Disclosure Agreement (VDA), which provides for the payment of tax and interest but no penalty. VDAs usually have a “look back” period for prior taxes of three years, which is enticing because if the company is contacted by the state, the look-back period is not limited.
- Several states have enacted amnesty programs whereby both penalty and interest are abated. Taxpayers should consider which program is most advantageous if both are available.
The benefit is that the taxpayer only needs to contact and deal with one person at the organization vs. contacting each state individually.
With multi-state VDAs or state programs, taxpayers should use a tax advisor to contact states so the taxpayer maintains anonymity until an agreement is reached. In addition, tax advisors should research the franchise tax implications of entering into a VDA program. The VDA programs are typically administered by the state’s Department of Revenue, making all taxes they administer eligible for the VDA. However, states have been known to contact taxpayers after the VDA is executed concerning franchise taxes administered by the Secretary of State.
The moral of the story is that while it is advisable to become compliant, don’t do so without covering all the bases. Contact your state and local tax consultant to determine if you have nexus with a particular state and the most advantageous way to become compliant.
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