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Don't Ignore The Tax Consequence

Jun 29, 2009

I'm not a tax expert.  In fact, I admit that I prefer to avoid questions related to taxes. .. that doesn't mean I ignore taxes altogether though.  Fortunately, I have a pretty good idea of what I know well enough to provide advise and that line where I need to get help.

Unfortunately, many firms or business managers ignore or are ignorant of activities that can create significant potential liabilities for their firm.  Nexus is a legal term that essentially means an event or activity has ocurred that allows a state or city to have the right to tax the company.  In recent years, states have become more aggressive in their efforts to find new revenue streams.  Or, put in other terms, to find a means to tax new entitities, especially if those companies have out of state addresses.

 To create "Nexus", each individual state makes the rules that determine when Nexus takes place.  This event can vary by state.  Unfortunately an item that creates Nexus in one state may not create Nexus in another.  this means that you could be surprised or een schocked by what events might trigger Nexus.  For example, in some states, Nexus can be created by having a sales person call on potential clients or even display merchandize at a trade show.  In other states, hiring or more precisely paying an employee that resides in that state can be a triggering event for Nexus. 

The question that may be asked is, "What does this mean?  Does it matter at all?"  There isn't a clear answer to those questions.  Once Nexus is established, the new state now has a right to tax and potentially audit the company.  In theory, the state has a right to only the portion of their income that relates to sales within their state.  The practical realities can vary however;  my home state is Indiana.  Some years ago, I recall a situation where Ohio was able to establish Nexus.  At the time, I said to our tax acountants "Well, this really menas, doesn't it, that Indiana can no longer tax 100% of our income but not the portion in Ohio?" 

I remember her reply well, "In theory, Mike, you are correct.  Unfortunately, it never seems to work out that way.  One state may not recognize some portion of the claim of another state.  Usually you end up paying taxes on more than 100% of your income."

Paying taxes in another state also means the time and cost of preperation of another return.  Regards of whether the return can be completed by internal personel, or use of external tax experts, there will be time consumed to gather the information and cost for preparation.  These are costs in addition to any costs prior to this new return.  In the case I experienced, the equivalent Ohio tax rate was also higher than the rate we previously paid in Indiana.

What steps should you take?  The primary thing to remember is--- don't forget the potential for new tax concerns.  Talk to your tax advisors before you make a decision.  It is always easier to fix a problem before it happens than after the problem occurs.  Sometimes you can't put the genie back into the bottle.

More from Michael P. Landrigan…

About the Author

Michael is a business professional with over 31 years experience in finance, working as a Controller, Vice President of Finance and Administration, and CFO. In those positions, he has been effective in leading not only the accounting function, but MIS and HR as well.

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