Franchise tax
Companies that meet state-specific “doing business” definitions are subject to franchise tax, which may be calculated based on assets, net worth, or gross receipts. In the illustrative example, once the portfolio company established nexus in North Carolina, it became subject to a $6.8 million cost — (($10 billion net worth × 45% SSF) × 0.15%).
Sales and use tax
The location of workers can affect where the revenues they create are taxed. A company should know where employees are working because the services those employees provide may be subject to sales tax in some states but not others. Location can also affect the taxes paid on software and other items purchased for employees’ use.
Gross receipts
Multiple states and cities impose a gross receipts tax on the total gross revenue of a business. The sourcing rules may differ from sales and use taxes, but the implications for companies with remote workers are similar. Employees who work from locations with taxes on gross receipts may affect the filing obligations of their employers.
Failing to account for these state tax risks can have a dramatic impact on a portfolio company’s future plans. When potential buyers discover unaddressed tax issues, they may question the company’s business practices and the stewardship of management. They could reduce their offer or back out of the deal altogether. Longer escrow periods and more holdbacks are also possible. This potential for lower valuation makes tax compliance just as important for CFOs and controllers as it is for tax directors.
Remote and hybrid work is here to stay
As companies develop their return-to-work plans, they should aim to address the state tax challenges of remote and hybrid working. Organizations are creating new strategies to adapt to flexible ways of working, including re-evaluating their approaches to hiring, revamping policies on where and how work gets done, and adopting workplace and technology changes. Of course, there is no one-size-fits-all approach. Companies should consider their unique needs, culture and risk appetite and leverage technology-enabled solutions to reduce cost while remaining scalable to future growth.
When evaluating technology-enabled solutions, many organizations are first identifying, based on their assessment of risk tolerance for their employee population, whether they need pre-work request and approval workflows, post-work review and validation systems, or a combination of the two. In addition to improving cost efficiencies through reduced human-hours spent analyzing risks or coordinating approvals and assessments, technology-enabled solutions can also help reinforce organizational business rules around remote and hybrid work while communicating and enforcing a company’s policy in a transparent and consistent manner.
As they contend with the world of hybrid work, companies should assess whether their internal systems can track and accurately report employee work locations and state and local filing obligations. The earlier that a CFO or controller addresses these issues, the better off a portco will likely be as it plans for the future.
The following Ernst & Young LLP subject matter experts contributed to this article:
Ralph Furlo, Partner, Indirect Tax
Bridget Ahern, Principal, People Advisory Services
Christopher Hill, Senior Manager, People Advisory Services