Planning Around State and Local Tax Issues in Utah
How a legal professional can help businesses comply and still thrive
on December 30, 2020
Updated on August 3, 2022
State and local taxes are a significant and often underappreciated burden for businesses. According to a report from the Council on State Taxation (COST), state and local business taxes make up nearly 4.5% of the total American private sector GDP. “The primary taxes are property taxes, state income taxes and sales tax,” says Nathan Runyan, a tax attorney in Salt Lake City. “Utah doesn’t have a [real estate] transfer tax, but there’s some other transfer taxes, and there’s also industry specific taxes.”
These taxes can have a major impact on the cash flow, financial returns and profitability of your business. Strategic tax planning is an important aspect of successfully building and growing a business in Utah. Your company can comply with tax laws and still thrive. Here are five key areas of state and local tax (SALT) law that a business tax attorney can help you with in Utah.
Structural Tax Planning and Internal Accounting
The importance of proper tax planning cannot be overstated. Too many Utah businesses run into avoidable tax problems simply because they failed to put the right structure in place. Innocent mistakes and oversights can be costly. An experienced legal professional can help you create a tax plan and internal accounting procedures that ensure that your business is fully accounting for state and local tax liability during the tax year.
Structural planning isn’t just for setting up a small business. “Structural planning is important if you are looking at, for example, an acquisition,” Runyan says. There are different tax implications depending on whether the sale is structured as a sale of equity or a sale of assets, he adds.
Transactions will need to be aware of state income tax implications as well as sales tax, and both can vary depending on how the transaction is structured. For example, “On the sale of a business, there’s typically no sales tax on intangible property like stock,” Runyan says. “But if the business is sold and the assets are individually sold, there could be a sales tax implication for that.” Plus, he says buyers in Utah may qualify for an isolated or occasional sale exemption.
An experienced business tax professional can help you understand and plan for the state and local aspects of transactions, including tax treatment, total financial liability, and risk mitigation.
“Within my own firm, we have corporate attorneys who advise clients on how to do sales and working on the actual sale of the business or sale of assets,” Runyan says. “They’ll have state and local tax attorneys like myself come in and review the documents, review the structure and advise the best structure that would minimize state and local taxes, from our perspective.” A state of Utah and local tax attorney will also be able to explain the tax code, what taxes need to paid and what documents should be sent to the taxing authority, and can also help clients when they need to make corrections.
SALT Applicability and Residency Questions
Perhaps no state and local tax issue causes more confusion for business owners than residency questions. In some cases, the business owner’s personal property is a factor as well as the location of the business itself. “Now, if it’s a C corporation, the residency of the owners shouldn’t really matter,” Runyan says. “But if it’s an LLC or pass-through entity and S Corp, the income that flows through to the owner does matter in the residency of the owner.”
For businesses that operate in multiple jurisdictions, “it’s very important to recognize what the apportionment fractions are for each of the states and to work through that,” Runyan says. Businesses can be sometimes be taxed in other jurisdictions even if they don’t have a physical presence in that state. “So there’s potential for an argument that the economic nexus or the activity in the state will require a filing if you have enough sales in the state,” Runyan says. At the same time, some types of income are only taxable in the primary place of business, or domicile.
A business tax lawyer can help you resolve any questions or concerns you may have about tax applicability or tax residency.
Tax Credit and Tax Incentive Identification
Tax credits and tax incentives represent a significant source of financial savings for businesses, and they vary by industry and location. “You can have income tax credits, both state and federal, and you can also have incentives from state and local entities,” Runyan says.
Here’s one example of state-specific tax credits and incentives: in Utah, there is no sales tax on the purchase of solar panels installed in the state, and there’s also a production tax credit for solar energy. Both are intended to encourage renewable energy production.
Other tax incentives can be created to encourage companies to create jobs, or to build in a certain area. “There’s definitely opportunity for businesses to negotiate, both at the state level with the Office of Economic Development, and at the city and county level to get abatements for property taxes and sales taxes,” Runyan says.
It is crucial that your company is able to identify and take advantage of any applicable credits and incentives. You may be in a position to reduce your state and local tax liability within a calendar year by a substantial amount with a few relatively simple steps. An attorney can help identify tax credits and incentives that might apply to your business and can also help you negotiate with government entities. “The lawyer will understand the credit, understand the incentive,” Runyan says. “There’s documentation and contracts that you enter into and it’s important to make sure that the provisions of the contract are accurate and do include the correct statutory provisions.”
Representation in State and Local Tax Controversies
With state and local tax issues, a proactive approach is always best. This is especially true if you are involved in any type of tax controversy (dispute). The biggest types of tax controversies Runyan sees involve property tax, state income tax and sales tax. In property tax disputes, Runyan urges, “It’s important to have an advocate to work with the property tax division. And if there’s a trial or a case before the tax commission, it’s important to have counsel to present your valuation evidence and to make sure that the property tax division is doing it correctly.”
Many business owners don’t fully grasp the intricacies of Utah’s sales tax laws. As a result, it’s easy to lose a dispute because you’ve made the wrong legal argument. Not only can an experienced attorney pinpoint the correct legal arguments for state sales tax, they can work to resolve disputes before they reach litigation. “We are often called on by clients to work with the auditing division early on in the process, while the audit is still going on, so that we could negotiate and present the taxpayer’s position,” Runyan says, “so that potentially there isn’t a need for an appeal.”
Whether your business is dealing with the Internal Revenue Service (IRS), the Utah State Tax Commission, or any local tax department, a legal professional will protect your rights and interests. If you have any specific questions about the rights or responsibilities of your company, contact an experienced Utah business tax attorney for guidance and support.