In my 4-part Nexus series, we have examined common business activities of manufacturers that give rise to nexus gotchas. In this final installment of the series we will examine the best ways to manage this process. Begin by following these four steps to set you on the road to nexus compliance.
Step 1: Annually review your nexus footprint
Look at all areas of your business to identify nexus-creating activities.
- Operations. Do you deliver products on your own trucks? Do you perform repair, installation, or maintenance services at client locations?
- Human Resources. Where are employees located? Include contractors and agents.
- Sales and Marketing. Where do sales people travel? How often? Do they attend trade shows? Do you have agents working on your behalf? Internet affiliates?
Step 2: Be proactive before you receive nexus questionnaires
Typically, once you receive a nexus questionnaire, your options are limited. The DOR has the upper hand and there is no statute of limitations for non-filing. In other words, if you had nexus for 7 years, the state has the power to go back 7 years and assess your tax on all sales made to that state during that time period. Plus, they can assess penalties and interest. Dollar signs can exponentially add up.
Step 3: Know your options
When most manufacturers realize they have nexus issues, they seek resolution with Voluntary Disclosure Agreements (VDAs). These agreements are between the company and the state as a way to resolve any unpaid sales taxes and get the company in nexus compliance while reducing many of the penalties and interest accumulated during the period. If a company knows it has unpaid sales taxes due to nexus violations and the state has not sent a nexus questionnaire, VDAs are a great way to settle with the state.
I urge manufacturers to retain a sales tax expert to negotiate VDAs. We know the best way to work with the revenue departments to minimize liabilities. Plus, in most cases your company will remain anonymous allowing you flexibility to reject the state’s offer.
Step 4: Evaluate the pros and cons of registering in states
Once it is determined that your company has sufficient presence in one or more states where you are not registered, should you immediately register with the state(s) through a voluntary disclosure agreement? Here are some pros and cons of registering:
- If a state finds an unregistered taxpayer, tax can be assessed starting with the initial date that nexus was created. BUT, under a VDA, the statute of limitations is typically the regular statute period of only 3-4 years.
- The longer you remain unregistered the larger the eventual liabilities if you get caught.
- Once a state contacts a company regarding business activity within its borders, the possibility for a VDA is eliminated.
- Periodic sales tax returns will need to be filed.
- Professional fees are associated with VDA registrations.
Here are a few other points to consider before making a final decision about nexus registration:
- States where you have the highest sales volume should warrant more consideration than those with lower sales volume.
- If your company has multiple legal entities in states where you are not registered and one of these entities gets audited, your red flags may appear.
- Registering in a state for other types of taxes, such as payroll taxes, often puts you on the state’s radar for possible sales tax nexus activities.
- If you have not been diligent about collecting exemption certificates, the possibility of owing significant back taxes increases.
- States known for aggressively searching for unregistered taxpayers warrant additional considerations.
This four-part Nexus for Manufacturers series has hopefully given you the jumpstart to achieve nexus compliance before states seek you out. The chances of receiving a nexus questionnaire are increasing.
Share your nexus questions with me. What is your greatest nexus concern? Has your company received a nexus questionnaire?
Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:
- Direct Pay Permits for Manufacturers - Good Idea?
- Manufacturing Purchases: 5 Sales-Use Tax Basics for Purchasers and A/P
- Manufacturing Exemption Misconception: Everything is Tax Exempt!
- Manufacturers’ Utility Studies: 5 Approaches to Utility Exemptions
- Manufacturing Sales & Use Exemptions: Open to Interpretation