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.
Is there anything that prohibits imposing net income tax?
There is something called public law 86272 which is federal legislation that was enacted many years ago and all it says is that a state is prohibited from imposing a net income tax if your only contacts with the state are the solicitation of sales of tangible personal property. While it's a short phrase there's a lot of nuances in there. For instance it only applies to solicitation of sales of tangible personal property. So if you're doing actually making a sale as opposed to soliciting the sale, or if you're soliciting sales of services or warranties or some other sort of intangible it doesn't apply. Also it only applies to net income tax so it doesn't apply to sales tax or gross receipts tax or net worth taxes. So it's a very very narrow exception.
If I don’t file tax returns, what happens to me?
Well the worst thing that can happen is essentially you get audited. And states have gotten more sophisticated, more ways of finding you. They can find you either through maybe auditing one of your customers or auditing one of your vendors. Maybe you're filing one sort of tax like a payroll tax, it's very common for companies to register for payroll in a state and avoid registering for other types of taxes, states will do a cross-match and that's one way they find you. Now the worst case scenario is that you end up getting audited and get a large assessment. Very often with income taxes it's a tax people may view it as a tax you may have owed anyway and so you have some interest and penalties, they may view it as a minor issue. Something like sales tax is a bigger issue generally. Very generally speaking a sales tax is something you're actually collecting from someone else so they're paying and you're collecting and remitting it to the state as the state's agent. However if you get audited you are secondarily liable for that so you may get audited and what's happened is you've actually taken on your customers’ liability so in addition to paying your own tax you're paying someone else's tax which is the worst case scenario. Very often people say ‘well I'll be able to go back and get it from my customers’ - maybe you can, maybe you can't. Depending upon your type of business some of the customers may be out of business so you can't get it back, some customers may be uncooperative, sometimes if you've got let's say an internet retail and you've got thousands of transactions with very small tax amounts to go after all those people is just impractical so it really does end up being that you're taking on someone else's liability.
In this Apportionment overview, Gary Bingel discusses challenges and opportunities and how planning can help manage overall tax liabilities, and knowledge can help mitigate potential exposures and combat aggressive taxing authorities on audit.
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.
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.