Today more and more businesses, including construction companies, are experiencing growth outside of their home state. However, many don’t realize that doing business in multiple states can significantly complicate your tax compliance requirements.
With each state and local tax authority operating under different rules and regulations, it’s not easy to keep up. Understanding how multi-state business operations will impact your organization is critically important, specifically before an audit occurs. I recently discussed this topic with Tim Klimchock, Principal of SN’s Construction & Real Estate Group.
Q: Tim, what are you seeing with your construction clients as far as doing business in multiple states?
Tim: State and local corporate income and sales tax compliance is definitely on the increase. Compared to 5 years ago, even two years ago, more and more construction companies are finding opportunities outside of their home state. In most cases, it starts as a neighboring state, but then through word of mouth grows to other states. It’s fantastic for them, especially in such a competitive market, but as you know, it can lead to some complex state tax situations.
Shane: That’s right; it’s something that often gets ignored or brushed under the rug. Part of that has been because historically states weren’t coming after that income. But with the increased investment within state and local tax governments to enforce upon out-of-state companies, this has become a front-burner issue. The U.S. Supreme Court Case in 2018, South Dakota vs. Wayfair, certainly added to the aggressiveness and favorable tax laws to impost state taxes upon foreign companies.
Q: Have your clients had any interactions with the states as they grow more aggressive in collecting their state corporate income and/or sales taxes?
Tim: Some have, and we certainly don’t recommend just waiting to see if you are caught being out of compliance. A company that is not filing taxes in each state they are doing business in is unfortunately just waiting to be caught. It’s a waiting game that has serious consequences, including extreme penalties and interest.
Shane: Absolutely, and that’s one thing we want to bring to the construction industry’s attention. Especially if you are a construction company contemplating a sale of your business within the next three years, then it becomes mandatory to become compliant as you conduct your sell-side tax due diligence.
Q: Can you explain the Voluntary Disclosure Program and its benefits?
Tim: Many states now have a State Corporate Income and State Sales Tax Voluntary Disclosure Program. A voluntary disclosure program allows companies to reinstate their compliance by resolving any occurred overdue tax obligations. Depending on the state and the program, a construction company may be able to settle up to three years of unpaid taxes without penalty, as a result of the limited lookback period. It’s an excellent deal for firms that discover they are non-compliant, especially if they are out of compliance for greater than the limited lookback period.
Q: In addition to voluntary disclosure, how have you seen construction companies successfully handle the process of state tax compliance?
Tim: Great question! State tax compliance is an area that many construction firms tend to overlook. It’s fine to get compliant, but if you don’t stay compliant, what’s the point. Companies that are successful with this are ones that go through the process of determining nexus and then develop a strategic tax plan based on those results. It’s complex and increases as the number of states and localities that you work in grows.
Which honestly, is why we have experts like you, Shane, to perform the nexus studies and design customized plans to ensure compliance for state corporate income and state sales taxes.
Shane: I appreciate that, and it’s one of the best parts of my job, helping companies determine their state tax liabilities and taking the stress and worry of compliance of their shoulders. Thanks for your insight, Tim. In our upcoming webinar, I’m going to dig even deeper into the subject of Construction State and Local tax compliance, as well as strategies to minimize your risk and cost.
Register today to reserve your spot.
Shane Finn, Strategic Tax Advisory Manager
As a leader of SN’s State and Local Tax (SALT) Practice, Shane applies his significant experience to help clients navigate the complex SALT environment, ensure compliance, and enhance profitability. Working with clients in a wide range of industries including Professional Services, Construction, Real Estate, and Manufacturing, Shane has specific expertise in Credits & Incentives, Excise Tax, Income & Franchise Tax, Mergers & Acquisitions Due Diligence, Property Tax, Research & Development Tax Credits, Sales & Use Tax, and Unclaimed Property.
Tim Klimchock, CPA, CCIFP, Principal – Architecture, Engineering and Construction Group
Tim collaborates with architectural, engineering and construction clients to better manage business practices and improve profitability. As a Certified Construction Industry Financial Professional, Tim has mastered nine critical knowledge areas within the construction industry, enabling him to provide exceptional technical service to his clients.