Nexus and Apportionment: How Do These Issues Affect My Taxes?
Times are changing for most companies. You have customers in California, staff in Texas and inventory in Kentucky. You used to sell widgets. Now you sell knowledge. You used to have one office, now you have many.
As a result, complexities abound and every state wants its share of taxes to increase tax revenue.
So, when growth and expansion leads to nexus questions or apportionment issues like market sourcing, throwback and cost of performance rear their heads, finance pros at savvy companies know to turn to the tax experts at EisnerAmper.
To learn more, you can refer to our video series or contact one of our state and local tax professionals.
Seeking to maximize tax revenue, states are becoming more aggressive about tax collections. Nexus refers to whether your company has sufficient contacts to be subject to state and local tax. Our nexus video series provides an overview, as well as typical pitfalls and, lastly, opportunities for your tax team to consider.
Overview - Nexus
Nexus varies state by state but, generally speaking, the contacts required to generate taxes can be fairly minimal. Furthermore, the term "physical presence" is often misunderstood and can lead to unwanted surprises, including penalties. Other key focus areas include remote employees, and new sourcing rules among others.
As you might guess, a major nexus pitfall includes unpaid taxes. Issues such as 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.
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.
States decide how to divide up the income of a business among various jurisdictions by the apportionment process. As you might imagine, with tax collections declining, the struggle between competing tax authorities can mean challenges for the corporate tax department.
In the good old days, states used an evenly-weighted formula of property, payroll and receipts. More recently, states have moved to formulas that emphasize receipts and the customers' location. Either way, the determination of tax liabilities remains complicated.
Our video series seeks to explore some of the issues around apportionment, including pitfalls to be aware of and potential opportunities.
As noted, apportionment refers to the manner in which income is divided between various taxing jurisdictions. Several factors combine to create complexity and confusion. Over time, a number of states have moved from an evenly weighted formula to one in which receipts receive more emphasis. Our video overview sets the stage for our pitfalls, risks and opportunities discussions.
Apportionment Pitfalls and Risks
Given the relative state of complexity and confusion surrounding apportionment, your company should be on the lookout for pitfalls. Overpaying taxes is a primary item to avoid, but overpayments are not always easy to identify due to the shifting sands of apportionment. As well, issues around market sourcing, "nowhere income," and costs of performance require due consideration.
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.