As wholesale distribution companies continue to grow and stretch their physical and economic footprint, salespersons, delivery vehicles, and support personnel cross state lines more frequently. These company expansions often mean establishing physical locations in other states or targeting similar companies for acquisition or merger in order to gain customer service efficiencies and open new markets. Internet sales become increasingly important as they allow businesses to market to customers nationwide without creating additional travel and payroll expenses. Whether employing expansion strategies or functioning under normal operations, distribution companies should be mindful of the tax issues when operating in multiple states.
Most Federal tax law applies consistently to companies, regardless of geographic or economic footprint, which allows companies to operate with a reasonable degree of certainty. However, multi-state companies must comply with the laws of the state and local jurisdictions in which they do business, each representing a separate taxing authority with its own rules, regulations, and interpretations. These overlapping state tax requirements make it difficult for a multi-state distribution company to determine if it is subject to the tax laws of a particular jurisdiction. This often leads to uncertainty when making decisions regarding income tax filings, sales tax filing and collection, business license requirements, and property tax filings. In addition, when targeting a company for acquisition or merger, it is vital to review its compliance with tax laws in order to determine whether or not a future tax liability may exist.
With the nature of the issues associated with multi-state taxation and the issues that may arise with non-compliance, wholesale distribution companies should routinely consider the following best practices:
- Review the states in which the company operates to determine compliance with applicable tax laws and regulations. This review should include states where physical locations are present, as well as states where shipments are delivered and salespersons and service personnel (both employees and independent contractors) travel.
- Review sales and use tax compliance processes to determine if appropriate customer documentation is being acquired regarding exemptions and jurisdiction applicability and whether not sales taxes are being charged and remitted to the appropriate jurisdiction.
- Convey to salespersons, accounts payable, invoicing, and accounts receivable personnel the need to communicate any activities in new jurisdictions in order to ensure proper assessment of compliance requirements.
- Discuss with legal counsel the states where operations are conducted to determine if qualification in those states has either occurred or is necessary.
- Integrate a comprehensive review of the multi-state tax compliance function for any acquisition or merger target during the due diligence phase.
If you would like additional information or assistance with tax compliance issues when operating a business in multiple states, contact Kassouf & Co.