State and local taxes are arguably the most complex part of the tax system in the U.S., and for businesses that operate across state lines, they are especially relevant and difficult to navigate.
As difficult as these taxes may be, they are also very important for multistate businesses to get right, as failure to do so means that the business is not operating in good standing with the relevant state, which can have widespread ramifications.
State and local taxes are administered by state and local authorities, operating independently of federal taxes. Examples of SALT include sales taxes, corporate income taxes, excise taxes, local lease taxes, use taxes and others.
While many states and localities are uniform in terms of the types of taxes they administer, the definitions of what triggers these taxes vary markedly from state to state.
These differences can have a material impact on a company's requirement to pay a particular state or local tax, or even to register as a taxpayer at all.
The most commonly dealt with state and local taxes are sales and use tax, corporate income and franchise taxes.
Dealing with SALT as an accountant
Given its endless nuances, it can be difficult for a CPA or accountant to advise a client on a SALT matter, especially if the matter pertains to an issue relating to a state in which the CPA is not licensed.
However, with the advent of e-commerce, remote work and freedom of movement between states, SALT is becoming increasingly relevant to even the most simple of business models, making it more important than ever for accounting professionals to know how SALT works, and where to look for guidance.
What do businesses need to be aware of with SALT?
When it comes to SALT, there are two key consideration points for every business to be aware of:
- Which state taxes to register for and file; and
- Where to file them.
Limiting the scope of SALT awareness to these two points simplifies the approach.
The first step to uncovering this information is to run a thorough analysis of which states the business has a connection with. For such an analysis to be effective, the definition of "connection" needs to be extremely loose, covering all passive and active instances where the business activities reach a state outside of its headquarters.
From there, the analysis needs to sharpen, and eventually, the business will begin to determine its genuine SALT filing footprint.
Which industries are most at risk of noncompliance?
From an industry standpoint, it really comes down to which companies are spread across many states in meaningful ways.
The most obvious industries that tend to have complex SALT filing footprints include:
E-commerce: With customers all over the country, inventory being stored in different locations, and a location-agnostic workforce, the e-commerce industry is rife with SALT complexities.
Retailers: Similar to e-commerce, most retailers look to expand their market share to locations outside of their home state, thus creating multistate activity and triggering SALT complexities.
Software companies: In addition to serving customers and clients across the U.S., the states are not aligned in their definition of software, and whether it is taxable. This being the case, software and tech businesses are normally subject to an increased level of complexity than other industries.
Service-based firms: Some states believe that non-tangible services are still taxable, and some states don't. Additionally, some services are location agnostic and therefore attract remote talent. Just like software, this creates the perfect storm for SALT challenges.
The consequences of noncompliance?
Unfortunately, given these ambiguities and challenges, noncompliance is common across the board.
Noncompliance can take on multiple forms, some more severe than others.
- Home-state filing only;
- Registering for all taxes everywhere;
- Registering for some taxes and not others;
- Collecting or paying the wrong state tax amount, or from the wrong type of customer.
Whichever form noncompliance may take, its ramifications can be significant.
The most commonly spoken about consequences of SALT delinquency are penalties and interest. Without compliance, in the event of a state-driven audit, the state has the right to recover unpaid taxes, impose penalties for noncompliance, and collect interest on those unpaid taxes and penalties. This can be costly.
However, the less frequently considered ramification of noncompliance is that it inhibits growth and progress. It can influence mergers, acquisitions and the analysis of actual business performance.
For all growth-minded businesses, these ramifications are arguably more costly than fines and interest, as they impact the vision and direction of the company in question.
How can accountants help?
There are a few ways in which accountants can support their multistate clients and ensure SALT compliance.
Encourage analysis: A business that is focused on growth is not looking for additional problems, so it's unlikely it will recognize the need to get its SALT affairs in order. CPAs can take an active role in educating their clients about these issues and encouraging them to take the topic of SALT seriously and undergo relevant analyses to clarify their SALT filing footprint.
Enlist the help of specialists: Many SALT practitioners build their practices to work well with CPAs, effectively providing an outsourced solution for SALT consulting. The benefits of aligning with such a practitioner are substantial, and will ultimately lead to compliance and satisfaction, all made possible by the CPA.
By combining these two strategies, CPAs will not only help their multistate businesses navigate their way out of SALT complexities but will help them develop proactive strategies that eliminate the risk of noncompliance from the get-go.
