The broad variations in state tax requirements — what’s taxable and what’s not, the threshold for collecting sales tax or paying income tax, how and where to register and file — make it difficult for companies doing business across multiple states to remain compliant with economic nexus rules.
You may be underpaying (in which case get ready for penalties) or worse, overpaying. It’s a costly problem either way — and although not a new issue, changing laws have put a different spin on nexus.
Before 2018, for example, a company was only required to collect a state’s sales and use tax if it had a physical presence in that state. The result? Millions in revenue lost by states as ecommerce started to gain traction.
A Supreme Court decision (South Dakota v. Wayfair, Inc.) reversed the physical presence requirement, required every business with $100,000 in sales or 200 transactions in the state to collect and remit South Dakota sales tax. Other states quickly followed the South Dakota precedent, causing businesses to have nexus in many more locations than before.
Companies doing business in multiple U.S. jurisdictions also need to be aware of a second type of economic nexus beyond sales tax. If your company’s gross sales in particular states exceed a certain threshold, those sales would be subject to the state’s income tax.
The value of a state tax nexus study
As the laws changed, Magone & Company quickly went to work conducting state tax nexus studies to protect our clients. Word spread, and we began to receive inquiries from companies worldwide for the same service. Here are two examples of the results:
Health & beauty products wholesaler
A European company established a wholly-owned subsidiary in New York state with offices in New York City. The parent company approached our firm to find ways to mitigate the subsidiary’s tax burden, despite being told by its tax advisor that the U.S. tax filings were correct and appropriate.
After a comprehensive review of existing state and city laws and the subsidiary’s tax and financial records, Magone & Company amended the company’s tax filings to secure a refund of nearly $1.4 million in income taxes paid. We continue to serve as the company’s tax advisor.
Vitamin products wholesaler
The NJ-based subsidiary of an Asian manufacturer requested our help filing U.S. tax returns for a prior year as well as the current year.When we obtained the tax and financial records of the company, our review uncovered numerous discrepancies in previous tax filings related to carryover computations. In addition to amending previously filed returns, we also recommended changing the reporting of sales for the current year.
The total tax savings resulting from the work performed by Magone & Company was approximately $1.3 million, and the company has now retained Magone & Company as its auditor and tax advisor.
Who can benefit from a tax nexus study?
U.S. companies that conduct business in multiple states, as well as U.S. subsidiaries of foreign entities, generally have the most to save by conducting a tax nexus study. For more information, please reach out to the Magone & Company team.