While apportionment issues present challenges they also present opportunities. Proper planning can help to manage your overall tax liabilities, and knowledge of these issues can help mitigate potential exposures and combat aggressive taxing authorities on audit.
Gary Bingel: I usually come in both on the audit defense side and on the appellate side. We really like to get involved as early as possible in the audits just because very often we can steer them in the right direction. We know more what they're looking for, we may be able to describe your business in a way that they understand more easily. Especially for a lot of tech companies, auditors don't understand a lot of the tech speak, so when you get into that, they're just going to look at an invoice or look at a contract and pickup on one or two words that they do know what they mean, and then try and source your revenue that way, despite the fact that might not be what you're really doing.
Very often we have service companies, maybe software as a service, a certain revenue, certain software companies that may be selling a service, but they're delivering it via software. Well, an auditor may look at your contract and just see a software license and say, well, I'm going to source this and reports and software license rules as opposed to in accordance with service sourcing rules, and they might be totally different. One, they might just say, well, we see where you're billing the customer and go by market sourcing as opposed to looking at where the costs are actually incurred and maybe it should be under a cost to performance.
Apportionment is the manner in which income is divided between various taxing jurisdictions. A number of states have moved to receipts receiving more emphasis. Our video overview sets the stage for our pitfalls, risks and opportunities discussions.
Defensively, your tax team wants to avoid pitfalls associated with nexus. On the other hand, understanding nexus can open the door for opportunities such as Voluntary Disclosure Agreements or amnesty.
A major nexus pitfall includes unpaid taxes, uncollected sales tax and flow-through entity issues are sometimes missed. Avoiding sticky situations requires an understanding of what creates nexus for different taxes, and in different jurisdictions.
In this Nexus overview, Gary Bingel discusses how Nexus varies state by state, the contacts required to generate taxes, "physical presence" and other key focus areas including remote employees, and new sourcing rules among others.