• Tariff-driven business model changes may affect P.L. 86-272 protections and trigger throwback exposure.

• Throwback and throw-out rules can tax income in original states when destination states don’t impose income tax.

• Reshoring strategies tied to tariffs should be reviewed through a tax lens to manage nexus and apportionment exposure.

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Tariff uncertainty continues to challenge manufacturers and distributors. In response, many businesses are making fast, sometimes reactive decisions: shifting fulfillment strategies, diversifying suppliers, and reworking customer contracts. While these steps are often necessary to protect margin, they can have unexpected ripple effects — particularly when it comes to state income tax exposure.

As operations evolve, companies may unknowingly trigger state-level tax rules — including throwback and throw-out provisions — that can increase tax burdens in their home states. These rules are rarely top of mind during operational planning, but, in today’s climate, they should be.

What You Think You Know: Public Law 86-272 Protections

Public Law 86-272 (P.L. 86-272) has long been a helpful shield. It protects companies from state income taxes when their only activity in each state is asking for orders for tangible personal property, and when orders are approved and fulfilled from outside that state.

But P.L. 86-272 isn’t a blanket exemption — and it doesn’t prevent other states from taxing that same income through alternative mechanisms. That’s where throwback and throw-out rules come in.

In response to evolving e-commerce practices and the Multistate Tax Commission (MTC’s) revised Statement of Information on P.L. 86-272, several states have taken steps to limit the scope of this federal protection:

• California: Issued Technical Advice Memorandum 2022-01, aligning closely with the MTC’s guidance. The memorandum specifies that certain internet-based activities, such as post-sale help via electronic chat or email, may exceed the protections of P.L. 86-272.

• New York: Released draft regulations incorporating the MTC’s examples, showing that interactive internet activities could lose P.L. 86-272 immunity. The regulations are currently in draft form and subject to change.

• New Jersey: Announced a policy change to evaluate P.L. 86-272 protection on an entity-by-entity basis within combined groups, potentially altering the tax obligations of group members.

• Minnesota: Circulated a draft revenue notice in April 2023 proposing adoption of the MTC’s revised guidance, signaling a move towards stricter interpretations.

Businesses using these states should closely examine their internet-based activities to assess potential tax implications under the updated interpretations of P.L. 86-272.

Throwback and Throw-Out Rules: Why They Matter

In states that enforce these rules, untaxed sales into other states can be “thrown back” to the state of origin. Here’s how:

• Throwback rules require that if you’re not taxed on a sale in the destination state (for example, due to P.L. 86-272), the income from that sale must be reported in the state where the goods were shipped from.

• Throw-out rules remove untaxed sales from the apportionment formula, which can artificially inflate your tax burden in the states where you do pay.

These rules can significantly shift your tax liability — especially if you’re shipping into multiple states where you have no nexus but generate substantial sales volume.

In a recent engagement for a new client, we found that the location of the client’s warehouse was the largest factor in planning when potential throwback was considered. If the client relocated operations from a throwback state to a non-throwback state, the impact on the sales factor in the apportionment formula was neutralized. Setting up operations in a state with throwback led to an inflated sales factor in the apportionment formula and an unexpected state tax liability.

Having conversations before transactions is extremely valuable as proper planning can lead to potential tax savings.

Why Tariff Responses Are Quietly Changing Your Tax Profile

Tariffs aren’t just a global trade issue, they’re reshaping day-to-day decisions inside U.S. companies. For many manufacturers and distributors, the last year has been a series of rapid adjustments: rethinking where goods come from, how they’re delivered, and how quickly orders get to customers.

You may have shifted fulfillment closer to major markets to cut lead times. Maybe you’ve swapped offshore suppliers to sidestep new tariffs. Some companies have moved toward direct-to-consumer models, while others have quietly changed how customer orders are approved or supported.

Individually, these decisions may feel operational. But taken together, they have a real impact on how income is sourced and taxed across states. They can shift your exposure under throwback or throw-out rules — especially if your sales are increasing in states where you don’t currently have income tax obligations.

In short, what begins as a supply chain fix can evolve into a state tax issue — often without anyone realizing it until filing time.

Reshoring and Tax Considerations Go Hand in Hand

For many companies, reshoring has become a practical response to ongoing tariff uncertainty. Bringing operations back to the U.S. can reduce exposure to trade risk and improve supply chain control — but it also reshapes how and where your business is taxed at the state level.

Operational changes like relocation or restructuring can result in:

• Nexus creation in new states

• A shift in which sales are protected by P.L. 86-272

• Adjustments to your apportionment formula

• New reporting obligations, credits, or incentive opportunities

While every business has unique goals, involving tax professionals early in reshoring or fulfillment planning can help find potential exposure or compliance gaps — without delaying execution.

For example, when companies shift operations to avoid tariffs by opening new distribution hubs or adjusting shipping routes, the tax impact extends beyond coordination. These changes may influence how income is apportioned and whether certain sales fall under throwback or throw-out rules.

Tax professionals can support this process by:

• Modeling apportionment changes: Projecting how operational shifts affect sales factor weighting

• Evaluating throwback exposure: Estimating tax impacts from untaxed destination-state sales

• Finding new nexus points: Highlighting where physical or economic presence may trigger new filings

These insights help companies anticipate tax consequences tied to operational agility (without crossing into trade policy or legal advice). It’s about making sure strategic decisions don’t lead to unintended risk at the state level.

What You Can Do

Protecting your company from unexpected throwback exposure doesn’t require slowing down — it just takes coordination. Here are three practical steps to take now:

1. Evaluate protected sales: Identify where you’re relying on P.L. 86-272 and whether the destination states impose income tax.

2. Map shipping and fulfillment models: Understand where goods originate and whether origin states apply throwback rules.

3. Review apportionment exposure: Determine how throw-out rules or untaxed sales may affect your overall income distribution.

Tax May Not Be the Driver — But It’s in the Passenger Seat

You’re adapting to economic pressure with speed and creativity. But every supply chain move or sourcing shift may have tax implications your business didn’t see coming.

P.L. 86-272 may protect your business in some states, but it doesn’t stop others from taxing that income using throwback or throw-out rules. And when tariff-driven decisions lead to reshoring, the tax impact becomes even more layered.

Understanding how these state rules apply can keep your strategy intact and your risk exposure in check.

Where Tax Strategy Meets Business Agility

MGO is a national tax, audit, and consulting firm serving growth-minded organizations across manufacturing, distribution, and consumer sectors. Our State and Local Tax (SALT) team works with companies navigating complex operational shifts, helping you align your tax strategy with business agility.

From throwback analysis to nexus reviews, we bring practical insight that supports fast-moving decisions and long-term resilience. Talk to us today about how to keep your operations moving — and your tax strategy aligned.

The post How Tariff Changes Could Affect Your State Tax Profile appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Expanding through contract manufacturing opens opportunities for your cannabis or hemp brand — but also brings complex financial and regulatory challenges.

• Stay ahead of tax risks by aligning your operations with both federal and state compliance rules.

• Strengthen your contracts and tracking systems to keep royalty payments accurate and transparent.

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Contract manufacturing arrangements can accelerate brand growth for cannabis and hemp companies, but they present complex tax, accounting, and compliance challenges. To protect financial integrity and valuation, companies must:

• Recognize and present revenue in a manner consistent with accounting standards and investor expectations. 

• Structure operations to preserve favorable tax status — especially for cannabis intellectual property (IP) entities avoiding Internal Revenue Code (IRC) §280E. 

• Monitor multi-jurisdictional tax nexus triggered by licensing activity. 

• Implement clear, enforceable, and regularly reconciled royalty calculation methods.

1. Revenue Recognition and Financial Presentation

Accounting Considerations

In contract manufacturing models, brand owners typically license IP to local manufacturers, who produce and distribute products under the brand name in exchange for royalty payments. Under U.S. generally accepted accounting principles (GAAP), this licensing arrangement should be accounted for as royalty income — distinct from product sales revenue recorded by manufacturers.

• Licensed operators: Recognize product sales with corresponding inventory and cost of goods sold (COGS).

• IP companies: Recognize only royalty income, without inventory or COGS.

For both cannabis and hemp operators, proper classification ensures financial statements reflect contractual entitlements — not hypothetical retail values — which can withstand both audit and investor due diligence.

Investor and Valuation Impact

Royalty-based models often report lower top-line revenue than direct sales, potentially influencing valuation multiples in capital raises. Your company can mitigate this perception by:

• Presenting retail market performance data as supplemental (non-GAAP) information.

• Demonstrating brand market share, pricing strength, and geographic expansion.

• Maintaining accounting integrity by ensuring GAAP statements reconcile with contractual royalty terms.

Sophisticated investors prioritize accuracy and contractual consistency over inflated revenue optics.

2. Tax Positioning and Regulatory Compliance

Cannabis: Preserving Non-280E Status

Cannabis IP holding companies that do not sell THC products directly and operate as an independent trade or business are generally not subject to IRC §280E and enjoy a significantly lower federal tax burden than state-licensed cannabis operators. However, maintaining this advantage depends on operational alignment between a company’s tax position and accounting presentation.

• Revenue must be recorded as royalty income, not product sales.

• General ledger (GL) accounts and financial statement categories must reflect licensing activity, not manufacturing operations.

Misalignment — such as recording product sales revenue while claiming 280E exemption — can trigger IRS scrutiny.

Hemp: Avoiding Misclassification

While hemp companies are generally outside §280E due to the 2018 Farm Bill, misclassification of revenue streams can still lead to incorrect tax filings, higher tax liabilities, or state compliance issues.

Proactive Compliance Measures

• Regular review of GL account descriptions and revenue categories.

• Documentation that ties reported revenue directly to licensing contracts.

• Periodic confirmation that financial presentation supports intended tax treatment.

For cannabis brands, this is critical to preserving 280E protection; for hemp, it safeguards proper business classification and tax outcomes.

3. State Tax Nexus and Multi-Jurisdictional Compliance

Income Tax Nexus

Licensing IP can create state income tax nexus without physical presence. States differ in sourcing rules — some focus on where products are consumed, others on where IP is exploited. Cannabis companies must navigate cannabis-specific rules layered over general sourcing provisions, while hemp companies contend with varied CBD/hemp regulations.

Sales Tax Considerations

Licensing arrangements may create sales tax obligations or require exemption certificate documentation. Hemp brands selling directly to consumers are typically subject to standard sales tax rules in each state.

Risk Mitigation

• Conduct nexus analysis regularly across all jurisdictions where products are sold.

• File returns in nexus states even if no tax is due.

• Document exemptions and monitor legislative changes.

Factor in marketing, contractor activity, and promotional events in nexus determinations.

4. Royalty Calculation and Documentation

Common Dispute Areas

Royalty disagreements often arise over:

• Gross versus net sales bases.

• Treatment of COGS, taxes, and regulatory fees.

• Allocation of shared costs (utilities, equipment, marketing).

• Returns, discounts, and promotional allowances.

Industry-Specific Nuances

• Cannabis: Must incorporate jurisdiction-specific excise taxes and licensing fees into formulas.

• Hemp: May face cost allocation issues related to compliance testing and certification.

Best Practices

• Include pro forma royalty calculations in contracts, tested with realistic production and pricing scenarios.

• Obtain written acknowledgment of the agreed methodology.

• Specify all potential chargebacks, shared costs, and allocation rules.

• Maintain separate royalty tracking systems.

• Perform periodic reconciliations between contractual formulas and actual payments to identify discrepancies early — an emerging industry best practice.

• Consider independent accounting reviews to validate partner-reported figures.

• If the manufacturer and the IP company are related parties, contracts should be reviewed in relation to tax transfer pricing rules that require arm’s length and market rate terms.

Position Your Brand for Contract Manufacturing Success

Contract manufacturing can offer compelling growth opportunities for your cannabis or hemp brand. The key to sustainable success lies in disciplined revenue presentation, strong tax positioning, proactive compliance, and robust royalty oversight.

By aligning accounting standards with tax objectives, maintaining transparent investor communications, and reconciling royalties regularly, your company can position itself to expand with confidence while minimizing regulatory and financial risk.

How MGO Can Help

We help cannabis companies across the U.S. to navigate complex accounting and tax challenges — including contract manufacturing arrangements. Whether you’re structuring royalty agreements, managing state tax compliance, or preparing for a potential audit, our dedicated Cannabis practice can help you grow smarter. Reach out to our team today to learn how we can support your goals.

The post 4 Critical Tax and Accounting Considerations for Cannabis and Hemp Contract Manufacturing Arrangements appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Buyers will scrutinize tax compliance during the due diligence process.
• Failing to address potential underpayments or nexus issues can lead to purchase price adjustments, indemnifications, or even deal cancellations.
• A proactive tax nexus analysis can spot potential issues early and protect your business valuation.

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Preparing a manufacturing business for sale is a complex process. It can be so complex that around 10% of all announced transactions are canceled, according to an analysis from McKinsey.

When preparing your manufacturing business for sale, one way to help the deal go through is to conduct a tax nexus exercise. This process identifies your business’s income and sales tax obligations and addresses potential underpayments before a buyer performs due diligence. Taking a proactive approach to state and local tax exposures can be the difference between a seamless sale and a derailed deal.

Understanding Nexus in the Manufacturing Industry

Nexus refers to the connection between your business and a state that obligates you to collect and remit sales tax or pay income taxes. You can create nexus through physical presence (such as employees, offices, or warehouses in a state) or economic activity (based on thresholds like sales volume or number of transactions).

The landscape of sales tax nexus has grown increasingly complex since the 2018 Supreme Court decision in South Dakota v. Wayfair, which expanded states’ authority to enforce economic nexus laws for sales tax collection.

Why Nexus Matters in a Sale

Buyers who evaluate a business scrutinize tax compliance as part of the due diligence process. If a manufacturer has failed to address nexus obligations, the buyer may:

• Adjust the purchase price to account for potential tax liabilities.
• Hold back funds in escrow until you resolve the exposure.
• Demand indemnification, placing the financial burden of future tax disputes on the seller.

Common Pitfalls for Manufacturers

Manufacturers face unique challenges in managing tax compliance. Below are some common pitfalls and tips for avoiding them:

Failing to Collect Resale Certificates

Many manufacturers sell at wholesale and rely on resale certificates to exempt transactions from sales tax. However, failing to keep certificates current or collect them from all customers can lead to significant exposure.

For example, one of our clients, a manufacturer of high-end doors, unknowingly triggered nexus in multiple states through their installation activities. When the business was up for sale, buyers uncovered an estimated $5 million in uncollected sales taxes.

Fortunately, after analyzing their prior accountant’s workpapers, we realized the manufacturer had not collected resale certificates from many of their customers. By collecting those certificates, we reduced the estimated liability to $300,000, salvaging the deal without significant price adjustments.

Underestimating Economic Nexus Thresholds

States vary widely in their economic nexus thresholds, with some as low as $100,000 in sales. Manufacturers with high transaction volumes or multi-state operations may unknowingly exceed these limits.

For this reason, you must have mechanisms in place to monitor sales volume in each state where you make sales. Many states have a short turnaround time in which they expect you to register once you exceed the economic threshold.

Overlooking Corporate Employee Activity

Having employees work in a state, even temporarily, can create nexus. For example, employees working remotely from another state or sending clients across state lines for installations or inspections may trigger physical nexus.

Determine where all employees, especially remote workers, live and work to assess potential nexus implications.

Assuming Public Law 86-272 Provides Protection

Historically, manufacturers relied on Public Law 86-272 (P.L. 86-272), which exempted businesses from income tax if their activities were limited to soliciting orders for tangible personal property shipped from outside the state.

In 2021, the Multistate Tax Commission, an intergovernmental agency dedicated to ensuring fair and consistent tax policy among states and localities, updated its interpretation of P.L. 86-272, concluding that most internet-based sales fall outside its protections.

If your business relies on P.L. 86-272 to shield transactions from state income taxes, it’s crucial to analyze what specific economic, physical, or digital activities occur in each state and address them before putting the business up for sale.

How MGO Can Help

If you are preparing to sell your business, conducting a tax nexus exercise isn’t just “nice to have” — it’s an essential part of preparing the business for sale.

Considering nexus compliance upfront protects the business’s valuation, streamlines the sale process, and addresses financial risks for both seller and buyer. If your current accounting firm lacks this capability, ask them to team up with a firm that has a state and local tax-focused niche.

Proactively addressing state tax compliance with the help of an experienced team like MGO’s State and Local Tax group can help your deal close smoothly and profitably.

The post Selling Your Manufacturing Business? Consider Sales Tax Nexus appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Key Takeaways:

• Early tax planning is crucial to avoid costly mistakes and improve your U.S. market entry.
• Carefully evaluate entity structure, supply chain, and transfer pricing strategies.
• Engage with experienced legal and tax professionals to guide your U.S. expansion.

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Foreign direct investment (FDI) in the United States continues to grow, underscoring the country’s appeal to global businesses. However, this influx of investment also highlights the critical need for thorough pre-arrival tax planning. Proper planning is essential for navigating the complexities of the U.S. tax landscape and achieving a smooth and successful entry into the U.S. market.

Importance of Planning Before Entering the U.S. Market

The growing interest in the U.S. market among international investors makes it even more crucial for businesses to engage in comprehensive tax planning before entry. The U.S. tax system is multifaceted, with multiple layers of federal, state, and local taxes — each with its own set of regulations.

For foreign businesses, understanding these complexities early on is vital for mitigating tax liabilities and keeping compliance. Without a robust pre-arrival tax strategy, your company may face unexpected tax burdens, penalties, and operational challenges that could hinder your success in the U.S.

Checklist for Pre-Arrival Planning

Before entering the U.S. market, your business should follow a comprehensive checklist that addresses critical tax and operational considerations. Here are some of the key steps:

Decide the Appropriate Entity Structure

• C corporation or LLC (limited liability company): Given the ongoing growth in FDI, selecting the right business entity is crucial to capitalizing on the favorable investment climate in the U.S. A C corporation may be beneficial for companies looking to raise capital through equity, while an LLC offers flexibility and potential tax advantages.

• Branch, subsidiary, or no taxable presence: Foreign businesses must decide whether to operate as a branch of the parent company or set up a subsidiary in the U.S. Each choice has different tax implications and operational challenges. Another option, if planned appropriately, could be to sell in the U.S. without creating a taxable presence. This can be achieved by conducting limited activities or relying on a U.S. income tax treaty to avoid creating a permanent establishment in the U.S.

• Joint venture or partnership: Some foreign businesses choose to partner with an existing American company to more quickly pierce the market. This option can provide a more systematic and flexible path to U.S. market entry.

Analyze Supply Chain Implications

• Customs duties and tariffs: Understand the impact of U.S. customs duties and tariffs on imported goods. Proper supply chain planning can help minimize costs and avoid delays.

• Logistics and distribution: Evaluate the most efficient logistics and distribution channels for your products in the U.S., considering factors such as warehousing, shipping costs, and regional demand. With FDI driving increased competition, improving your supply chain can provide a critical advantage.

Develop a Transfer Pricing Strategy

• Compliance with Internal Revenue Service (IRS) guidelines: Price intercompany transactions according to arm’s length principles to follow IRS transfer pricing regulations. This is especially important for businesses with significant cross-border and/or cross-state transactions.

• Documentation requirements: Keep thorough documentation of transfer pricing policies and transactions to avoid penalties during an IRS audit.

Understand State and Local Tax Obligations

• Nexus considerations: Determine where your business has nexus for sales and use tax, income/franchise tax and other tax — whether through physical presence, economic activity, or other factors — since this will dictate your state and local tax filing obligations.

• Sales tax compliance: Register for sales tax collection in jurisdictions where your business has nexus and follow state-specific sales tax regulations.

Address Benefits and Payroll Requirements

• Health insurance and retirement plans: Understand U.S. regulations on employee benefits, including health insurance and retirement plans, which may differ significantly from those in other countries.

• Payroll taxes: Prepare for U.S. payroll tax obligations, including Social Security, Medicare, and federal and state unemployment taxes.

Engaging with Legal and Tax Professionals

Working with experienced legal and tax professionals is critical to successfully navigating the complexities of the U.S. tax system. These professionals can provide you tailored advice based on your specific business needs, helping you avoid common pitfalls and improve your tax strategy.

How to Choose the Right Advisors

• Experience and knowledge: Look for advisors experienced in U.S. tax law, particularly those specializing in international and state and local tax issues who have a deep understanding of the industries in which you operate.

• Proven track record: Seek out professionals with a proven track record of helping foreign businesses successfully enter the U.S. market. Client testimonials and case studies can be valuable indicators of their capabilities.

• Collaborative approach: Choose advisors who will work closely with your in-house team and your other consultants to develop a cohesive strategy that addresses all aspects of your U.S. market entry.

Position Your Business for a Seamless U.S. Market Entry

With the U.S. continuing to attract significant FDI, your business must be well-prepared to enter the market. Pre-arrival tax planning is key. By carefully considering entity structure, supply chain logistics, transfer pricing, and state and local tax obligations, you can position your business for long-term success in the U.S.

How MGO Can Help

Entering the U.S. market can be complex, but you don’t have to navigate it alone. Our assurance, tax, and consulting professionals — including International Tax and State and Local Tax teams — are here to guide you through every step of the process.

Reach out to our team today to learn how we can help your business plan strategically to achieve a smooth U.S. market entry.

The post Your U.S. Market Entry Pre-Arrival Tax Planning Checklist appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Key Takeaways:

• Understand economic nexus to avoid unexpected tax liabilities when expanding your business into the United States.
• State-specific sales tax rules vary widely; compliance avoids penalties and streamlines operations.
• Consulting with tax professionals can help you navigate complex state and local taxes, enhancing your U.S. expansion strategy.

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The U.S. continues to captivate global businesses, attracting significant foreign direct investment (FDI). It’s easy to understand why: Entering the U.S. market is a strategic move that gives your business access to a vast customer base and a thriving economy. However, this opportunity also comes with the challenge of navigating a complex tax landscape. Understanding the nuances of state and local taxes is crucial to maintaining compliance while refining your U.S. operations.

This article explores critical aspects of state and local tax issues — focusing on economic nexus, sales tax obligations, and the importance of consulting services in navigating these challenges.

Overview of State and Local Tax Complexities

The U.S. tax system is uniquely intricate, with businesses required to navigate not only federal taxes but also the varying tax rules of 50 states and many localities. As a strong influx of FDI drives more companies to establish operations in the U.S., many of these businesses find themselves unprepared for this complex tax environment. Companies must stay compliant across multiple jurisdictions — a challenge that can significantly impact your overall tax burden.

Consider a European company expanding its e-commerce operations into the U.S. The company quickly discovered that a lack of understanding of state-specific sales tax obligations led to non-compliance, resulting in costly penalties and accumulating interest. By consulting with tax professionals, the business streamlined its tax compliance processes and reduced its overall tax liability — highlighting the importance of professional guidance.

Economic Nexus

Definition and Implications of Economic Nexus

Economic nexus refers to a business’s economic activity within a state, which may create a tax obligation regardless of physical presence. This concept gained prominence following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require businesses with significant economic activity in a state to collect and remit sales tax (even if the company has no physical presence in the jurisdiction). Since the Wayfair decision, an increasing number of states are applying economic nexus for both sales and use taxes as well as state income taxes through the use of a factor presence nexus standard.

State-by-State Nexus Thresholds

It is crucial to understand each state’s threshold for economic nexus. It’s also important to understand that the economic nexus threshold for sales and use tax may not be the same as the threshold for income tax. For example, in New York, a business with more than $500,000 in sales and 100 transactions within the state must collect and remit sales tax. However, a corporation is not subject to New York corporate income/franchise tax unless its New York receipts equal or exceed $1,000,000. Other states may have higher or lower economic thresholds. Keeping track of these varying standards is essential for proper compliance.

Impact of Legislation

Changes in state and local tax laws, such as those resulting from the Wayfair decision, have far reaching implications for businesses — especially in e-commerce. Your company must continually monitor changes in state tax laws to remain compliant and avoid unexpected tax liabilities.

Sales Tax Obligations

Sales tax requirements in the U.S. are state-specific, with each state setting its own rates, rules, and exemptions. This can be particularly challenging if your company operates in multiple states, as you must manage varying tax obligations depending on the jurisdictions where you conduct business. For instance, while a good or service may be subject to sales tax in some states, it may be exempt in others.

Examples of Compliance Challenges

Compliance with state-specific sales tax rules can be complex and time-consuming. For instance, a company might face challenges in categorizing products or services as taxable or nontaxable according to each state’s tax code. Additionally, managing exemption certificates, state and local tax rates, filing deadlines, and keeping up with ever-changing tax laws can create significant administrative burdens.

Industry Specific Considerations

The sales tax challenges facing businesses vary from industry to industry. For example, an e-commerce company selling software-as-a-service (SaaS) may find its revenue is subject to sales tax in some states while not in others. To properly address the issue, the company should understand how the various states source their revenue. Then the company should review those identified states’ laws to determine how they define taxable products and services. Finally, the company needs to understand how each state applies similar laws in their own unique manner. Understanding these nuances is critical for correct tax collection and reporting.

Consulting Services 

Role of Consulting in Navigating State and Local Taxes

Given the complexities of state and local tax laws, consulting with tax professionals is crucial. They can help your business understand its tax obligations, develop strategies to minimize your tax burden, and verify you are compliant with evolving state and local tax rules and regulations.

Consulting Strategies for Compliance

• Nexus studies: Consultants can conduct nexus studies to determine where a business has tax obligations, helping you avoid potential penalties for non-compliance.
• Automation tools: Consultants can assist you with implementing tax automation software to streamline the process of calculating, collecting, and remitting sales tax across multiple states.
• Audit representation: Consultants can aid with state tax audits by helping to prepare all necessary documentation, confirm the company is fully compliant with tax laws, communicate directly with the auditor, and provide nuanced arguments regarding tax positions taken.

Tax Credits and Incentives

Consultants can help businesses take advantage of state-specific tax credits and incentives, which could be a deciding factor for where to set up a new facility. For example, states like California offer significant credits for research and development (R&D) activities. Your business should conduct a comparative analysis of the tax incentives offered by different states. A state currently receiving high levels of FDI may offer significant tax credits for R&D activities or job creation, which could be critical for manufacturing companies deciding where to locate their operations. These incentives are often part of state-level strategies to attract more foreign businesses.

Emerging Trends and Future Considerations

Changes in State Tax Policy

One emerging trend is the increasing reliance on sales tax by states due to declining income tax revenues — a shift that may be partially influenced by broader economic trends, including strong FDI inflows into the U.S. Your business can prepare for these changes by staying informed about legislative updates and adjusting your tax strategies accordingly. A state and local tax consultant can play an instrumental role in assisting your company in keeping up with these trends.

Impact of Remote Work

Since COVID, the rise of remote work has further complicated state tax obligations. Companies with remote employees in multiple states may face new tax liabilities even if the business has no other physical presence (like an office). Additionally, as remote work becomes more prevalent, the tax obligations for companies with employees in multiple jurisdictions are becoming increasingly complex, further underscoring the need for proactive tax planning.

Tax Treaty Considerations

While primarily a federal issue, international tax treaties can influence state tax obligations indirectly. For instance, income tax treaties might mitigate double taxation. Although states are not parties to foreign tax treaties, your business should be aware of how state and local taxes may interact with these income treaties.

Preparing Your Business for U.S. State and Local Tax Compliance

Successfully navigating the complexities of state and local tax is a critical part of expanding your business into the U.S. By understanding economic nexus, managing sales tax obligations, utilizing consulting services, and staying ahead of emerging trends, your business can maintain compliance, avoid penalties, and improve its operations in the complex state and local tax environment. As the U.S. continues to attract significant FDI, being well-prepared and staying informed will be key to achieving long-term success.

For further insights and guidance on expanding your business into the U.S., reach out to our International Tax team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. In this series, we will delve into specific aspects of this process, providing guidance and practical tips. Our next article will dive into pre-arrival tax planning.

The post Master State and Local Taxes for Your U.S. Expansion appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Tech companies have historically faced complex state and local tax challenges, particularly regarding nexus and sales tax.
• Understanding product and service classification, customer types, transaction documents, and research and development activities is crucial to navigating tax challenges.
• Regular nexus reviews and proactive tax planning can help companies determine compliance, mitigate risks, and identify savings opportunities.

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For technology companies, state and local tax (SALT) — particularly issues related to nexus and sales tax — can be a minefield. Here is what you need to know to stay compliant and avoid costly mistakes.

Understanding Nexus and Protected Activities

Nexus determines whether your company has a taxable presence in a state. For today’s tech businesses with customers spanning across the U.S., nexus can be triggered more easily than you might think.

• For sales tax purposes, in addition to physical presence, most states have statutes that establish a “bright line test” based on sales revenue and/or transactions.   Generally, the rule is $100,000 or more in sales and/or more than 200 transactions occurring in a state. This is referred to as “economic nexus.”
• For state/local income tax purposes, in addition to physical presence, some jurisdictions also have a “bright line test” based on the presence of certain factors including property, payroll, or sales in a state. This test is referred to as “the factor presence test.”

Additionally, for net income tax purposes, there is a federal law that protects certain activities performed by taxpayers selling tangible personal property. Public Law 86-272 (PL 86-272) shields most sales solicitation activities — which would normally be subject to income tax — from a state’s jurisdiction. However, assisting with installations, calibrations, or training are among activities typically not protected (even though these tasks may support the sales process). This common selling practice in the tech industry often creates income tax nexus without companies realizing it.

PL 86-272 does not apply to service providers. Thus, to the extent the revenue generated by a tech company is for services (as defined by each state) and the company solely solicits sales in the state, the activity will nonetheless create income tax nexus in that state.

For franchise tax, gross receipts tax and other state/local taxes, nexus thresholds may be far lower than the ones discussed. In addition, the PL 86-272 protections do not apply.

The application of nexus rules by tax type to the tech industry is extremely complex and requires a review by a state tax law professional.

Navigating Sales Tax Complexities

In addition to nexus, sales tax rules can vary significantly from one jurisdiction to another, making compliance challenging for tech companies. Two main factors drive this complexity:

1. Product and Service Classification and Documentation

Different states may classify your product/service in different ways, affecting its taxability. This is especially true in the tech industry where states are continuously examining the definition of software as a service (SaaS). For example, one state might conclude your product/service is software while another state may classify it as data processing. State auditors will review your revenue streams, documentation, etc., to make the determination. This conclusion matters as some states tax data processing while others may not.

The classification also matters in the application of sourcing rules by state. For example, sourcing software revenue may differ state by state. It may be sourced based on where the software or server is located in one state and where the user is located in another state. The complexity arises in applying two (2) sets of rules on the revenue generated from the same transaction.

2. Customer Type

The taxability of your product/service can also depend on the type of customer you sell to. Nonprofit organizations, healthcare facilities, government entities, and wholesalers may be exempt from sales tax in certain jurisdictions. Keeping accurate exemption certificates is essential when selling to a mix of taxable and exempt customers to avoid over collecting or under collecting taxes.

Exploring Tax Credits and Incentives

In addition to understanding your nexus and sales tax obligations, your company may also benefit from exploring tax credits and incentives available at the state and local level such as: 

R&D Tax Credits

Tech companies frequently engage in research and development (R&D), which can qualify for substantial tax benefits. Similar to federal R&D tax credits, many states offer R&D credits that can help reduce your overall tax burden.

Environmental Incentives

As your company expands, you may invest in new office space or facilities, incorporating environmentally friendly technologies. Some states offer environmental tax credits that can help you reduce costs while contributing to sustainability initiatives.

4 Key Strategies for Staying SALT Compliant

Keeping up with state and local tax laws can be overwhelming — especially when they are constantly changing. Here are strategies to help you stay compliant:

1. Understand Your Obligations

Staying compliant starts with understanding how your products and services are classified for both income and sales tax purposes. Each state may treat your offerings differently and understanding whether your product and/or service is taxable, and at what rate, is critical. Additionally, you need to assess your support and sales activities to determine whether they are protected activities, such as those covered by PL86-272, or if they create taxable presence (nexus).

2. Simplify with Software

Sales tax software can help streamline your compliance process. Many tech companies operating in multiple states use this tool to add sales tax automatically to customer invoices. The software calculates the tax rate for each location based on state, local, and district level rules. It can also help with tracking transactions and automating sales tax filings, reducing errors, and saving time.

3. Document Your Decisions

Meticulous documentation is key to maintaining compliance, especially if your company is subject to an audit. Keep records of decisions on tax classifications, nexus determinations, and exemptions. This documentation will be invaluable during an audit — helping you prove that your company acted in good faith and followed the appropriate processes.

4. Conduct Regular Reviews

As your business grows, so do your tax obligations. It is important to periodically review your nexus footprint — especially when expanding into new states or hiring remote employees. A nexus review assesses your corporate and selling activities by state to determine if your company has tax nexus and therefore potential tax exposure and filing obligations. Regular nexus reviews will help you collect and remit sales taxes and pay income and gross receipts taxes in all necessary jurisdictions and avoid penalties for non-compliance.

Taking a Proactive Approach to SALT

As your tech company expands into new markets, staying ahead of state and local tax (SALT) obligations becomes increasingly important. Regular nexus reviews and proactive tax planning not only helps you avoid costly mistakes but also positions your company for sustainable growth.

How MGO Can Help

With extensive experience working with technology companies and a dedicated SALT team, we can help you effectively navigate the complexities of state and local taxes. Through our nexus review process, we analyze your multistate activities — including sales, payroll, and property presence — to develop a tailored SALT compliance plan and resolve outstanding liabilities resulting from unpaid taxes in various jurisdictions.

In addition, our Tax Credits and Incentives team can help you determine if you qualify for any state and local tax credits to offset your tax burden.

Reach out to our team today to gain clarity on your SALT obligations and protect your business.

The post How to Keep Your Growing Tech Company State and Local Tax Compliant appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Vineyards and wineries often navigate sales and use tax requirements in multiple jurisdictions, with different rules, rates, and exemptions in each state.

• Promotional activities, such as “buy one, get one free” offers, hosting wine tastings, and online advertising can unknowingly create use tax exposure.

• Sales tax compliance software often doesn’t address excise and gross receipts taxes, such as Washington’s B&O tax and Ohio’s CAT.

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Navigating state and local taxes (SALT) is challenging for any business that sells across state lines, but it can be particularly challenging for vineyards and wineries.  

Various excise, sales and use, and gross receipts taxes can apply in different jurisdictions. Not following the complex web of tax rules and regulations can lead to audits, penalties, and even the loss of your license. Fortunately, with the right guidance, you can follow the various state and local tax requirements and even reduce your tax burden.

Understanding Sales and Use Tax Registration and Licensing

Sales and use tax registration and licensing requirements vary by state and depend on whether you ship products directly to consumers. Not all states allow direct-to-consumer shipping, adding another layer of complexity.

Evaluating your sales and use tax exposure requires answering several questions:

1. In which state and local jurisdictions do you have nexus? Sales tax nexus is a connection between your business and a tax jurisdiction that allows the state or local government to impose sales tax on your business. Most states levy a sales tax, and some, including California, Louisiana, and Tennessee, allow localities to impose their own taxes. You can have physical nexus in a jurisdiction by having employees or a location in the area or economic nexus by meeting a threshold for gross receipts or number of transactions.

2. Are you properly registered and paying taxes in that jurisdiction? Some industries might gamble on the cost-benefit analysis of registering and paying sales tax in multiple jurisdictions, but vineyards and wineries must prioritize compliance to maintain their licenses. If your winery has a license or distributes alcohol products in a state, it has nexus and should comply with all relevant tax obligations — regardless of economic thresholds.

3. Are you taking advantage of sales and use tax exemptions in each jurisdiction? Exemptions differ by state. For example, California offers a partial sale and use tax exemption for winery equipment used in manufacturing — such as grape crushers, de-stemmers, presses, bottling equipment, and fermentation tanks. Many states also offer resale exemptions, allowing winemakers to purchase tax-free raw materials like citric acid.

4. Do you have the proper documentation in place? If you take advantage of exemptions, you must have the right documentation. Without proper records, selling the business or facing a sale and use tax audit can be complicated and costly.

A reverse sales tax audit can help you answer these questions. During a reverse sales tax audit, a professional reviews your invoices and purchase orders, researches applicable laws, and thoroughly documents your exemptions. A reverse sales tax audit can also help assess whether you have overpaid sales tax due to missing available exemptions. If that is the case, you can review prior returns, find potential overpayments, and file amended returns to secure refunds.

Unique Vineyard and Winery Sales Tax Issues

The nature of the wine business brings some unique challenges to sales and use tax compliance. Here are a few issues to consider:

Promotions and Use Tax

Many wineries conduct “buy one, get one free” offers without realizing they must pay use tax on the free item and remit it to the state.

Often, a simple change of wording in the promotion, like changing it to “Buy 2 and get 50% off the total,” can eliminate use tax exposure.

Store Displays

Another area of concern is giving displays to stores. If the winery doesn’t sell the display to the store, the winery IS the final customer. If the winery didn’t pay sales tax on the display purchase, it must report and pay use tax on the item.

Event Marketing and Advertising

Many vineyards and wineries deploy sales representatives to host events without realizing this can create physical nexus in many states.

Examples include hosting wine tastings, holding educational events, and participating in festivals and music events.

Even online advertising can unintentionally establish nexus, so it’s crucial to work with an advisor who understands the industry and can help you find potential sales and use tax exposures.

Excise Taxes and Gross Receipts Taxes

Sales and use taxes aren’t the only taxes vineyards and wineries need to consider. Many states also levy excise taxes and/or gross receipts taxes. These are often more aggressive than sales tax because they’re levied on gross receipts with minimal exemptions. Some examples include:

• Washington’s business & occupation (B&O) tax

• Ohio’s commercial activity tax (CAT)

• Texas franchise tax

• Tennessee business tax

While excise and gross receipts taxes often have low rates, they can add up over time if not addressed promptly.

Don’t assume full compliance because you use sales tax compliance software. Some popular tax compliance solutions do not cover gross receipts taxes like Washington’s B&O tax, leading to potential oversights.

How We Can Help

From compliance with sales and use tax requirements to identifying and documenting relevant exemptions, MGO’s State and Local Tax team can review if your vineyard or winery still is compliant and doesn’t overpay your state and local tax liability.

Contact us today for help determining compliance and identifying potential tax-saving opportunities.

The post State and Local Tax Risks and Opportunities for Your Vineyard or Winery appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Sales and use tax rates and regulations change often, and the rules vary widely from state to state. As a result, many businesses find themselves “over-complying” with sales tax rules and neglecting potential savings. For taxes that have already been paid (and that are still within the statute of limitations), you can submit a claim for refund — through a process that is often referred to as a “reverse audit.” In this video, we explore how collaborating with our State and Local Tax team can help you perform a reverse audit to improve your bottom line.

To read more about Reverse Sales Tax Audits read our article here.

To get started working with the MGO State and Local Tax team, click the link HERE.

The post 4 Steps to Recover Overpaid Sales Tax with a Reverse Tax Audit appeared first on MGO CPA | Tax, Audit, and Consulting Services.