When evaluating new markets for potential business expansion, there are countless considerations – judging market demand, selecting the right site, evaluating the local workforce, determining the ownership structure, etc. Each new expansion opportunity essentially is its own startup.
One area that is easy to overlook is compliance. With the downturn in the economy, taxing authorities at all levels are scrambling to balance budgets, thus giving rise to more taxpayer audits. Not only are state, county and local governments auditing on their own behalf, they are also contracting with outside firms that have the ability to audit businesses on behalf of all governing bodies that they represent.
In addition to being more active in the marketplace, here are some trends we have identified in our compliance practice:
• Out-of-Jurisdiction Bullying – Taxing authorities do not necessarily feel like it is their job to be a friend to business. This is especially true if you are the new kid in town. While you would hope that taxing authorities would grant leniency to a new business that is non-compliant despite honest efforts, this is often not the case. Payment of back taxes, plus interest and penalties for non-compliance are the norm.
• Inconsistent Tax Treatment of Transactions – Wouldn’t it be nice if there were a universal set of rules that governed all elements of taxation and licensing? Wouldn’t it also be nice if, when you entered a new market, there was one central location to obtain all of your necessary permits and licenses? Unfortunately this is not the case, and the inconsistency in the rules can sometimes lead to double taxation. This most typically occurs when the revenue-producing activities can be judged to have occurred in multiple locations under different sets of rules.
• New Revenue Raisers – The Commerce Clause is a federal statute that essentially says that states cannot enact legislation or operate in a fashion that discourages commerce across state lines. As the money runs short at the state level, states are pushing the envelope with respect to the Commerce Clause and daring the federal government to strike down new and aggressive tax legislation. A high profile example of this is the “Amazon Tax”, which many states have enacted to capture internet sales tax from online retailers that deploy local affiliate partners to sell their products.
• “Economic Presence” v. “Physical Presence” – Physical presence has traditionally governed a jurisdiction’s ability to tax a transaction. Do you have employees or agents that sell your product in a particular jurisdiction? Do you have a storefront, distribution facility, or other business location in the jurisdiction? If the answer to either of these questions is “yes”, then you likely meet the physical presence standard for taxation. As states and localities have ramped up their collection efforts, physical presence seems to be giving way to a new “economic presence” standard that is intentionally broader and less well-defined.
So when you are evaluating new markets, what steps should you take to make sure you have the compliance element covered?
• Engage a professional advisor, typically an attorney or accountant, who is experienced in multi-jurisdictional compliance.
• Learn the local rules and determine the compliance costs of entering a new market before you go there.
• Assign ongoing compliance responsibility to someone within your organization or outsource that responsibility to a professional advisor.
• Assess how changes in your business model (revenue streams, product/service delivery) might affect taxing and licensing compliance.
Finally, what do I do if my business is selected for audit?
• Do not represent yourself. Understand that spending money for skilled representation will yield better results than going it alone.
• Establish with your professional advisor a game plan for the audit, including an expectation of audit results and representation fees. This will keep you from spending $5,000 to fight a $2,000 tax assessment.
• Determine how the results of an examination in one jurisdiction might affect your business in other markets. Make changes as necessary.