Disregarded Entities

conduct state tax "year-end" planning early, often & always

This is a Public Service announcement. Revealing a secret from the state and local tax underground. A secret that makes it difficult for companies to do business. To stay in compliance. To avoid compounding tax liabilities and interest and penalties.

What is this secret?

Wait for it . . . . . . . .

State taxes are a "moving target."

A "moving target" is defined as:

  • something that moves while someone is trying to hit it

  • something that is always changing

Some state tax rules don't change. Some state tax rules change at a certain time or in a certain tax year based on federal or state legislation. Some state tax rules change every year. Some state tax rules change suddenly based on a court case or ruling. Some state tax rules change without you knowing it based on a state's internal policy decision or change in interpretation of a statute or regulation.

  • So how does a company plan?

  • Conduct year-end planning?

  • Conduct beginning of the year planning?

  • Plan for acquisitions, mergers, divestitures?

Companies must stay on top of income tax laws on a tax year by tax year basis. Meaning, income tax laws are generally static for a specific tax year, but can change from year to year. Thus, tax pros should not follow "SALY" (same as last year) when preparing returns. This can lead to "IAP" (interest and penalties). With that said, there are situations when court case decisions or rulings happen that may have retroactive impact and create amended return / refund opportunities or may simply alter prospective returns.

In regards to sales tax, there are static rules but the interpretation of some of those static rules can change and are definitely not the same in every state. Sales tax rules and tax rates can change at different times of the year due to court cases, rulings and state legislation. Unlike income tax, sales tax periods are generally monthly, quarterly or annual

It's the lack of uniformity among state tax laws that creates risks and opportunities.

Some state income tax laws that may differ from state to state are:

  • Economic Nexus (creating a taxable presence)

  • Sales sourcing of sales of tangible property and services

  • Requiring throwback of sales

  • Allowing or requiring combined reporting

  • Allowing a pass-through entity (PTE) to make a PTE tax election (i.e., $10,000 SALT-CAP work around)

  • If PL 86-272 protection applies

  • Conformity to federal international tax considerations (i.e., GILTI, FDII, deemed dividends, ECI, etc.)

  • Treatment of bonus depreciation

  • Treatment of disregarded entities (i.e., single-member LLCs or Q-Subs)

Some sales tax laws that may differ from state to state are related to the following:

  • Sourcing of sales of services (including multiple points of use)

  • Sourcing of sales to/from non-US countries

  • Sales of software, SaaS, and other computer services

  • Sales of information services or data processing

  • Sales of services

  • Sales by construction contractors

  • Treatment of sellers in drop shipment transactions

  • Allowable or acceptable forms of exemption certificates

  • Treatment of leases (lessors and lessees)

  • Width and breadth of manufacturing exemption

  • Occasional sale or casual sale exemption when selling assets or business

  • Treatment of repairs and maintenance (labor and parts)

  • Treatment of research and development activities

  • Sales to governmental and non-profit entities

I could keep going, but I think you get the point.

So what is a company supposed to do?

Depending on what stage your business is (i.e., start-up, emerging, growth, mature), I recommend you inquire of your tax professional about the state tax impacts of your business. You may only have one or a few states to deal with right now. Some of you may have 20 or more states to consider. The key is to get on top of it now. To know what you don't know so you can make informed decisions. To stop problems from growing out of control and implement proper procedures and tax decisions. Be proactive. Don't let blind spots create a compound effect of problems.

Conduct year-end state tax planning, early, often and always.

QUOTES

  • "In all affairs, it's a healthy thing now and then to hang a question mark on the things you have long taken for granted." - Bertrand Russell

  • "Bureacracy is the art of making the possible impossible." - Javier Pascual Salcedo

  • "Knowledge is the beginning of practice; doing is the completion of knowing." - Wang Yangming

Sales Tax and Disregarded Entities: Who is the Taxpayer?

Does your company's corporate or legal entity structure cause confusion when it comes to the sales tax area? Meaning, does your structure involve various "pass-through" or "disregarded" entities?

"Pass-through" or "disregarded entities" are generally considered divisions or a part of their owner for federal tax purposes. Hence, they are not taxed separately from their owner. However, for state and local sales tax purposes, most states treat each "pass-through" or "disregarded entity" as a separate taxable entity. Therefore, it is very important when making a purchase for a specific project or filing for a business license, that the correct entity’s name and other identification is used. This issue arises especially in states where your company has multiple entities conducting business.

"Resale Certificates" and "Direct Pay Permits" Confusion

Another situation in which the issue arises is when "resale certificates" or "direct pay permits" are utilized by multiple entities. Resale certificates and direct pay permits are generally issued to a specific legal entity and cannot be transferred or utilized by other entities. Hence, it is very important that vendors have the correct information in their records, and your invoices, contracts, etc. reflect the actual entity that is involved in the transaction.