While the topic of state tax structure certainly is serious, it also is more than just a little soporific.
But hear accountants out — to them, there’s no bigger issue that businesses need to be woken up to when it comes to tax planning today.
Not knowing whether a state has a policy on the books that may impose a 7 percent sales tax on the sales of a business in a different state can subtract revenue unexpectedly, turning 5 percent growth into 2 percent loss, according to Gary Bingel, partner-in-charge of the state and local tax group at EisnerAmper LLP.
Another accountant, Kenneth Bagner of Sobel & Co., said it happens all too often.
“I’ve had clients in e-commerce get really surprised with tax notices — I’m talking six- or seven-digit notices before we were their accountants,” said Bagner, a member of the firm. “We have tons of examples of that, unfortunately.”
It all revolves around the concept of nexus, which loosely defines requirements for companies doing business in a state to pay taxes on sales despite not being based in that state, as Bingel explained.
“The biggest surprise to businesses is how you can create nexus so easily with almost no presence in some states,” Bingel said. “You don’t need to have warehouse, office or even an employee there. It can be a very low threshold — just having some sales there is enough.”
This issue has been around for many years, but any accountant will tell you it’s becoming more pressing as e-commerce sales grow. The trend of sales moving online has depleted a lot of brick and mortar sales tax revenue that states have long been leaning on for budgetary purposes.
In turn, states have chased potential taxpayers to the internet — but instead of trying to come up with ways of collecting retroactive taxes from individuals on online sales, it’s going after companies in the e-commerce marketplace that those taxpayers are buying from.
Ronald Burton, tax principal at accounting firm Grassi & Co., said this has become more prevalent over the past decade.
“In that time, states have gotten aggressive with audits, coming up with nexus based on various types out there and assessing tax where they never did in the past,” Burton said. “Just as corporations want to make more, states do, too. They’re wanting to keep the lights on.”
Burton works with large multinationals to help these corporations understand what states may be able to claim nexus based on its company structure. As businesses expand markets by tapping new customers online, the tax liability that it may result in is not typically a top consideration, Burton said.
Smaller companies — a small retailer selling specialty products through Amazon, for instance — face some of the same dilemmas.
“This could impact companies of all sizes,” Burton said. “It’s just that, the bigger you are, the likelier it is you’ll have sales in multiple states and inventory in multiple fulfillment warehouses. So, it’s a numbers game at that point.”
Different states have ways of determining whether nexus applies that are too varied to detail in one story. And accountants see states changing those policies almost on a day-to-day basis — but generally always in a more aggressive direction.
“States will always want to bring in that revenue, and they’ll continue to demand it until something happens at the federal level — either a Supreme Court case or some kind of congressional legislation — keeps states from doing so,” Bingel said.
Eventually, most accountants expect nexus will either be expanded in a way that is consistent across all states, or it will be curbed such that a form of safe harbor is created on these taxes.
States looking to recuperate the lost tax revenue in an age of online sales is likely to affect tax planning trends for years to come.
“And the next time you’ll see an evolution is the next time you see big shift in the market, like online sales were to traditional brick-and-mortar,” Burton said. “Whenever that thing comes around, that’s when you’ll see states move quickly to add levels of scrutiny, largely because of the economics behind it.”
Stephen Basiaga, a tax manager at WithumSmith+Brown PC, said what businesses are faced with is a lot of uncertainty. Nexus has a complicated history, and it’s getting more complicated as states unveil differing laws guiding tax filing requirements that are especially unfriendly to businesses with no physical presence in the state.
As tough as that makes it for his clients, Basiaga said he doesn’t expect the uncertainty to last.
“It will eventually (be clarified in the Supreme Court), because, somewhat like what certain states are doing with marijuana laws, this is actually still unconstitutional under case law and otherwise,” Basiaga said. “But states are still pushing the issue in the absence of federal direction one way or the other.”
How nexus can work
If nexus is still all Greek to you, Kenneth Bagner, member of the firm in charge of the tax practice at Sobel & Co., provided an example of how it can arise as a problem for a business owner:
“If I have a New Jersey company — even a small shop — that sells through Amazon, they might be shipping products to an Amazon distribution center in Pennsylvania. Amazon then sends the product to every location across the country where they have other warehouses that can do fulfillment to allocate goods in real time. If you’re in e-commerce and selling online through their site, any inventory you have in any of their centers at a given time causes nexus.”
Each of those states has its own sales tax, which those states expect to be paid.
“Usually, you would be collecting sales tax from the customer when the product is sold, but if you don’t have Amazon turn the trigger on for sales tax collection, they won’t do it, because they don’t own your product,” Bagner further explained. “And then, you’ll be left responsible.”
Tips from accountants
- Always know where your goods are sourced and where they are. Once they cross state borders, they can have a major impact.
- Be proactive. It’s better to admit you didn’t do a filing where you might have needed to.
- Remain aware of how nexus may affect the back end. A sale or a deal could collapse.