Business to Business
Hottest Tax Issues for Business This Year
It’s time for businesses to deal with the hottest tax issues they will confront at the beginning of the new millennium. Here are the areas that should cause the greatest concern. . .
The Internet is fast becoming a vital part of business operations for companies both large and small. A presence on the Internet in one way or another is now a necessity for most businesses.
In 1993, there were one million Internet users. . . today, there are 200 million. . . in 2005, there will be one billion, all within reach of any company using a Web site for electronic commerce.
Danger: Entering into e-commerce creates a host of potential tax problems. Often businesses build Web sites and strategies for marketing and selling via the Internet completely unaware of the multitude of tax traps awaiting them. Examples. . .
Sales and use taxes. Firms that sell over the Internet may become liable to collect sales and use taxes for states and localities where sales are made.
Complication: There are more than 7,600 state tax jurisdictions in the US with a variety of taxes, tax bases and tax rates. Since sales via the Internet may occur anywhere, a company may become subject to hundreds of state tax regulations.
Even worse: When a company doesn’t realize it is subject to sales tax withholding and doesn’t file a tax return, the statute of limitations never applies. Back taxes and penalties can grow to a huge amount.
State income taxes. A company may be liable for income taxes to a state if "nexus" is created. (Nexus is the degree of presence a company has in a state.) This may be as simple as maintaining a Web server in-state, keeping inventory there to fulfill Internet sales, hiring a service agent there or establishing any other presence in the state due to e-commerce activity.
International taxes. Many firms are now making international sales for the first time thanks to the Internet. Snag: They become subject to foreign nations’ tax laws -- such as the need to collect and remit Value Added Tax on sales to European countries. They may also have to deal with customs, duties and many other business regulations that foreign nations impose on firms that make sales to their nationals.
Important: Businesses that plan to deal with these issues can minimize problems. But firms that rush into e-commerce without considering taxes can unwittingly incur big tax liabilities and legal problems.
Mistake: Many people have heard of the "Internet Tax Moratorium" that was enacted by the federal government, and mistakenly believe this prevents the taxation of Internet activities. But the moratorium only prevents states from enacting new taxes on Internet access fees. Check with a state tax expert on your potential tax obligations on Internet sales. Safety. . .
Plan for taxes on electronic commerce from the beginning.
Explore potential liabilities when determining e-commerce strategies.
Keep in mind that new taxes may be imposed when the moratorium expires after October 20, 2001.
Design e-commerce systems to be able to handle any taxes that may be imposed.
STATE TAX AUDITS
Expect state tax auditors to continue to be increasingly aggressive in 2000 toward all firms, not just e-commerce firms. Hottest tax targets. . .
Sales and use taxes.
Out-of-state firms making in-state sales.
Aggressive corporate tax structures.
State tax auditors know these are the areas where the money is. Why. . .
Sales and use taxes. Businesses can incur sales and use tax liabilities as both buyers and sellers of goods.
As sellers, if they don’t collect the correct sales tax rate for each jurisdiction, they can become liable for the tax themselves. When companies are lax about the details of sales tax collections, years’ worth of liabilities may accumulate.
As buyers, the amount of sales or use tax a company owes may not be that which appears on the invoices that bookkeepers pay automatically -- so even firms that think they are paying the taxes they owe may be accumulating back tax bills.
Example: Out-of-state sellers may not be required to collect tax in that state and therefore do not have to put tax on the invoices, or may apply the wrong amount of tax. But, the company is liable for paying the correct tax.
Defense: Conduct a sales and use tax self-audit with the help of an expert, before the state audit. Companies often overpay taxes that are misinvoiced, so a self-audit may produce a tax refund.
Out-of-state firms attract state tax auditors for two reasons. . .
1. Many firms incur liability for income or use taxes without realizing it, because their presence in the state is "slight." If they fail to file tax returns in the state, they can incur many years’ worth of liabilities.
2. There’s the risk of larger assessments where a company with nexus has never filed in a state.
Warning: States have become aggressive in identifying out-of-state firms with an in-state presence. They examine data banks, such as motor vehicle records, monitor advertising and often share information with each other and the IRS.
Key: The critical issue in determining whether tax liability exists to a state is nexus.
Specific rules vary with each state -- but the required presence often is surprisingly small, especially in the sales and use tax area.
Don’t be caught by surprise: If the company makes any sales or has any presence in a state where it does not file returns, review the nexus issue with a state tax expert.
Employees are becoming more sophisticated about their pay, and more employees of firms both large and small want an equity share in the business. In a very tight job market, a company may have to provide it to retain top performers. This can pose a problem for private firms that wish to keep ownership within a small group, such as a family. Possibilities. . .
Set up a "phantom stock" program. Here, employees receive not actual shares but phantom shares that grow in value with the company’s stock. At a future date they redeem their phantom shares for cash.
Employees get nearly the same economic benefit they’d get from owning options, except they never actually own any company stock.
To the IRS, this is a cash bonus program where the size of the bonus is determined by the company’s stock value. Payments under the plan are deductible by the company.
An Employee Stock Option Plan (ESOP) can distribute shares to employees while providing the company with a tax-favored source of financing.
How: The ESOP borrows money to buy company shares for cash -- so the company gets a cash injection. The ESOP holds the shares to fund retirement benefits for employees. The company makes deductible annual contributions to the ESOP which it uses to pay off its loan.
Net result: The company effectively gets to deduct repayment of both principal and interest on the loan.
A growing business can use an ESOP to raise capital for expansion, keeping shares inside the business and under the voting control of management -- rather than raising cash by selling an interest to outsiders, such as venture capitalists. Alternatively, selling shares to an ESOP allows owner/shareholders to monetize part of their investment in the firm and to diversify their holdings.
Added benefit: Selling shareholders can roll their proceeds into publicly traded stock on a tax-deferred basis. And employees obtain a motivating interest in the business as well. However, implementation of an ESOP can be complicated. Consult your tax professional.
Article Courtesy of Bottom Line