Many pundits say you should not let the “tax tail” wag the investment or financial dog. However, if you have ever seen a large dog swinging its tail gleefully about, you certainly know the amount of unintended damage that may be done. We absolutely agree. Don’t let the tail wag the dog, but also don’t ignore the tail or you may lose something of value. In our first post, we mentioned nexus could cause you to need to register, file returns, and pay taxes; in this post we will discuss the costs of these three activities and the costs of not being aware of nexus.
When a business entity has activities in a new state the business may be required to file with the Secretary of State to register the business and receive the right to conduct business in that jurisdiction. Typically, there is a fee for an initial filing plus recurring fees on an annual or biannual basis. Registration typically includes filing a form with the state that lists key people in the organization and identifies an “Agent for Service of Process,” which is generally the person to contact in the event of a lawsuit. Failing to register or file recurring forms may result in penalties and may cause legal headaches in the event of a lawsuit.
There are two main types of tax returns you may need to file — income tax returns and sales tax returns. As with registration, the requirements for filing income and sales tax returns vary from state to state. Filing returns in a state other than your home state means having either an employee or an outside professional who understands the rules of the state. Employees or professionals who understand the tax return rules of other states are not inexpensive.
With both types of returns, you need to make sure you respect the filing due dates. Failing to file returns by the due dates may result in penalties and be costly, especially if the failures extend over many years.
Both income tax returns and sales tax returns typically require the payment of taxes when you file them. With income tax returns, the taxes are paid by the company based on the activities they conduct within the state (or just the fact they conduct activities in the state). With sales tax returns, taxes are paid by your customers and you collect and then pay them over to the state. Failure to pay your income taxes or to collect/remit sales taxes could result in substantial penalty and interest charges.
The Long Tail
In marketing the “Long Tail” refers to niche products or services that may be attractive to ever-smaller segments of the market. With taxes and returns, the “Long Tail” refers to the statute of limitations; the rules that prevent state agencies from opening up cases against delinquent taxpayers after a certain time has passed. Unfortunately, the filing of the return (and the payment of any taxes) is the event that starts the clock running on the statute of limitations. If you don’t file and pay, the limitations period does not start. Not knowing about nexus thus could create a large (and perpetual) financial risk to your company. If this happens your accountant may then require that you establish contingent liability reserves and they would be similarly perpetual.
We hope you will let your curiosity wag your interest over to our final post where we will discuss strategies for planning for the impact of nexus on your marketing plan and budget.
Christopher La Puma is a graduate of Stanford University, with a JD and LLM (Tax) from Georgetown University Law Center. He has 18 years experience in domestic, state and international tax planning and controversy and is currently enrolled in Chapman University’s Executive MBA Program.
Joshua Applegate is the Director of Finance at IOS LLC where he manages accounting, finance, and human resources. Before joining IOS Joshua ran his own tax and accounting practice for 9 years. Currently Joshua is working on his MBA at Chapman University with an expected graduation date of May 2016.