Click to Print

I Vant To Suck Your . . .

. . . bank account? To keep the lifeblood flowing in your financial veins, protect yourself from the local tax bogeyman.
March 1, 2000

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.

What You're Up Against

In their search for business taxes, states are attempting to prove what is known as "nexus." This means declaring a specific business activity (such as having a sales office located within a state) subject to state taxes. Nexus can also be established if an out-of-state company maintains tangible personal property in that state. Owning or leasing a warehouse in the state or owning land also creates nexus. Once a state proves nexus, it can subject a company to income, sales and use, and other business taxes.

Following the example of many state governments, municipalities are also taking steps to prove nexus. As a result, more business activity is becoming subject to local sales taxes.

As a business owner, if you find your company has tax-collection liabilities in a large number of states and localities, it's a good idea to determine exactly what activity is causing that liability, says John Logan, senior state tax analyst with CCH Inc., a provider of tax and business law information in Riverwoods, Illinois. After consulting with your tax advisor, you may find it advantageous from a tax standpoint to move a part of your business into a state with a lower tax rate.

In determining where you have a taxable presence, be sure to take both income, and sales and use taxes into consideration. Remember that when it comes to assessing income taxes on your business, your company must have some property and payroll in the state.

This type of review will help you determine in which states you have tax filing requirements and exactly what steps you need to take to be in compliance. If for some reason you have neglected to comply with the tax laws in a particular state, it's a good idea for you to try to reach an agreement with the tax collector there, says Neff.

One option is to take advantage of state amnesty programs to settle your outstanding liability. Under such programs, explains Neff, "states may be willing to reduce a company's tax bill for prior years and in some cases waive interest or penalties or both."

For Your Protection

There are a number of strategies you can follow to keep state and local governments from overtaxing your business. Here are some of the more important ones:

Contact Sources

CCH Inc., 2700 Lake Cook Rd., Riverwoods, IL 60015,

Grant Thorton, (312) 602-8977,

PriceWaterhouseCoopers, (213) 356-6191,