Middle market companies are on a mission to build sustainable growth while simultaneously managing internal and external forces attempting to blindside that growth. Unfortunately, multistate taxes can be one of those forces or an inhibitor to growth (additional cost of doing business). Consequently, most companies when faced with multistate tax issues are focused on risk management; however, there is another side to multistate taxes that can be an accelerant (cash infusion) to growth – something we call “opportunity management.”
The “Inhibitor”
Most businesses have had the misfortune of experiencing the “inhibitor” side of state taxes whether through audits, notices or the random nexus questionnaire received from a state. These painful lessons are sometimes self-induced by playing the “wait and see game,” or they are simply a product of not being proactive and/or not being aware of state tax law requirements and obligations that are created by having a taxable presence (i.e., nexus) in a state. Once nexus is created, then a whole host of issues arise from an income tax, gross receipts tax, franchise tax and sales and use tax perspectives that are deceptively simple and endlessly complicated. As companies grow, they become more exposed to the growth “inhibitor” of state taxation, i.e., “risk management.”
Risk management causes a company that used to file in one state (their headquarter state) to find out that based on new state tax law or court case rulings that the company now has nexus in thirty states for sales tax or 10 states for income tax purposes by simply having sales in a state (no physical presence).
Risk management makes a company aware that not only do they have nexus in additional states, but they now have to create a matrix to keep track of the taxability of what they are selling in those thirty states.
Risk management is when a company quantifies their exposure in thirty states and learns that they not only had nexus in those states for two years, but they had nexus in those states for ten years. That’s when a company first hears the term, “Voluntary Disclosure Agreement.”
The “Accelerant”
But what about the growth “accelerant” of state taxation? Does it really exist? If so, what is it?
The growth “accelerant” of state taxation lies in a few areas such as statutory and negotiated credits and incentives, sales tax exemptions, tax abatements, refundable income tax credits and utility rate reductions, and even income tax filing methods such as the methodology a company uses to source sales to a state; the apportionment formula used; the treatment of the gain on the sale of assets or an interest in another entity; whether an affiliated group files combined unitary returns or consolidated returns in a state, etc. This is “opportunity management.”
Opportunity management is the fun stuff. It’s the stuff that pays a company back for the choices they are making to grow their business. The state tax rules help a company pay for the actions they are already taking.
For example, opportunity management is helping a company identify investment tax credits, jobs tax credits, industrial machinery or manufacturing credits, training credits, film tax credits, cash grants, etc. for investments the company is already choosing to make. Some of those credits are refundable credits and some simply reduce a company’s tax.
Opportunity management is reviewing a company’s purchases and is finding that many of those purchases qualify for sales tax exemptions resulting in refunds of sales tax.
Opportunity management is reviewing a company’s state income tax returns and discovering they are filing stand-alone entity returns when they should be filing combined unitary group returns which allow the losses of one entity to offset the income of other entities.
Opportunity management is reviewing a company’s state income tax apportionment schedules and identifying errors in sourcing sales by state that ultimately reduce the amount of taxable income that is apportioned to high tax states.
Conclusion
Companies of all sizes (and their state tax consultants) can spend a disproportionate amount of their time on risk management and miss out on the benefits (and fun) of opportunity management. Don’t let that be you.