The latest Freed Maxick State and Local Tax Update contains a number of must-read items from around the country.
Illinois economic development: Legislation has reinstated and modified the EDGE credit program until June 30, 2022. The Economic Development for a Growing Economy Tax Credit Act (EDGE credit) may be claimed by new or existing businesses that create or retain jobs in Illinois. It is available to any individual, corporation, partnership or other business entity with an Illinois income tax liability and that is engaged in interstate or intrastate commerce. The business purpose can be for manufacturing, processing, assembling, warehousing, or a variety of specific other processes or services. There is a requirement of a minimum of $2.5 million of capital improvements placed in service in Illinois for businesses with more than 100 employees, while companies with 100 or fewer employees have no capital investment requirement. See the Update for a list of further conditions.
Rhode Island tax amnesty: The state’s budget bill, signed by Gov. Gina Raimondo, included a provision for the establishment of a tax amnesty program for all taxpayers owing tax. From Dec. 1, 2017 to Feb. 15, 2018, all late-filing penalties will be waived and participants will only be required to pay 75% of the interest accrued on late filings. The state will not pursue criminal or civil prosecution against any taxpayer under this program, assuming the taxpayer has either paid or entered into an installment payment agreement to pay all taxes and interest due.
Virginia amnesty: The state allows eligible taxpayers relief for delinquent returns filed from Sept. 13 through Nov. 14 this year. Taxpayers will have to pay the tax due and one-half of the interest. At the end of the amnesty, taxpayers with unpaid taxes that were eligible for relief and did not participate in the program will be subject to an additional 20% penalty.
Hurricane filing-deadline relief: In wake of the recent hurricanes such as Harvey and Irma that struck the southeastern U.S., many states are providing tax relief for taxpayers residing in areas designated as disaster areas by the federal government. In general, most states are extending deadlines to Jan. 31, 2018, for tax returns that had original or extended due dates between Sept. 4, 2017 and Jan. 31. Florida and Virginia have later extension deadlines of Feb. 15 and March 2, respectively. Some states provide additional specifications for taxpayers seeking relief. See Update for more details.
Other news: The Oklahoma Tax Commission has adopted changes to sales and use tax rules; the South Dakota State Supreme Court rejects the internet tax law; the Multistate Tax Commission has extended the deadline for the voluntary disclosure initiative for online marketplace sellers; Illinois legislation was passed that authorizes the state’s Department of Revenue to exchange personal income tax return information with the State Treasurer’s office; and drastic changes are made to the Illinois unclaimed property law.View full article
More and more Canadian companies are expanding their business activities into the United States. The states are becoming increasingly aggressive in enforcement and assessment of various state taxes and have changed their laws in order to capture more revenues. For these reasons, state tax considerations and planning have become a hot topic for Canadian companies in recent years.
Canadian companies expanding their operations into the United States need to be aware of the state tax implications. State tax laws differ greatly from federal laws and vary widely among the states themselves. Although the treaty between Canada and the United States provides for an exemption from federal income taxes in the United States in certain circumstances (i.e. lack of a permanent establishment or fixed place of business), in most cases the states do not recognize this exemption.
Some state tax implications a Canadian company should be aware of when they start doing business in the United States are as follows:
- In most states, there is no state income tax exemption under the treaty.
- In most states, a Canadian company will be taxed on worldwide income (subject to state apportionment).
- It may be easier to have “nexus” and be subject to tax in a state than you would think. Nexus is generally defined as a “certain level of business activity conducted within a taxing jurisdiction allowing that jurisdiction the legal right to impose tax.”
- The definition of state nexus differs considerably from the federal definition of permanent establishment, varies from state to state, varies by tax type, and has changed in recent years with the adoption of the concept of economic nexus.
- In most states, soliciting sales through independent representatives or an employee is enough to give a company some type of state tax nexus.
- In some states, having sales into a state greater than a certain threshold will trigger a state income tax filing requirement.
- In most states, delivering product in company owned vehicles is enough to give a company some type of state tax nexus.
- In most states, having inventory on consignment is enough to give a company some type of state tax nexus.
- States impose various state taxes, including but not limited to sales tax, income tax, personal property tax, franchise tax, payroll tax, and real estate tax.
- When a business fails to pay sales tax or other trust fund taxes, state law allows a state to hold a “responsible person” personally liable for these taxes.
State nexus is complex and should be considered fully before expanding into the United States. Even a minimum amount of activity in a state could trigger a registration or state tax filing requirement.If you would like help with U.S. tax compliance for a Canadian business and reviewing your activities in the states or state tax exposure, contact a member of Freed Maxick’s experienced International Tax or SALT Group for assistance. View full article
In efforts to increase revenue and to tax out-of-state businesses, many states send out tax nexus questionnaires. A tax nexus questionnaire is a set (usually multiple pages) of detailed questions about your activities in the state. The responses to these questions are used to determine if your business has nexus in the state.
Nexus is a minimum connection a business has with a state in order to impose tax. Once it's determined you have nexus, you usually have a state filing requirement. Some examples of questions that are asked are:
- How are sales made into the state?
- Did your company or affiliate actively solicit sales into the state?
- Amount of gross receipts from sales of tangible property during the last five years?
- How are deliveries made into the state?
- Do you own, lease, use, occupy, or maintain an office or other establishment in the state which is significantly associated with your ability to establish or maintain a market in the state?
Why Were You Sent a State Tax Nexus Questionnaire?
Usually these questionnaires are sent to businesses that are not filing or paying tax in the state and/or businesses the state suspects may have a filing requirement. In some instances a business could have payroll in the state and be filing payroll taxes. This triggers the state department of revenue to question whether that same business would also have an income or sales tax filing requirement. However, other times the states send these questionnaires to back up a filing position. For example, Missouri sends out a nexus questionnaire to businesses that claim Public Law 86-272 to make sure their activities in the state support this filing position.
If you receive a state nexus questionnaire, do not ignore it, but be very cautious how you answer the questions. Always answer truthfully but carefully. The questions are worded in such a way that may be confusing and often use terms that may not be clear or could be easily misunderstood or misinterpreted. Some of the questions may not be clearly answered with a yes or no response. In some cases, the wrong person at the business receives this and fills it out quickly without having a full understanding of what they are responding to.
Once the state receives a completed and signed questionnaire, it is hard to change the answers provided, even if the questions were misunderstood or the responses are not a clear picture of your business activities in the state.
What Happens After You Send In Your State Tax Nexus Questionnaire?
After the state receives your completed nexus questionnaire, they will usually either ask for additional information or determine if you have a filing requirement and owe tax, based on the answers provided. Answering these questions incorrectly or misunderstanding the question can lead to tax assessments and filings that might not really be required. And once submitted, it might be hard to contradict the responses given. On the contrary, sometimes your activities do create nexus in a state and you will need to begin filing returns and may have past exposure.
If you receive a state nexus questionnaire, always consult your tax advisor. Or if you need assistance, contact a member of the Freed Maxick SALT team. We can help you navigate through the questions to ensure they are answered properly.View full article
Spring has sprung! With the nice weather comes the concept of “spring cleaning.” Time to open the windows, let in the fresh air, clean up any lingering messes, and get everything in order for the upcoming season. It’s time to sweep out underneath your bed and dust out the cob webs. The same can be done in the state tax arena.
It’s time to do a little state tax housekeeping.
Now is a good time for businesses to take a look at their nexus fingerprint in the states and ask:
“Are we filing in states where we should be filing?”
“Are we filing in states where we shouldn’t be filing?”
Sometimes businesses file in states where they no longer have activity or are paying income tax in states where they aren’t really subject to income tax based on their activity in the state. This can be costly but easily fixed.
Maybe your activities in the state have changed such that your business should have been filing in new states or should have been collecting sales tax on items you were not aware of. If this is the case, you can go through a Voluntary Disclosure or Amnesty Program to ensure all your state filings are up to date and go into next filing season without the old cob webs lurking in the closet, so to speak.
Overpaying Sales Tax? It's Time for a Sales Tax Review
This is also a great time to look at what you are paying sales tax on and see if there is chance you are overpaying sales tax. Sometimes businesses have turnover or taxability of items change. There may be exemptions that are you are not aware, or refund opportunities for these overpayments. For example, there are many exemptions in the manufacturing industry that could easily be overlooked.
Finally, this a good time to look at where your business is registered and ensure you are registered properly. You may need to dissolve from states you are no longer doing business in. Furthermore, are you collecting sales tax in jurisdictions you are not registered in? If you are, this should be rectified immediately.
As you clean out your closets as part of your spring cleaning, don’t forget to do the same when it comes to your state taxes. Please contact a member of the Freed Maxick SALT Team to help you conduct a state tax review and a sales tax review.View full article
From time to time, states offer Tax Amnesty Programs. A tax amnesty program is a limited time opportunity for certain taxpayers to come forward with unpaid tax liabilities in exchange for waiver of penalties and sometimes interest or some portion thereof. These are good revenue raisers for the states.
Pennsylvania has currently enacted a tax amnesty program. This is a good time for taxpayers that have unpaid tax liabilities to come forward and pay their Pennsylvania tax liabilities. The tax amnesty period is only for a limited time, running from April 21, 2017 to June 19, 2017.
What Taxes are Eligible?
- Eligible Pennsylvania taxes include those administered by the Pennsylvania Department of Revenue, which are due as of December 31, 2015.
- Some examples of eligible taxes include Corporate Net Income Tax, Capital Stock or Foreign Franchise Tax, and Sales and Use Tax.
- Non-filed tax returns or reports, as well as unpaid, under-reported or un-established taxes, whether known or unknown to the Pennsylvania, constitute eligible delinquencies.
Who is Eligible for the 2017 Pennsylvania Tax Amnesty Program?
Individuals, businesses, and other entities with Pennsylvania tax delinquencies as of December 31, 2015, are generally eligible to participate in the program.
The following taxpayers do not qualify for the program:
- Taxpayers currently under criminal investigation for an alleged violation of any tax law;
- Taxpayers, who prior to the amnesty period, have been named as a defendant in a criminal complaint alleging a violation of any law imposing a tax administered by the Department;
- Taxpayers who are defendants in a pending criminal action for an alleged violation of any law imposing an eligible tax;
- Taxpayers who currently have a signed voluntary disclosure agreement covering periods eligible for the 2017 Amnesty Program; or
- Taxpayers who participated in the 2010 Pennsylvania Tax Amnesty Program.
What Are the Benefits?
- Pennsylvania will waive all the penalties, collection and lien fees, and half of the interest for any taxpayer who participates in the Tax Amnesty Program.
- In some instances the penalties and interest can be more than the tax owed.
- Pennsylvania will rescind liens or other enforcement actions for the eligible debt.
- If a taxpayer is eligible for the Tax Amnesty Program but chooses not to participate, a 5% non-participation penalty will be added to the balance due and the taxpayer may be subject to other enforcement actions.
How to Participate in the 2017 Pennsylvania Tax Amnesty Program:
- To participate, taxpayers must file an online Amnesty Return, file all delinquent tax returns, and make the required payment within the Amnesty Period.
- If the taxpayer has unpaid taxes or unfiled returns for periods not eligible for Amnesty (due after December 31, 2015), those periods must be filed for the taxpayer’s participation in the program to be approved.
There is a limited window on this program. Taxpayers with unpaid Pennsylvania liabilities who desire to take advantage of the program should do so quickly. Please contact a member of the Freed Maxick SALT Team for assistance with the 2017 Pennsylvania Tax Amnesty Program.View full article
The complexity of state and local sales and use tax is a problem in every state and for many businesses. Each jurisdiction has a different rule on the taxability and exemption of a particular product or service. For instance, downloaded computer software (that isn’t customized) is considered taxable in New York, but not taxable in California. Payroll services are subject to sales tax in Texas as a data processing service, but this service is not considered taxable in Pennsylvania or New York.
It continues to be a growing problem in an ecommerce world for businesses, especially small businesses, to stay compliant with each state’s regulations and to identify overpaying sales tax. In addition to the complexity of sales and use tax, states continue to broaden the taxability of transactions and audit businesses in order to raise more revenue. As such, businesses are likely to err on the side of caution and pay unnecessary sales tax on purchases or charge customers who are exempt. A company should evaluate the complexity and volume of their sales and use tax transactions to determine if there’s a remote possibility that the company is overpaying sales tax.
Reverse Sales Tax Audit
A reverse sales tax audit is a thorough analysis of a business in order to identify the overpayment of sales and use tax. A state and local sales tax consultant will evaluate your company’s business operations, fixed assets, and how you are paying and charging sales and use tax.
Generally, the first step is an evaluation of the purchasing function within your business in order to obtain an understanding of how purchases are being made and approved. Once the consultant has analyzed the business processes and purchasing methods, a sample of paid invoices will be reviewed for sales tax that was charged on exempt items and for the incorrect sales tax rate that may have been applied. Once a quantitative analysis has been completed, the appropriate documentation and information will be delivered to the state or vendors to recover the overpaid sales tax.
It’s also imperative to have an analysis performed on invoices to your customers. In today’s competitive global market, the ultimate decision of a customer could be based on the price of your product or service. Therefore, it’s vital for a business to know who they are selling to and whether the customer is subject to sales tax in their jurisdiction. Generally, a similar approach in reviewing the purchasing functions would be used on the company’s sales functions.
If you’ve had a reverse sales tax audit performed in the past, opportunities may still exist. State tax laws and exemptions are always changing and these changes could be overlooked by your company. In addition, having a reverse sales tax audit performed in conjunction with a major capital project underway can save tax dollars promptly by avoiding the payment of sales tax on purchases of equipment, supplies, etc. that could be exempt.
If your business engages in manufacturing activities or purchases and sells across multiple jurisdictions, you should discuss a reverse sales tax audit with a Freed Maxick professional from the SALT team. Contact Freed Maxick's professionals to discuss your specific situation, or call to speak with an individual directly at 716.847.2651.View full article