If you're like most entrepreneurs, state and local taxes are probably taking a sizable bite out of your company's bottom line. But there's no reason to roll over and pay the tax collector. It's time to put some useful tax-saving strategies to work.
At the state and local levels, the tax landscape has undergone some major changes. "As the U.S. has moved from a manufacturing to a service economy, state and local governments have had to change the way they tax business activity to preserve their tax base," says Joe W. Neff, partner in charge of state tax consulting at PriceWaterhouseCoopers in Los Angeles.
In recent years, states have made more services subject to sales and use taxes. "A lot of states are being more aggressive than ever in this regard," Neff says.
States have also beefed up compliance efforts to boost revenue collection. "While many states find they don't need to raise tax rates, they are determined to collect all the taxes they feel they're owed," says Neff. As a result, a large number of states have established special compliance programs designed to locate businesses operating in their states that are not paying sufficient taxes.
To find out about company operations, states are sending out questionnaires, calling toll-free 800 numbers and attending trade shows to glean as much data as possible about taxable business activity, he explains. Some states have even opened audit offices in other states, established information-exchange agreements among themselves and with the federal government, and have refined strategies for tracking down companies they believe aren't paying their fair share of taxes.
Some state and local governments have even gone so far as to use private tax collectors to track down business taxpayers in their efforts to assess unpaid taxes on unreported business activity, says Elizabeth Burton, state tax specialist with accounting firm Grant Thornton in Chicago. Once tax hunters successfully locate taxpayers and collect the taxes owed, they share a portion of the levies collected.
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.