State and local taxes (SALT) often take a back seat to federal tax considerations, to the extent that tax is even at the table when it comes to deciding what’s best for a business. And while federal income tax is typically the largest tax liability for a business, ignoring SALT in business planning can create unnecessary risk and leave money on the table.
For example, after the Iowa Department of Revenue (DOR) levied all but $1 from a client’s checking account, I got the levy reversed and the levy and the DOR returned the client’s money. In another case, I once helped a client file a $1.2 million sales tax refund claim for software they had erroneously paid tax on. Not every refund claim results in a seven-figure return, but you can see how including SALT in your business’s tax planning can save you money that you can be spending more wisely.
As you evaluate what kind of handle your business has on SALT and what steps you may need to take, here are some key SALT questions to keep in mind:
Even if federal income tax is the biggest item on your business’s tax bill, you may still owe a good amount to one or more states. Businesses paid $1,096.2 billion in state and local taxes in fiscal year 2023. State tax compliance can be a true headache if you don’t put thought into it before it’s too late.
Some states are facing budget crunches, and history tells us that state tax agencies often increase scrutiny of refunds and credits to make up the difference. In addition, states are getting more aggressive about whether businesses owe them income tax.
Many states are deploying AI-based audit tools to identify audit targets. AI tax software is not sophisticated enough to realize why a particular business may not pay tax the way it expects (yet), but that won’t stop tax agencies from sending notices. As a result, businesses are more likely to need to justify their tax filings. Even if the business doesn’t owe any additional tax, it’s an unpleasant exercise if you’re not prepare.
A SALT attorney can:
Several factors go into deciding on the right structure for your business – make sure tax is one of them! Businesses are taxed differently based on their entity structure – C-corp, S-corp, LLCs, partnerships. You may be able to claim certain credits or deductions as one type of entity but not another, for example.
States enforce tax on businesses that have nexus in their state. “Nexus” is generally some minimal connection with a state, but it’s determined differently for income and sales taxes. You’ll need to pay attention to where you have employees, where you make and solicit sales, where you own real property, and when your other physical property is. Nexus has gotten very nuanced in recent years thanks to the advent of online sales and remote work.
Once you know where you have nexus, you’ll need to figure out which of those states require permits and for what taxes. Keep an eye out for overlapping taxes, and make sure you don’t miss any due dates.
If it’s been a while since you thought about taxes, now is the right time for a review of your internal processes. We can identify any overpayments and seek refunds to get that money back. We can also pursue voluntary disclosure agreements or other options to resolve liabilities before you get contacted by a tax agency, saving you money on penalties.
Growing business have quickly changing needs. As you scale, consider the following:
Answers to all these questions can impact your tax positions in one or multiple states, as well as your Intellectual Property and Mergers & Acquisitions strategies.
It’s crucial to identify SALT issues before the due diligence process begins. You never want to get close to selling your business only to have the buyer say they think you might owe millions in unpaid tax.
If you’re looking to transition your business to another generation or are considering converting to an Employee Stock Ownership Plan (ESOP), you’ll need to carefully consider things such as how to structure the transaction, plan formation, and negotiating financing terms and structure.
That position may not be true everywhere since sales tax laws can vary widely by state. Do you sell in other states? Also, does your business pay tax correctly on all of its purchases? If not, you may be found to owe use tax.
A “tax controversy” is any interaction with a tax agency beyond typical compliance (which consists of filing returns and paying tax). It includes permit registration, voluntary disclosures, asking informal questions or requesting formal rulings, responding to notices, audit defense, and appeals. Any of these activities will attract attention from a tax agency, and you should consult with a SALT attorney about the best approach.
First, contact a BrownWinick SALT attorney right away: states can move very quickly and behave very differently than the IRS, so the difference in expertise can be crucial.
Second, don’t panic: often, auditors will ask for more information than they really need to see what else they can learn about your business (or your vendors—a popular audit lead-generating technique).
Third, be nice! No one benefits from being angry at an auditor who is simply doing their job. Once you get in touch with us, we’ll make sure to provide the necessary information to resolve the audit as simply as possible.