A recent report by CFO, the 2014 CFO State Tax Survey, examined how 78 tax directors responded to state tax compliance changes implemented in 2013. These directors were asked to rank states based on various tax-related issues.
The report noted certain states are increasing their tax collection efforts for out-of-state corporations.
“One way of doing so is by asserting economic nexus – a threshold of business activity that makes an out-of-state company subject to income tax (as opposed to sales and use tax) even without a physical presence in the state,” the report said.
When asked which states were most aggressive in this regard, respondents ranked California as the top state. California was followed by New York, New Jersey, Michigan and Massachusetts. In regard to the states that are least aggressive in asserting economic nexus, South Dakota, Nevada, Virginia and Wyoming, which tied for third, and Kansas and Maine were the top 5.
Tax directors aren’t fond of California
California held a position in the top five spots for all other negative dimensions of the survey. For overall tax environment, it tied with New York for least fair and predictable. When it came to asserting sales and use tax nexus, California was ranked most aggressive, and held No. 1 for likelihood of enacting corporate tax rate reform and aggressiveness in pursuing clawbacks of business tax incentives granted to individual companies.
The only ranking where California wasn’t seen as the most unfavorable was in regard to whether respondents thought the state’s fiscal condition would have adverse effects on their companies in the next year. The Golden State followed behind Illinois at No. 2 for this question.
Companies must understand their state tax reporting obligations
The IRS has made significant efforts to close the tax gap, which refers to the disparity between actual tax revenues that are collected and what the agency should be collecting. At the state level, many reforms and actions have been put in place to accomplish the goal of improving tax collection efforts.
In fiscal year 2011, Idaho beefed up its efforts by adding 48 temporary auditors and collectors. This move led to $26.3 million in collected taxes, far exceeding the original $11.5 million estimate. As states increase their enforcement, companies need to be aware of reporting responsibilities to avoid penalties.
For more information about state tax reporting, check out our education section.
