rs-multi-state-tax-compliance-representation

What are the risk factors for doing business in multiple states? Well, when you operate in one state, your circumstances are pretty easy to control. The facts of just your business, you have control over how those change. You’re only worrying about your state’s law. And it’s a much smaller scale. The problem is with a growing number of businesses today, a growing number of businesses are reaching out and having contacts with multiple states. So there’s a number of different ways that this creates risk for businesses.

Number one is shifting facts. So as you widen your net, as you get broader and bigger, and as your level of contacts increases with different states, you can’t always control the facts of your situation. So for example, if you have an employee in your company and they move to a different state, well, now you’ve just created nexus in that state for circumstances that are really kind of beyond your control.

The same thing with vendors. If you’re using vendors in multiple states, then you have to be worried about their contacts and their practices to make sure that their activity is not creating nexus for you in a state that you didn’t intend.

The next part that’s really complicated and that creates a lot of risk is the changing laws. So
nexus laws and the laws around multi-state businesses, number one, they’re very actively changing at this moment because a lot of states are trying to broaden their tax base. They’re trying to create as many taxpayers as possible to fund the revenue coffers of their state.

So the laws are changing in these areas, but it’s not like you’re dealing with one set of laws either. You’re dealing with laws for all 50 states. And while a lot of states do things similarly, there are some very pronounced differences between the different states. There’s not only difference from the law side of things, but there’s also differences from the enforcement side of things.

So you take a state like California, California is very, very aggressive towards out-of-state businesses and very unforgiving when an out-of-state business claims ignorance to California’s laws.

So that’s kind of the overall landscape of why multi-state taxation creates risk for businesses that operate in multiple states. And the best thing that you can do is try and protect yourself from that risk by understanding it and taking actions to mitigate it.

So the first thing that you should do is not contact the states. I can’t tell you how many prospective clients that I talk to where somebody has reached out to a state Collections officer or somebody in the out of state compliance unit and inadvertently stuck their foot in their mouth by something that they said, which the state may or may not have known ahead of time. So it’s not a good idea to call them and volunteer information to the states. Rather the first thing that you really need to do is assess what your risk is. So you want to look at your level of contacts and your sales volume in the states that you think you have liability in. You want to kind of gather that information together so that you can better assess what your risk is and then even after you assess what your risk is, you really want to speak to a multi-state taxation expert. Speak with an attorney and have them go through and outline what your options are. A lot of people are too quick to say, “well we have Nexus in a particular state, we owe money in a particular state so let’s just go ahead and give this state all this past tax liability.” What they do by doing that is they inadvertently subject themselves to more liability and more risk than what they would have owed if we had created a measured multi-state tax strategy and executed that ahead of time. So a lot of people are very quick to jump into action and what I would encourage you to do is measure twice and cut once. Really solidify what your risk is, solidify what your options are and then pick the best option for your organization in order to minimize your liability and create a compliance path so that you have a platform to operate off of in the future. It’s not just the past tax liability you have to worry about, it’s about creating stability for your organization in the future so that they can continue to make sales and not have to worry whether they’re going to get into trouble or not. So number one it’s about mitigating liability and number two it’s about creating a compliance plan going forward.

A dropshipping transaction involves a situation where a seller is selling a product to a buyer but shipping that product to the buyer’s customer which may or may not be located in a different state.

Dropshipping is an incredibly complicated thing from a tax perspective because you may have one party or multiple parties in multiple jurisdictions. You could have a California seller, you could have a Florida buyer or you could have a customer in New York where the product is ultimately going to.

So the biggest challenge for tax professionals in this situation is where do you pay the tax to? With customers in different states, this is really important because there are a variety of issues around which state has jurisdiction to collect the tax revenue that make this incredibly complicated.

In a dropshipping transaction, you want to make sure you understand the different types of situations that your company faces and then create a plan around how to address those from a tax filing perspective. Then in your sales process, you want to ensure that you’re collecting the appropriate documentation and you’re doing what you can to mitigate your own risk in this situation.

The problem with a lot of dropshipping transactions is many companies assume that because product is going to one place or because their customer is located outside their state that they’re not obligated to collect tax, and unfortunately the way that most state sales tax laws are written, particularly surrounding dropshipping transactions, is it puts the online business on the hook for liability unless they’re collecting resale certificates from that particular state or they’re taking other appropriate measures to mitigate their risk. So there are a lot of tax consequences to dropshipping.

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Well this gets very complicated with an internet business depending on what you’re selling and where you’re selling it to and your level of contacts with that particular state, whether they’re physical contacts which a lot of internet businesses don’t have or more commonly economic contacts. Economic contacts can be defined by a dollar threshold. Let’s say you make a hundred thousand dollars in sales in a state. Or they can be designed by a transaction threshold, so let’s say you do 200 transactions in a particular state. So it gets really complicated to determine the amount of tax that you owe because each state kind of has similar rules but they’re different in a lot of ways. So the first thing that you do is you figure out based on your sales summary what states you are doing business with the most and that determines the nexus rules in those jurisdictions so that you can make sure that you’re appropriately collecting tax or if you’re not collecting tax, that you’re not at risk or have any liability associated with that. If your business is expanding, you want to know where the threshold is, when you’ve got to turn the switch on so that you start collecting tax in that jurisdiction and then with the other states, it’s about planning. So it’s about looking at your level of contact, looking at your sales and determining whether or not you need to collect tax in that jurisdiction but the way that you do this is you start with your top ten, your top 15 states that you’re doing business in which may represent 65 to 80 percent of your sales and then you look at other subjects where you may have less activity. That’s the best advice I can give to internet businesses or businesses that do a lot of business over the internet in order to account for their sales. Now the good news is there’s a number of software programs, there’s a number of tools, we’ll help you execute this part of the process but it’s not just the execution that’s important because software will only do the execution part, it won’t do the planning part. Software doesn’t think independently, software relies on the inputs it receives to spit out outputs. What you need before you get to the execution part, so you need a good strategy. Going in you need to understand where you’re exposed, what the risk is, what your filing requirements are, what your paying requirements are and then build a plan around that and use software to automate and execute. This doesn’t have to be a long drawn-out process, this doesn’t have to be an insanely costly process, you don’t have to start filing sales tax returns in all 50 states but you do want to plan going in and then you want to make sure you can execute that plan effectively so that you’re not at risk in the future.

So the most common problem I see for multi-state businesses is a failure to understand what the problem is and what I mean by that is depending on your level of sophistication, you may rely on a CPA for tax advice. You may have the benefit of having an internal CFO or an internal controller or somebody else who kind of guides you through the financial world. The problem with most companies is when most companies think about taxes, they’re thinking about federal income tax and potentially state income tax, but if they’re thinking about state income tax, they’re only thinking about the state that they’re in. So the problem with multi-state taxation is you’re bringing in laws of different jurisdictions that may be out of the core competency of the people that you trust for your tax reporting and advice. Let’s take a CPA for example. Most CPAs don’t specialize in multi-state taxation. If you think about your CPA, your CPA probably specializes in preparing federal and state corporate income tax returns or they may do individual returns as well and so their bread-and-butter, their day in and day out, is preparing federal and state income tax returns. The problem in doing that is a multi-state taxation is a different animal, so in preparing your federal and state income tax returns, a lot of accountants don’t realize that the activity that you’re conducting is creating Nexus or subjecting you to liability in different states. It’s not something that they generally catch because it’s not something that’s that’s in their wheelhouse or that they’re thinking about. I mean you’re watching this video right now. Take your own individual situation. When was the last time you talked to your CPA about multi-state tax consequences? When was the last time your CFO brought up “hey you know we’re expanding in all these different states, what are the jurisdictional requirements in different states?” Multi-state taxation is not an issue that a lot of companies think about. You don’t really think about the engine of your car unless the check engine light comes on but because of the shifting landscape in this area, because the states are aggressively expanding their tax bases, it’s a huge area of risk for a lot of businesses so it’s important to understand the many variables that go into multi-state taxation and make sure you have an appropriate and effective plan for dealing with that.

Should I hire a CPA or should I hire a tax attorney? So the answer to that is it depends on what the situation is. That depends on the cast of characters on your team and what their level of experience is and it depends on how you want to solve the problem. So what I will say generally is with people within an organization and with CPAs, a lot of those people don’t have sufficient multi-state tax background. Just because I’m a tax attorney doesn’t mean I’m an estate planning specialist or I know a whole bunch about estate tax. It doesn’t mean I know a whole bunch about foreign transfer taxes. There’s a variety of things that are tax that are not in my wheelhouse as a tax attorney. Multi-state taxation is something that’s in my wheelhouse but the reason it’s in my wheelhouse is because I practice in this area of law and I do this all the time for clients who are multi-state businesses. A lot of CPAs and a lot of internal company people don’t have that level of experience so regardless of who you decide to hire, you want to make sure that you’re hiring somebody with sufficient experience to solve the problem. Now in a lot of cases, not all cases, but tax attorneys generally cost more than CPAs. We usually bill out at a higher rate so it’s also important to assess the problem and determine what solution you need. If it’s a simple reporting issue and you have a good multi-state CPA, that person might be the most appropriate person to handle it. Alternatively if you’ve got somebody in your company who has run a multi-state tax department or who has a background, you’re probably better handling it in house but the problem with multi-state taxation is it’s not just about the law. The law is complicated because you’re dealing with multiple jurisdictions. It’s about the procedure and it’s about how states handle collections and enforcement action against taxpayers that are outside of their jurisdiction and it’s about understanding the playing field. On the landscape of that, oftentimes what I usually recommend is a multi-prong approach. I’m a big believer in efficiency for companies so what I tell them is look, engage with the tax attorney, figure out what the strategy is and then outsource the execution of that strategy to where it makes the most sense. So a lot of multi-state clients, for example with our firm, come in for consultations. They’ll sit down with me, we’ll go through 60 or 90 minutes and we’ll develop a strategy and then they walk out of the office or hang up the phone and we’ll take that strategy to their internal people or to a CPA and help them execute it. So when making this decision, you want to make sure that whoever you’re going to have lead the team has the appropriate level of experience and then try and subdivide the work among who it makes the most sense to. Some people prefer to have our office handle everything and that’s okay but what I try and do for our clients is promote efficiency and really it’s about spreading and dividing labor between those three buckets of people on your team and doing what makes the most sense for your organization.

You know, well that’s a broad question. It obviously depends on the facts, depends on how much trouble you’re in and it depends on how much work we’re going to do. So the answer to that is I can’t tell you off the bat but what I will tell you is my hourly billing rate is $525 an hour, our junior paralegal bill is at $150 an hour and then the rest of our attorneys and staff are somewhere in between. For most multi-state taxation issues the important part is strategy. So a lot of clients come to us and we’ll do a consultation we do a paid consultation. We’ll sit down for 60 or 90 minutes and we’ll develop a strategy and then in some cases, that client can just go off and execute that strategy and they don’t need us any further. Some clients after that strategy session, after we’ve built the plan, want us to stay and help execute the plan for one reason or another. So in those situations we usually bifurcate the work between our senior attorneys which are anywhere between $350 and $525 an hour and then our paralegals which are anywhere between $150 and $225 an hour. From a cost perspective the most important thing that I like to stress is efficiency. So I certainly don’t want to bill anybody any more than I have to. I don’t want to bill them any less than what it takes to get the job done but I’m a small business owner myself and trust me, I understand cost. One of the benefits of the way that I look at cost is I’m approaching this from a small business perspective. I want to make sure clients are getting value for the services that we’re providing. I want to make sure that

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