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Overview

A Maryland-based company which provides website design and consulting services, as well as creator and licensor of electronic email software, sells its services throughout the US. In recent years, the company spun off the email software division, while the parent company continued to provide website design services. The two companies share corporate officers.

 

Challenge

As with many taxpayers, the company was unfamiliar with the concept of nexus for sales & use tax purposes. Unfortunately, the company’s officers assumed that, because no tangible personal property was being provided to customers, either in sales of software or website design services, it did not have sales tax collection and remittance responsibilities. On advice from the company’s CPAs, who were concerned with the possible taxability of the design and consulting services, the CFO contacted Altus Group to evaluate its potential sales tax compliance obligations. After an initial consultation, Altus Group was engaged to provide the client with multi-phased sales & use tax consulting services.  The first phase of the engagement was to complete a multi-state nexus survey.

Working with the client, we reviewed employee travel logs, customer lists and historical sales data. This information was used to complete our proprietary nexus survey, which allows us to effectively and efficiently determine those states where the client has nexus for sales & use tax compliance purposes. The client unknowingly had nexus for sales tax (as well as corporate income tax and franchise tax) in several states due to their activities. These activities included the client’s employees attending sales meetings and customer support visits. This nexus created a sales tax liability as many states tax electronically-delivered software and several states tax website design services.  As such, both the website design company and the email software company had outstanding unrecorded historical sales tax liabilities in several states.

 

Solution

Our determinations were detailed in a formal nexus report that outlined for the client, the states in which it had an obvious and ongoing physical presence and material sales (high visibility) as well as those states in which personnel may have made brief visits. However, the company otherwise had no substantial presence and either no or immaterial sales activity (low visibility). The report also presented preliminary estimates of potential sales tax exposure by state.

We discussed our findings with the client, informing them of the critical sales tax and nexus issues, and then initiated the next phase of the engagement in earnest. Before initiating corrective actions with the identified states, Altus contacted many of the client’s largest customers and obtained exemption certificates or affidavits asserting use tax accrual, which reduced the potential tax liabilities further.  On an anonymous basis, Altus then negotiated sales tax voluntary disclosure agreements (VDAs) for the client in the nine states where the historical liability was the greatest. Partnering with the client’s CPA firm, many of these VDAs included corporate income taxes or franchise taxes for which the client was also historically non-compliant.

 

Result

Utilizing the VDA programs, Altus limited the client’s historical liabilities, which spanned up to ten years in some states, to the most current three or four years, with penalties, and in some cases interest, abated in full.  Through the nexus survey and VDA process, Altus was able to save the client an estimated $413k or 74% of the total estimated liability. The client is now much more knowledgeable of sales tax issues and has peace of mind knowing both companies are in full sales tax compliance in the high visibility states.  The client was extremely pleased with our work and our results and continues to look to us for general tax guidance and consultation.

Services provided

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