State and Local Tax: 9 in 2009
#1
Q: Are we properly filing in the appropriate jurisdictions and for the requisite tax types?
A: Although your business may not be subject to income tax in a particular jurisdiction because it lacks physical presence, the mere solicitation of orders or sales of tangible property might be enough to require your company to be responsible for a non-income tax. These non-income tax types may include, but are not limited to, sales/use tax, franchise/net worth tax or gross receipts tax. Prior to filing your state tax returns, a summary of the various tax types and the differing level of in-state activity that creates a filing requirement should be made to ensure that no significant tax exposure exists.
#2
Q: Does my business have a filing obligation for sales/use, franchise, gross receipts or other non-income tax types?
A: Solicitation of sales is a protected activity that does not create income tax nexus under P.L. 86-27; however, sales/use, franchise, gross receipts and other non-income taxes generally have a lower nexus-creating threshold. The nexus bar has been lowered by many states for other tax types; in fact, one day of business activity in Michigan can create nexus for the Michigan Business Tax (MBT). It is important as a tax professional to have an awareness of your company’s activity in states other than your domicile. Do you have employees who live out of state? Do you use third parties to conduct business? These are just a couple of the questions that need to be asked when reviewing your filing obligations.
#3
Q: Is my organization prepared to identify, quantify and disclose state income tax exposure as required under FIN 48?
A: The Financial Accounting Standards Board has delayed the implementation of FIN 48 for non-public enterprises. FIN 48 disclosures for non-public enterprises will apply to financial statements for fiscal years beginning on or after December 15, 2008. Once FIN 48 has been finalized, non-public enterprises will be required to analyze the technical merits of their tax positions and determine the likely outcomes of these positions if they are ever examined by the taxing jurisdictions. These tax positions range from not filing in a particular jurisdiction to excess compensation or international transfer pricing. The bottom line is that non-public enterprises should begin, if not already doing so, to formulate a strategy to be able to comply with the pending disclosure requirements under FIN 48.
#4
Q: Have I fully considered and evaluated how best to mitigate any state tax exposure?
A: The liability exposure from not filing a tax return does not cease simply from the passage of time. The time period that a jurisdiction has to assess a taxpayer generally does not begin to lapse until a tax return has been filed. As a result, exposure from non-filing never goes away, and typically only increases due to additional tax, interest and penalties. Many states allow taxpayers to voluntarily disclose their tax exposure, often limiting the number of years to be filed and abating applicable penalty. Voluntary disclosures are generally available to taxpayers who have not previously registered or been contacted by the state.
#5
Q: Have I properly reviewed our company's books and records to identify overpayments during a state tax audit?
A: An audit is an excellent opportunity to review records for overpayments. While a refund claim can be filed for overpayments that are within the statute of limitations, it is more efficient from a time and effort standpoint to review records during an ongoing audit. In many cases, the state will allow the company to apply tax overpayments to underpayment liabilities discovered during an audit, thereby offsetting the liability identified by the auditor. The reduction in the underpayment also has the added benefit of potentially reducing penalties and interest.
#6
Q: Prior to signing-off and paying a state tax assessment, has our organization fully evaluated the propriety of the assessment?
A: Auditors are human and make mistakes or incorrect assumptions. Before finalizing an audit, someone with the time and expertise should review the audit assessment and work papers in detail. A change in one or two issues or assumptions in the audit may have a significant impact on the assessment. A thorough review of the audit and related documents is required to assure the propriety of an assessment and to ensure that your company was not assessed on nontaxable activities or that the tax due was not incorrectly calculated.
#7
Q: Does our organization have any property that is subject to the various state unclaimed property reporting requirements?
A: When property is abandoned or unclaimed after a specified holding period, ownership of that property reverts to the state. Types of reportable property and their holding periods vary by state. Some examples of common unclaimed property include: uncashed payroll checks, gift certificates/gift cards, uncashed accounts payable checks, outstanding accounts receivable credit balances and stocks/dividends. All states, plus Washington, D.C., require the filing of annual unclaimed property reports, even if there is no property to report. Unclaimed property is an area frequently audited by many states, and the interest and penalties associated with non-filing can be substantial if reportable property exists.
#8
Q: Is our business taking advantage of all the state tax credits and incentives available to us?
A: There are countless state tax credits and incentives available to businesses. For example, there are credits for locating a business in designated areas, qualifying educational donations, creating and maintaining jobs, using certain fuels, and many others. Credits and incentives may be industry-related or available to any type of business. Government and legislature create and modify credits and incentives every fiscal year. Identifying and properly applying these credits can result in significant tax savings.
#9
Q: Are the appropriate controls in place for our business’ sales and use tax determinations?
A: When a taxable item is purchased and sales tax is not paid at the time of purchase, use tax must be accrued and remitted to the appropriate state. Most use tax determinations are made after a purchase has been completed. These decisions generally fall into the hands of a company’s tax department or the accounts payable personnel. Such personnel generally rely upon their knowledge and experiences to determine the correct taxability of an item. Others rely on a spreadsheet or matrix that lists common purchases and the taxability of each. Providing a tax matrix to personnel to reference in the decision-making will increase the uniformity and accuracy of the use tax determinations.
To learn more about these topics or to speak to one of our state and local tax professionals, please call 412-697-5200 or email SALT@schneiderdowns.com.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.