Taxes: A Burden for Taxpayers
One of the biggest problems with taxes is that they keep increasing at the state and local level. This creates a burden for taxpayers who have to keep up with the ever-changing laws.
As the tax leader of the national technology industry group at CohnReznick, I am proud to partner with an organization that is committed to helping its clients navigate the ever-changing landscape of tax laws and regulations. Our team of experienced tax professionals provides clients with the knowledge and tools they need to stay compliant and minimize their tax liability.
As a tax partner working with growing technology companies, my main focus is on mitigating risk and ensuring compliance with tax regulations. My clients are often more focused on growing their customer base and adding recurring revenue, but I work to ensure that their income tax charges are minimized. On the journey from seed rounds and angel investors to liquidity events and public offerings, my clients may face many tax traps, but I am here to help them navigate the complexities of the tax code. With careful planning, my clients can avoid costly mistakes and move closer to their goal of a successful IPO.
The largest of these tax traps is the sticky and growing web of state and local taxes. As recently as 10 years ago, a business could generally use a physical presence standard to determine where tax filing requirements were needed. This was generally protected by a law known as Public Law 86-272, which limited the ability of states to tax commerce of businesses residing and operating in other states. Challenges to this law began in 2012 when California introduced an “Economic Nexus” standard for “Doing Business in California.” From that point forward, simply having customers in the state of California could result in the imposition of California income tax on an out-of-state business. The new California law sets a dangerous precedent that other states are sure to follow. This could lead to a patchwork of state and local tax laws that would be difficult for businesses to navigate. The best solution would be for Congress to pass a law that would establish a uniform standard for when businesses are required to file state and local taxes. This would provide much-needed clarity for businesses and help to prevent the growth of the tax trap web.
In the next ten years, the landscape of taxation is going to change drastically. The rise of digital media and the remote work force are going to have a profound impact on the way taxes are collected. Technology companies need to be mindful of this and adapt accordingly.
Sales taxes are often complex and confusing, but they don't have to be.
The decision in the Wayfair case has led to all states with a sales tax implementing some form of an economic nexus threshold. This has created a challenge for companies in determining the "situs" of a transaction, which is where it will be taxable. Planning with our clients to gather this data and properly address sales tax liabilities and exposures is a key area of focus as companies grow.
It's no secret that the world is increasingly becoming digital. We can see it in the way we consume entertainment, the way we work, and even the way we shop.
The rules for state taxation are often very different depending on whether or not your company is selling a “tangible” item, or what is considered an “intangible” item. While sales tax laws have historically been targeted toward taxing tangible goods, more states are trying to define taxes that can capture revenue from the sale of intangible goods. Maryland, for instance, was the first to implement a Digital Advertising Gross Revenues Tax (DAGRT). Digital products under their sales tax now also include subscriptions to online content, access to video or online games, and digital downloads of media. Digital media companies broadcasting podcasts and streaming video over the internet to users in every state are entering new territory as digital broadcasting is not contemplated in many standing laws on the subject. This is starting to change though, as Oregon signed legislation in 2021 that included digital broadcasters in the broader definition of broadcasting.
There's no doubt that the pandemic has changed the way we work.
Technology companies have been forced to consider the possibility of adding to a remote workforce, and the benefits and burdens of those decisions. Telecommuting employees can lead to nexus for sales tax, income tax, franchise tax, property taxes and withholding taxes in a state regardless of whether or not you hire with the help of a PEO or not. These filing requirements are even more complicated for companies with main offices in states that maintain a “Convenience of the Employer” rule. Without a bona fide office in that new state, New York could try to claim that an out-of-state employee owes payroll and withholding tax to New York. Even for companies trying to do the right thing, these rules and risks of double taxation lead to uncertainty.
For technology companies, the complex ecosystem of state taxes can feel challenging, to say the least. With the increase of remote work and the increased use of digital services, it is important to keep these three areas in mind as your company grows. By doing so, you can navigate the tax landscape more effectively.
The information provided in this paragraph is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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