Have you noticed that states are coming up with more and more creative ways to tax you?
In Texas, the law doesn’t allow for an income tax, so they’ve added a gross margin tax. The gross margin tax is based on gross income plus a couple of choices in how to take a minimal number of deductions. In other words, it’s an income tax where the income is much higher then under regular rules. And because it’s not an income tax, per se, it’s legal.
Ohio has a CAT (community activity tax) which is a calculation based on business activity within the state. Ohio is getting pretty aggressive though, and deciding if you have ownership in related businesses (under their definition), those businesses could be subject to Ohio tax as well.
California has a franchise tax. They also have income tax and some of the highest sales tax in the country, so this is just one more tax that is targeted right at business owners and real estate investors.
And, of course you have annual income returns, quarterly and annual payroll return and monthly, quarterly or annual sales and use tax returns.
This is where it starts to get difficult. Who is watching all of your tax filing requirements? The easy answer might seem to be “my CPA” or “my bookkeeper”, but are you sure that someone is watching ALL the states and ALL the requirements?
It’s too easy to let something slip through the cracks these days as the rules keep changing.
Here’s an example that I’m afraid we’re going to hear about all too soon in the very near future:
Sara’s business was located in Colorado, but she traveled to Arizona, Texas, California and Nevada to sell her products. She knows that she has to collect and pay sales tax on sales she makes at the events she does in the states. But after that, if someone orders from her on the phone or via her website, she only collects sales tax on sales to Colorado, which is where she is. She has another business that provides services. She and her father (who works for her) visit other states to meet with potential clients, but then most of the work is done back in their home offices in Colorado. She doesn’t pay income tax to any other state then Colorado.
That was until the state audit notices turned up. She had stayed long enough in Arizona and Texas that it was considered that she had sales tax nexus there. Plus, she hosted her website in Delaware so she had Delaware nexus. And even though the services and products companies were separate, they got added together for determining the ‘economic presence test’ for California. Over 25% of the total revenue came from California, so they had an income tax issue in California as well.
Suddenly, they had states from all over demanding to see their records in audits and sending long questionnaires!
Sara decided to just ignore them all and figured that she was in Colorado and all her assets were in Colorado, so there was nothing that Arizona, Texas, California or Delaware could do to her.
She was wrong.
They started seizing assets in Colorado just a few weeks ago.
Sara wasn’t one of our clients when this all started, but she did have a good, local CPA who understood Colorado and federal income tax law. And she had a good bookkeeper who knew how to track sales and properly complete the Colorado sales tax reports.
But no one was paying attention to the overall NATIONAL issue she had.
Who is watching your NATIONAL tax profile? Who is checking your nexus for income tax, sales tax and ‘other’ taxes?
You don’t need to know everything when it comes to taxes. Nor should you – you need to focus on what you know…making money in your business. But that doesn’t mean you can just hire someone and expect them to know what you need.
It IS your job to make sure you’ve got the right experts in the right places, asking you the right questions.