State Budget Woes to get Even Worse

Today's Wall Street Journall reports that states are facing an aggregate revenue shortfall of over $230 Billion from 2009 through 2011.  California, New York, Illinois, are all facing multi-billion dollar budget shortfalls for this year alone.  In this consumer driven economy sales tax revenues are down considerably and the personal and corporate income tax base is eroding quickly as profits languish and unemployment continues.   Compound the revenue shortfall with increased costs of services and decline in investment income, the states are running out of options for balancing their budgets.

So what does this mean to you as a business owner or manager?  A lot!!  It seem logical to me that if states are running short of sales tax revenue then they need to bridge that gap.  This will be through increasing tax rates, expanding the tax base, increasing enforcement, or all three.  I'm thinking all three
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Increasing enforcement may be the quickest and easiest thing for states to do.  This can include increases use of nexus questionnaires and an increase in audit activity.  For businesses that are doing things correctly these activities may pose no problem to you.  If your business is not in full compliance you should be concerned.  It only takes one  sales tax audit to inflict significant financial damage to your business.  Being proactive is essential. In many cases, states also have corporate officer liability and successor liability so you really can't hide completely from the sales tax problems that are confronting your business. 

Tax rate increases are never popular and will likely be the last resort.  Expanding the tax base can include removing or sunsetting sales tax exemptions or expanding the tax base to include more services.  This is already happening with regard to taxing digital products and expanding the tax on other technology products and services.  Another way to expand the tax base will be fo press Congress to require remote retailers (on-line and catalog) companies to collect tax in the destination states.  Legislation like this has bounced around for decades  but has usually not taken hold.  The time may be right for this now.

As I read articles like the one in the WSJ it causes me concern for the small businesses that could be ruined when they are audited by a state. Don't ignore the sales  tax issues your company may have.  Deal with them while you can still manage some of the outcome.