State taxes can be daunting. There are so many ways companies can trip into nexus creating activities in multiple states and suddenly find themselves in a compliance nightmare. I see this situation often in my practice. Many of my clients are in the technology industry. Silicon Valley moves at an alarming speed (well, except for Highway 101 – but that’s another story!), and companies move people and product into multiple states just as quickly – sometimes without even realizing the ramifications. State taxes – including sales tax and income tax are often an afterthought, but then come back and rear their heads when a company is getting its next round of funding or needs a financial statement audit. It is at this point that people usually take notice of the state tax situation. Why? Here’s a scenario:
Tech Co has been utilizing salespeople, based in California and Texas to sell its new “SaaS based solution” since 2012. The company’s employees and third party contractors travel frequently across the US to sell this subscription based service. Salespeople have ramped up activities from 5 states, to 10 states, to 20 states in the last 3 years. They engage in selling, training, consulting activities in various states. But it’s SaaS – no tangible products, so no sales tax – right? Well, wrong, actually. Some states treat SaaS as a taxable service or product. (Here is a prior blog that discusses the taxability of SaaS) As part of a key round of funding, the Tech Co now needs a financial statement audit. One of the first questions the audit firm asks is “How big is your accrual for sales tax?” Hopefully the answer isn’t “Sales Tax? What sales tax?” This is often where we come in – and assist clients in voluntary disclosure projects.
What does it look like?
We consult with our clients and perform a nexus and taxability review. This helps to determine where the company is taxable and how their products and services might be treated for tax purposes in various states. At this point, we also perform an exposure analysis. If you’ve been taxable in a state for several years and have not properly remitted sales tax, how much money is at stake? (That’s what the audit firm wants to know too.) Once it’s been determined where you have nexus (or taxable presence), since when, and for how much potential liability, the next question is generally, “now what?” Now, we engage in the process of fixing this issue with the states – both retroactively and going forward. The retroactive part is where the Voluntary Disclosure process comes into play.
VDA Benefits
Most states allow for companies to come forward anonymously (through a third party) and come into compliance. In return for voluntarily coming forward, states generally offer some incentives. While they vary by state, the advantages for coming forward voluntarily through the states’ official programs often include the following:
- Reduced lookback period – most states require a 3 or 4 year lookback for both sales tax and income tax. So, if your company has been engaged in business for many years, some of the potential liability will be reduced.
- Waiver of penalties – most states waive all penalties associated with late filing, underpayment, etc.
- Ease of filing – in voluntary disclosure we generally deal with a point-person who assists through the entire process. There is still plenty of paperwork to be filed in order to bring a company into compliance, but the process is smoothed by having a point of contact (a real person with an actual direct phone line) to reach out to.
- Schedules vs. returns (sales tax) – most states also allow the delinquent sales tax to be reported on a single schedule – instead of requiring multiple tax returns. That makes the process of going back retroactively much easier.
- Reduction or waiver of interest – a few states still allow for the waiver of interest as well, but it’s not common, as most states statutorily assess interest. But even in states where the interest is not waived, the process to pay the interest is made easier by going through the process.
- Leniency on extension/filing – Often we work with clients who are coming forward in multiple states at any given time. It can be difficult for them to accumulate all the data quickly in order to engage in the filing. By working through the voluntary disclosure process, we can often request additional time to file and bring the client into compliance.
Voluntary disclosure (also referred to as the “VDA” process, for the voluntary disclosure agreement that is signed between the company and the state), is generally a win-win for everyone involved. Contact us if you need an overview of your multi-state tax situation. We can quickly tell you if a VDA project is the best way to get your company into compliance and find you some peace of mind!
