Release date: February 2, 2010
Guest: Nadia Manin
Running time: 9:05 minutes
Authorities are pursuing taxes at the US state level more aggressively then ever before. PwC’s Nadia Manin reveals how to deal with tax officials and mitigate taxes and penalties.
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You're listening to another episode of PwC's Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today's busiest tax directors.
Gerry Lewandowski: Here with us today is Nadia Manin, a senior member of PwC Canada’s US Tax Consulting group based in Toronto and a specialist in US state and local taxation. Nadia has been with PwC Canada for 14 years and provides US state and local tax services to Canadian companies currently operating in the US or seeking to expand into the US. Nadia will share with us some of her insights on the current state of taxation and tax administration at the US state and local level and the pressures coming to bear on Canadian companies doing business in the US.
Thanks for joining us, Nadia.
Nadia: Happy to be here.
Gerry: Nadia, we have seen some recent articles and commentary in the media around the terrible state of finances in some US states such as California and how this has impacted Canadian companies doing business in the US from a tax perspective. Can you shed some light on this?
Nadia: Well, in the past year, we have seen 48 out of the 50 states in the US experiencing revenue shortfalls and many states such as California being close to bankruptcy.
We’re seeing this with one of our own clients. There is quite a bit more activity – especially in the sales tax area—in states such as California, Michigan and New Jersey, where companies are receiving notices and getting assessments more frequently than they otherwise would have.
As a result, states are becoming more aggressive in an effort to expand their revenue sources. They are accomplishing this by either going after non-compliant taxpayers much more aggressively than in the past and by changing their tax laws.
We’re seeing this with one of our own clients. There is quite a bit more activity — especially in the sales tax area — in states such as California, Michigan and New Jersey, where companies are receiving notices and getting assessments more frequently than they otherwise would have.
Gerry: Now with Canadian companies starting to see more inquiry letters or other probing communications from these state tax authorities, what should finance or tax officers be doing when they receive these communications, particularly in respect of those states where they are not already filing tax returns?
Nadia: The issue of taxable presence in the state or nexus is an area that Canadian companies have to be very careful of. We recently had a situation where a client received a nexus questionnaire in the mail. The client said that it looked innocuous and so he went ahead and completed it without checking with us. The client completed the form incorrectly and, as a result, has been assessed a fairly substantial state tax liability as a result.
Canadian companies should be very careful and get assistance before they complete the questionnaire. The questions may be misleading in the way that they are phrased and it may result in the state determining that the Canadian company has nexus where it otherwise wouldn’t.
Canadian companies should check with their advisors how to best deal with the questionnaire.
Gerry: Now Nadia, what kinds of penalties and interest are assessed by the states for non-payment of taxes? Can the state authorities go after a company’s assets?
Nadia: Penalties for non-payment of taxes can be as high as double the value of the original assessment, plus interest.
States also can file liens against a company’s assets. We’ve had an experience with one client where the state of Texas actually put a lien on their property, giving rise to a cash flow issue as a result. The lien arose as a result of an outstanding sales tax liability that the client was not even aware of.
In a situation where a Canadian company has not yet received a notice from a state, the Canadian company can come forward and file a voluntary disclosure with the state on a no-name basis. One of the benefits of a voluntary disclosure is that in many cases the penalties can be abated.
Gerry: Nadia, are there any particular things that a client should be doing to get into this voluntary disclosure program?
Nadia: A Canadian company is eligible for a voluntary disclosure, whether for income, franchise or sales tax, as long as the company has not received a notice from the state.
If they have received a notice, they’re no longer eligible to participate in a voluntary disclosure program.
A voluntary disclosure is done on a no-name basis. It involves completing a form that describes the taxpayer’s business and the facts surrounding the situation as to why there is nexus. Negotiations will take place between the company and the state, also on a no-name basis. The name of the company is revealed once a deal has been reached with the state.
As I previously mentioned, in most cases we are able to abate penalties; in addition, a voluntary disclosure usually only goes back three years.
If a company receives a letter from a state authority and they realize they may have exposure in that state, then it would probably be a good time to just go right ahead and do a voluntary disclosure, because once you start the voluntary disclosure process the state is prohibited from auditing you.
Gerry: I have heard you use the word "nexus." What is the difference between my taxable presence for US federal purposes and my taxable presence for nexus in a state?
Nadia: Nexus refers to the degree of presence in the state needed before the state has a right to tax you. The nexus threshold is much lower than the federal "permanent establishment" threshold.
Let’s take for example a Canadian company with sales people travelling across the border into the US to solicit sales.
Under the Canada-US Treaty, as long as the sales people do not conclude contracts on behalf of the Canadian company in the US, the Canadian company should not have a permanent establishment in the United States.
From a state perspective, however, most states do not follow the Treaty. As a result, the presence of employees soliciting sales in a particular state may be sufficient to cause a Canadian company to have nexus in that state, resulting in a situation where you may not have a taxable presence for federal tax purposes, but you do have a taxable presence or nexus for state tax purposes.
The nexus requirement does vary among the states. The more aggressive states like California, New York and New Jersey, may have a lower threshold for nexus.
For example, the Michigan Business Tax Statute provides that if you are present for a day in Michigan (and you meet certain other requirements), then you’re considered to have nexus in Michigan. However, if you are only present for part of the day in Michigan, the statute "rounds up" and assumes you’re there for the full day.
States have also become so aggressive in recent years that they are focused not only on catching non-compliant taxpayers, but the states have been amending their laws in order to broaden the concept of nexus to include such things as "economic nexus" and "affiliate nexus."
In both of those situations, you do not need to have physical presence in that state to be caught and have a filing requirement. Court cases have established that the presence of a related party or third party, doing anything on a company’s behalf to establish or maintain a market in a state, may be sufficient to cause or establish nexus in that state.
Gerry: So finally, Nadia, if I am a finance or tax officer of a company that is currently doing business in the US or considering doing business in the US, what should I be doing at this point to identify and manage my US state and local tax exposure?
Nadia: PwC has a new service offering called the Nexus Navigator. It is essentially a proprietary web-based tool.
The tool is very user-friendly and is very cost-effective for smaller and mid-sized companies. For a small fixed fee, we will meet with the company to go through the questionnaire. The questionnaire takes on average a little more than an hour to complete.
We would then take back the information and compile a report, which would include a summary of the potential risk areas that the company has. In other words, we identify the states and also the risk areas by income, franchise and sales tax.
Our deliverable also includes “heat maps” for each of those particular taxes. Red would indicate that there is an issue that the company has to deal with immediately. Yellow indicates that you may have an issue, but either it is immaterial at this point or we would need additional information to investigate further. Green indicates that the company is active in that state but there really is no exposure (for example, where you are attending trade shows in the state once a year).
Therefore, the Nexus Navigator is a web-based tool that assesses a company’s state tax profile and potential exposures in a cost-effective manner.
Gerry: Nadia, I’d like to say thank you for your perspective on US state and local taxes.
For further information on this, please contact your local PwC professional, or go to our PwC website at www.pwc.com/ca.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.