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Income & Franchise Tax Planning

Economic Nexus Standards and State Filing Obligations

What is Franchise Tax?

Most companies are aware they must register and file tax returns in every state where they maintain a physical location. However, did you know filing obligations may exist even when your business is not physically located in a state? States are constantly amending their laws to capture more revenue by creating new, inventive economic nexus standards. As a result, physical presence is the only factor that establishes nexus, leaving some companies unsure of their nexus standing in states where they do business. How can you be sure your company is meeting all its state tax filing obligations?

Our State & Local Tax (“SALT”) Services group can work with your company to determine where state filing obligations exist, and develop a solution to reduce your compliance burden.

Nexus Review

Cherry Bekaert’s nexus review services provide comfort that your state tax issues are handled in the best manner possible. We can assist in bringing your company into compliance with its state tax filing obligations. Your economic nexus concerns and protections will be addressed, and you will receive assistance with quantifying and rectifying any potential state tax exposure.

Voluntary Disclosure Agreements (“VDA”)

Most states offer VDAs to encourage companies to comply with a state’s laws, thereby generating revenue that the state may never have captured. Cherry Bekaert is experienced in negotiating favorable terms for multistate businesses, while finalizing any outstanding liability or compliance issues in a given state. On your behalf, we can negotiate and secure voluntary disclosure agreements to reduce and eliminate any outstanding liabilities for prior tax years.

State Amnesty Programs

State Amnesty Programs are infrequently offered by the states, but can provide an alternative to VDA. The terms of amnesty programs vary by state, but they generally offer some form of forgiveness of penalties and interest if taxpayers come forward to disclose liabilities, similar to VDAs. States can, however, impose a longer or unlimited lookback period under amnesty programs. Some states have even penalized companies that do not come forward during their amnesty programs.

Despite the complexities and risks of multistate exposure and compliance, Cherry Bekaert is adept at assessing your company’s nexus and recommending the best approach for dealing with any outstanding state liability.

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Revenue Sourcing Analysis

If your business provides services to customers in multiple states, be wary of the opportunities and pitfalls that may result from different state income tax sourcing rules. Not all states source service revenue the same way; state laws vary and are highly fact dependent. Apportioning income tax by the location of service revenue is a headache, since you must consider the intricacies of your business and the complexities of state sourcing rules. How can you be sure your multistate business is accurately reporting service income and paying the right amount of tax to the correct states?

State Approaches to Sourcing Service Revenue

States typically use one of three approaches to determine the amount of service revenue attributable to a given jurisdiction. Within each approach, state law varies on the application of these rules.

  • “Cost of Performance” Method
  • “Pro Rata” Method
  • “Market-Based” Method

Ensuring Accurately Reported Service Income

The complex approaches that states adopt to apportion service income demand close attention to the details. To minimize overall state franchise tax liability, a multistate business needs sound tax planning to use these complexities to your advantage. Failing to consider these complex, varied approaches to service income apportionment guarantees either an inflated state tax liability or unanticipated exposure.

About Our Franchise Tax Planning Services

Working with Cherry Bekaert’s SALT professionals will give you a detailed analysis of the applicable sourcing rules for your multistate business. This will help you accurately determine the numerator of each state’s sales factor and ensure that your business is not under- or over-reporting revenue for state income/ franchise tax compliance requirements.

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Louis Cole

Partner, State & Local Tax Leader

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