For many companies, especially smaller businesses, the tax code is a large source of unnecessary frustration. While the individual tax code is complex enough, the reporting and filing burden on companies is even higher. In addition to the federal requirements, each state has its own tax code which includes its own tax forms, payment thresholds, filing deadlines, filing schedules, and payment thresholds, among other unique requirements and obligations. Business tax compliance can be a true nightmare. Understandably, many small businesses are overwhelmed just trying to comply with the tax code. Working with an experienced business tax compliance attorney can help alleviate some of the stress associated with business tax compliance. In the meantime, here are three of the most important considerations to take into account when your business is trying to comply with the tax code.
- Find the right “nexus.”
A company will be required to collect local sales taxes if there is a sufficient “nexus” to the locality – whether that is a state, city, or county, among other jurisdictions. The legal term “nexus” is essentially concerned with whether there are sufficient connections to the locality so that it would be fair to burden the business that operates there.
Like most legal doctrines, whether there is a sufficient “nexus” is a fact-specific determination. There are some easy examples on both sides, though. For example, take a small business that operates exclusively in Maryland. This small business then sells a couple trinkets to someone who owns a pawn shop in Virginia – a fact which is unknown to the small business owner in Maryland. The Maryland business will not be liable for collecting Virginia taxes based on the sale of her trinkets a week later at the pawn shop in Virginia. Why? Because there are insufficient connections to the state. The Maryland business owner does not do any business in Virginia, has not made any attempts to do business in Virginia, and did not know that her goods would be sold in Virginia. It would be unfair to expect the Maryland business owner to collect and pay these taxes to the State of Virginia.
On the other end of the spectrum, there is a small business based out of Washington, D.C. that also sells trinkets. However, this small business owns a warehouse and two factories in New York. In addition, this small business also directly sells some of his goods every month to multiple retailers in the Empire State. Unlike the previous example, the D.C. business has plenty of connections to the State of New York – a warehouse, factories, and resellers. Further, the D.C. business is not only aware that his goods are being sold in the state, he intentionally sells the goods in the state. For these reasons, it would be fair to hold him responsible for collecting New York sales taxes.
- Register with the locality.
If there is a sufficient nexus between the business and the locality, then the business will typically be required to register with the locality, typically a state. The exact type of registration depends upon the state and the level of connections between the state and the business. For example, a company that has employees in a foreign state will likely have different registration requirements than one who only sells goods in a foreign state.
- Learn and follow the locality's tax code.
After registering with the locality, a small business will be required to follow that locality’s tax code. This involves learning and properly following each locality’s unique tax laws, tax forms, reporting requirements, and payment thresholds, among other aspects of the tax code.
For many localities and states, these requirements can seem onerous and difficult to understand. For example, here is the way several states treat electronic filing of taxes – a seemingly benign area of tax law that most companies would incorrectly assume to be uniform across the country. In Virginia, almost every corporation is required to file electronically – although there are hardship waivers for certain businesses. Maryland, on the other hand, does not require businesses to file electronically. Similar to Maryland, Washington D.C. does not require electronic filing. The law is even more nuanced in New York, with different requirements for businesses depending on the businesses’ entity form, its access to broadband internet, and the method used to prepare the tax returns.
The Tax Code – A Moving Target
Unfortunately for small business owners, the hassle of complying with the tax code does not stop there. States, cities, and counties are constantly revising their tax code. This means that even if a small business owner learns the tax code and all of the filing requirements, it will still be required to stay abreast of any changes. For this reason, it is best to contact a knowledgeable tax attorney who can ensure that you are up-to-date on all your taxes while also minimizing any potential tax liability. That way, you can focus on running your business instead of staying up-to-date with the constantly changing tax laws.
If you have questions about business tax compliance, schedule a consult with business taxation attorney Stephen Thienel today. Mr. Thienel has decades of experience assisting clients with tax compliance issues throughout, Maryland, Virginia, and the District of Columbia.