don't let state tax 'blind spots' wreck your company

WHAT IS A BLIND SPOT?

According to Wikipedia, a blind spot, also known as a scotoma, is an obscuration of the visual field. A particular blind spot known as the blindspot, or physiological blind spot, or punctum caecum in medical literature, is the place in the visual field that corresponds to the lack of light-detecting photoreceptor cells on the optic disc of the retina where the optic nerve passes through it. Since there are no cells to detect light on the optic disc, a part of the field of vision is not perceived. The brain fills in with surrounding detail and with information from the other eye, so the blind spot is not normally perceived.

Now, that wasn't exactly what I think of when I think of a blind spot.  I usually think of a blind spot when I am driving my car.

In that context, Wikipedia says a blind spot in a vehicle is an area around the vehicle that cannot be directly observed by the driver while at the controls, under existing circumstances. Blind spots exist in a wide range of vehicles: cars, trucks, motorboats and aircraft.

As one is driving an automobile, blind spots are the areas of the road that cannot be seen while looking forward or through either the rear-view or side mirrors. The most common are the rear quarter blind spots, areas towards the rear of the vehicle on both sides. Vehicles in the adjacent lanes of the road that fall into these blind spots may not be visible using only the car's mirrors. Rear quarter blind spots can be:

  • checked by turning one's head briefly (risking rear-end collisions),
  • eliminated by reducing overlap between side and rear-view mirrors, or
  • reduced by installing mirrors with larger fields-of-view.

STATE TAX BLIND SPOTS

Now, what does this have to do with state taxes?  

Well, I believe most, if not all, companies have state tax blind spots.  These blind spots may include:

  1. nexus (taxable presence) in states in which the business is not filing income tax returns or collecting sales tax
  2. using the incorrect apportionment formula, including the wrong items or amounts in apportionment factors or using the wrong method to apportion different types of income (tangible, intangible, service, etc.)
  3. including the wrong entities in a combined or consolidated state income tax return due to incorrect unitary group analysis
  4. classifying business income as nonbusiness income (or vice versa)
  5. misapplying P.L. 86-272 protection (i.e., business is not operating within limits of protection or business is applying P.L. 86-272 protection to the wrong type of tax)
  6. misapplying sales and use tax exemptions
  7. not self-assessing and remitting use tax on purchases of taxable items
  8. assuming the business is selling is a nontaxable service, when it is actually selling tangible property
  9. assuming the business is selling intangible property, when it is actually selling tangible property
  10. not adding back related-party expenses on the business' state income tax return when required
  11. adding back related-party expenses on the business' state income tax return when NOT required
  12. when acquiring or merging entities, failing to perform state and local tax due diligence to uncover liabilities and determine a tax-efficient way to combine the entities (before and after the acquisition/merger)
  13. failing to comply with state bulk-sale notification requirements
  14. filing a separate return when a combined group return should be filed
  15. allowing a FIN 48 reserve for state uncertain tax positions to grow year after year without attempting to reduce uncertainty

And the list goes on and on and on.

YOUR COMPANY / YOUR STATE TAX BLIND SPOTS

In regards to your company's state tax "blind spots," it usually depends on the stage your company is in and the size of your business.

As your business grows and changes, it is vital that your business examines its state tax "blind spots" before a "wreck" (audit assessment, nexus questionnaire, etc.) occurs.

Do you know what your state tax 'blind spots' are?

Do you need to install a warning system?