As we continually await federal government action, each year states get more and more aggressive in determining nexus for sales tax purposes. Many larger multi-state taxpayer are giving in and collecting and reporting nationwide. For example, effective May, 2014, Amazon started collecting in Florida. However, many unsuspecting multi-jurisdictional companies can get blind-sided by a state’s determination that it has the fatal sales tax nexus. So what can be done?
Rather than waiting for the ticking time bomb to explode, why not take a proactive approach. Of course, in most states, if a company has not registered or filed for sales tax, then it potentially has exposure dating back to its existence. Most states have a voluntary disclosure program. The power of the voluntary disclosure program is that it limits a company’s sales tax exposure to three years in most states. This often substantially reduces a company’s exposure for a potential nexus determination.
In addition, the cost of conducting a voluntary disclosure is often relatively insignificant. Many taxpayers often just assume the exposure of the voluntary disclosure is their sales multiplied by the state’s tax rate. However, if researched properly many of our clients find unsuspecting exemption opportunities that further reduces their sales tax exposure in a particular state. A good example is that states often have broad exemptions for manufacturers which often shield them from large tax exposure. Still, other states allow for prospective compliance if nexus is questionable. Most states also have interest abatement provisions and penalty waivers for voluntary disclosure participants.
Another surprising trick is that the multi-state tax commission (“MTC”) offers a multi-state voluntary disclosure program. Specifically the multi-state voluntary disclosure program allows a tax non-filer with potential liability in multiple jurisdictions to negotiate a settlement agreement. Currently the participating states in the MTC voluntary disclosure are Alabama, Alaska, Arizona, Arkansas, California (SBE only), Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. This can be an effective tool if you or your client’s company is unsure of its nexus status in multiple states.
Now more than ever, states have detailed third party information about what a company is doing in a particular state. This makes it more difficult for an unsuspecting business to remain under the radar and avoid tax responsibilities. Further, the current economic climate has led states to be more and more aggressive in nexus determinations. Therefore, it may be wise to cut your or your client’s exposure to three years and enter into a voluntary disclosure.
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