The proposed Marketplace Fairness Act (“MFA”) has dominated the state and local tax community in 2013. Despite not yet being enacted, the MFA debate has brought to light a closer examination by companies that may have nexus in certain jurisdictions. Combine the increased knowledge of the subject with the increasing aggressiveness of state nexus legislation, and more and more companies fall in the current state threshold for nexus creation. Over the past year, we have seen an exponential increase in calls and emails from companies that may have nexus all over the country.
Acknowledging nexus is an important step by a company, but determining what can be done to minimize state and local tax exposure can be a perplexing conundrum. At its most basic level, most companies have three general choices if it is determined it has nexus in a particular jurisdiction. A company can 1) do nothing and pray, 2) look into a voluntary disclosure type program, or 3) a combination of both.
After determining that a company has nexus in a state, many companies we speak with would prefer option 1 – do nothing and pray. While it may prove to be successful, many times states ultimately find out about a company’s presence in that state. Worse, without ever registering, states can go back to the beginning of the company’s existence and impose a substantial tax liability.
For many conservative companies, option 2 is undoubtedly the safest approach. Most states have some form of a voluntary disclosure program. The voluntary disclosure often cuts the liability to three years and offers some form of penalty abatement. Further, many states allow for a company to register and report tax on a prospective basis only, especially if the claim of nexus is somewhat grey.
While there is no one size fits all in the area of state and local tax, most of our clients elect to a combination of options 1 and 2. A company may choose the voluntary disclosure route in states in which it has a high volume of sales and other nexus questionnaire generating events (i.e. – an employee, a large customer under audit, etc.). In states which a company has less exposure, the proper approach might be just to sit dormant and hope time just continues to pass.
There are certainly a myriad of nexus mitigation tactics to combat the current state of aggression across the country. Each client we talk to gives rise to other planning techniques in the nexus battle. For example, what happens if a company was to just cease to exist and a new registered company, selling strikingly similar goods, was simultaneously created? Is there anything a state can do against the former company? What about personal liability of the officers of the first company? Whatever is decided, it should clearly be with the assistance of a state and local tax professional.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?
- Does Nexus Trail a Company After Leaving a Jurisdiction?
- Nexus Update: Washington Enacts New Nexus Standards
- New Proposed Nexus Legislation – Not Very Helpful