Brotman Law

Business in Multiple States and Have Not Filed a Sales and Use Tax and/or a State Income Tax Return

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In those states, well this is the hole rule. The rule when you’re in a hole is number one, stop digging and number two, measure the hole so that you can dig your way out of it. So the easiest thing for companies to do is to look at their exposure in the multiple states that they’ve potentially created nexus in and try and peg the date that Nexus was created. This can be a little difficult but the good news is in California, for example, California is one of the more aggressive states when it comes to multi-state tax issues. The reason is California figured out it could tick off a lot of people who are out of state by trying to collect tax from them and those people don’t vote so there’s no harm but the reality of the situation is if California doesn’t have cameras on its borders, it’s not tracking your cell phone movements. For the most part, it’s not really going to have any record of your Nexus creating activity in most cases so the good news is this isn’t about what you’ve done. It’s partially about what California knows and how likely it is that you’re going to get caught. So number one is to measure your exposure. Number two is to measure the likelihood that you’re going to get caught and where companies really start having issues is when interacting with other companies. So for example, if you’re going out and doing a bunch of prospecting and none of those potential clients sign up with you,

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What Are the Opportunities That Are Available for Multi State Tax Planning?

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Well the reality of the situation is there are tremendous opportunities and the opportunities exist because most people aren’t doing this correctly. What we’ve seen at our firm is we’ve seen a huge lapse in the number of CPAs that are catching these issues when they’re filing companies’ normal federal income tax returns. Everybody is focused on the federal and compliance in the state that they’re in and nobody is concerned about potential planning opportunities that exist outside of that state’s borders. So we deal with this a lot in California, because here we’ve got a nice high over 13 percent tax rate for state income and everybody is trying to get out of paying that level of income tax either on the corporate level or on the individual level. So the reality of the situation is for companies in California, they want to try and bifurcate as much of their sales outside the state of California as they can. California makes it really tough for a variety of reasons but the reality of the situation is that most entities have presence in different states in one way or the other so particularly for large organizations with either multiple offices that are spread out, manufacturers with maybe a manufacturing plant, people that are storing inventory in various locations or a variety of ways that people touch different states you might have an argument.

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Out of Compliance for a Multi State Sales and Use Tax or Multi State Income Tax Issue

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if I Discover I’m out of Compliance for a Multi-State sales and Use Tax or Multi State Income Tax Issue? Should I pursue a voluntary compliance program? The answer to this question is maybe and what drove me crazy your back when wayfarer was a huge issue and when companies were scrambling to try and deal with this his everybody was talking about let’s enter into a voluntary disclosure program as quickly as possible the reality of those programs is they were great deal from the states because they were raising revenue and collecting all sorts of taxes but they were bad news for most businesses just because you do business in multiple states doesn’t mean you have all this free cash flow to support paying a whole bunch of back tax liability but a bunch of people panicked a bunch of people registered for these voluntary compliance programs in these states in order to avoid penalties and maybe get a potato production of the interest rate but to what effect so the more practical and concern is is rather than whether.

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Doing Business in a State I Have Not Filed Returns and I Am Contacted for Audit

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Okay so the first thing that you do is not panic. I know it’s a big issue, I know there’s potentially a lot of liability on the table but the important thing is let’s not go crazy. So the most important thing that you can do is cut off communications with the company to the auditor meaning the company should not be communicating with the auditor directly. The more information that the company provides the auditor, the more likely that the auditor will issue an assessment not in the company’s favor. This is particularly true for companies that have historical Nexus in a state for multiple years and that have maintained some sort of presence there via the activities of their employees or holding inventory or whatever. So you need a third party representative because a third party representative, specifically an attorney, will be able to deflect the questions of the auditor and be able to mitigate any immediate danger. The first thing that I would tell an auditor in the situation where I have a client that’s not in compliance is going through an audit is hold off while we assess the situation. This gives the company enough time to breathe, gives enough us enough time to investigate the data and going back to the whole rule, how big is the hole, how do we measure it, and then it allows us to put a plan in place to strategize how we’re going to control

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What Does AB5 Mean From a Tax Perspective in California?

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So in January of 2020, California Legislature passed AB5 which governed the relationship between companies and their workers. Basically what AB5 states is that unless a hiring entity can prove that a worker is truly independent according to three specific factors, that worker will be deemed to be an employee of the company itself. The factors are number one, the company must not have in any condition of control over the work. Number two the worker services must be outside the core business or the hiring entity and number three the worker must maintain their own separate and independent business. So this was all raised with much fanfare and rightly so was called the death of independent contractors in California because unless you qualify for one of the exemptions that’s under the statute, pretty much all workers fall within an AB5 framework and they can be deemed employees. It’s only those that are providing true outside services like they have bookkeeper or CPA or law firm or videographer that really qualify outside the scope of AB5. The statute really is meant to pull as many people as possible into the employee relationship however from a tax perspective despite all the fanfare on the labor side, it doesn’t really have any impact. The reality of the situation is that the EDD has been using an AB5 framework for quite some time. So what I mean by that, well the reality is that when you go through an employment tax audit, EDD is already looking at control. Control was a previous factor under the old past and now really

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What Are the Differences Between the Federal System and the State of California?

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What Are the Differences Between the Federal System and the State of California? So the IRS tends to get a lot of flack but the federal system for tax is actually pretty well developed and here’s why the IRS is an administrative agency so as an administrative agency it makes rules interpreting the way that it’s going to enforce the tax law and it makes rules to govern what will happen if you get into a dispute with the IRS so the IRS is essentially a rulemaking Authority but in addition to the IRS you’ve got a Tax Court and what the Tax Court does is the Tax Court is a judicial system you’ve got judges it’s a court and you’ve got people in all 50 states who are litigating tax issues in court and there’s a series of judicial opinions that come out and what happens is those judicial opinions function as a check against the IRS so the IRS isn’t allowed to just ignore a judicial opinion so what happens is you’ve got this system of pools that’s created on the administrative level and then you’ve got this judicial check which functions against those rules so you’ve got this really well-defined harmony between the administrative system and the judicial check the system that operates and enforces the IRS rules and you can see that and a lot of the procedure that’s come out of the IRS level is it’s very well shaped by the courts in California you don’t have as good of a judicial system number one if you’ve ever been to court in California you know how difficult it is to get in there in.

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Recent Case History Impact in Multi States

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So I Want to Talk About the Recent Case history that has impacted the multi-state landscape and how we got to the place that we’re at today so the first case I want to talk about is complete auto transit versus Brady so complete auto transit versus Brady basically set up a system where the states are free to make independent judgments about what goes on in their state borders absent any sort of federal preemption so what that means is if the federal government hasn’t ruled that something is a national activity and it falls under the Commerce Clause of the Constitution that essentially the states can control what’s in their own borders so that was the first major case because it gave the states the power to basically operate as they see fit within their borders the second case is a case called quill quill was a Supreme Court case in the nineties and quill is significant because well basically ruled that unless a company or an individual had sufficient minimum contacts with a state that the state couldn’t charge sales or use tax and so this was significant because for the first time it mandated that company at least had to have some basic physical presence or some substantial contact in order for a state to mandate that a charge sales and use tax so quell was an extremely unpopular decision it states.

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