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Compliance
Solutions 3-30-06
In general, there
are four primary alternatives for handling compliance with state sales tax
laws:
- Voluntary
Disclosure
- Quiet
Registration
- Status Quo
- Multi-state
Registration
Selection of the
appropriate registration alternative should be made on a state-by-state basis
based after careful consideration of a company's nexus and prior period
exposure risk.
Disadvantages
A. Voluntary
Disclosure
This process
initially involves contacting the relevant taxing authority on a no-name basis
and working out terms pursuant to which the taxpayer could bring closure to
certain prior state tax liabilities and prospectively comply with the states
tax laws. The primary benefits of a Voluntary Disclosure typically include: a
limited look-back period, abatement of penalties, full or partial interest
abatement and full resolution of any material prior period liabilities. The
main disadvantage of this alternative is the cost. This alternative usually
requires the assistance of a third party service provider who will require a
fee for their services. The benefits (e.g., penalty abatement, look-back period
savings, etc.) should be weighed against the associated professional fees. This
is clearly the preferred alternative if prior period exposure is
material.
B. Quiet
Registration
This alternative
consists of quietly registering without bringing closure to prior period
liabilities. This alternative brings the taxpayer into compliance prospectively
and stops the state tax liabilities from continuing to grow, but does nothing
to resolve prior period liabilities and it would not be afforded any of the
benefits associated with participation in a Voluntary Disclosure program.
Specifically, it could not expect to receive any look-back limitation or any
penalty or interest abatement. In addition, registering for prospective
compliance often invites audits of prior periods. Accordingly, this option is
recommended only for taxpayers who are confident that material prior period
liabilities do not exist. The primary benefit of this alternative is that it
does not generally require professional assistance and, accordingly, is less
costly to implement.
C. Status
Quo
This approach
involves making no changes to your company's state tax registration or filing
status. This is clearly the riskiest option because it not only leaves your
company potentially exposed to all prior period liabilities (i.e., with no
look-back limitation or penalty/interest relief) but such liabilities continue
to grow with each passing year. Clearly, this option is recommended only in
states in which your company is confident that it does not have nexus and/or
material state tax exposure.
D. Multi-State
Registration (e.g., Streamlined Sales Tax Project)
Another
alternative would be to pursue multi-state registration options, should the
company determine significant exposure in the states in which it conducts
business, but is not yet registered to collect taxes. On October 1, 2005, under
the auspices of the Streamlined Sales Tax Project, an 18-state full amnesty
program was implemented. In order for the company to participate, a company
must be willing to register and collect sales tax in all thirteen full member
states, which are as follows: Indiana, Iowa, Kansas, Kentucky, Michigan,
Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South
Dakota and West Virginia. A company would also have the option of registering
and collecting sales tax in the following associated member states who have
agreed to provide the same benefits to Streamlined Sales Tax Project
participants who elect to include their state in the registration: Arkansas,
Ohio, Tennessee, Utah and Wyoming.
The benefit of
pursuing this registration alternative is that these states are agreeing to
forgive all prior sales and use tax obligations of out-of-state taxpayers who
register under the project and agree to collect sales and use tax in their
respective states. The downside of this alternative is that if you are not
conducting business in a majority of the SSTP member and associate states,
there may be little incentive to exploit the process if the company will only
receive the benefit in those few states.
The information
provided is for informative purposes only. Should you have questions or require
further assistance please contact an Olivier & Associates
Sales and Use tax professional.
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