By Lonny S. Cades, Esq.
Across the nation, individuals are not the only ones suffering from the effects of the poor economy. Federal, state and local governments are also struggling, each desperate to build up their respective coffers. In an attempt to raise much needed funds, municipalities have been stepping up their efforts to collect taxes from all sources, including individual residents, businesses with offices located in the particular municipality, as well as anyone conducting business within its borders. In order to collect these taxes, local districts are both enacting new tax laws as well as implementing existing laws that previously were not diligently enforced.
Examples of taxes being assessed by municipalities as part of the recent heightened enforcement efforts include, but are not limited to, business privilege taxes, sales and use taxes, occupational taxes (usually based on the number of employees doing work in the municipality), taxes on labor and services, earned income taxes and gross receipt taxes. In construction projects, it is often the case that both general contractors and subcontractors are taxed for work performed by the subcontractor.
As part of their efforts to crack down on taxes, municipalities are hiring firms, usually on a contingent fee basis, to go back as many years as permitted by the applicable statute to conduct taxpayer audits. The audits invariably result in a tax increase for each of the years assessed, as well as significant penalties, interest and attorneys' fees. Quite often, the penalties and interest assessed exceed the amount of the taxes determined to be due.
The definitions and rules contained in these municipal tax laws vary greatly across jurisdictions. Accordingly, it is important that contractors be aware of all local taxes that could be assessed for work done in a particular municipality prior to submitting a bid or negotiating price and agreement. Contractors would be wise to factor these potential taxes into the cost of the work. Individuals and businesses should consult with counsel to review their specific situation.
Contractors must beware even if they are doing work for a tax exempt entity as there still may be taxes due on a portion or all of the work. It is important to review the requirements for the entity maintaining the tax exempt status, as well as any filing requirements, and strictly adhere to them in order to utilize any available tax exemption.
With the increased scrutiny and enforcement by the municipalities, it is now more important than ever to maintain and retain detailed records for both the business, as well as for individual projects. For businesses doing work in more than one state, there may be some tax planning alternatives to consider, and the attorneys in our Business Transactions Group would be glad to explore these with you.
Lonny S. Cades is a partner in the Business Transactions Group at Cohen Seglias and focuses his practice in many areas of transactions such as formation, operation, acquisition and sale of corporations, limited liability companies, partnerships, joint ventures, limited partnerships and sole proprietors. He can be reached at (215) 564-1700 or firstname.lastname@example.org.