Moderated by Emily, Digital Transformation Consultant at Hyperbots
Sherry: Hello, and welcome to all our viewers on CFO Insights. I’m Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have John Silverstein here with me, who is a seasoned finance executive with over two decades of experience in leadership roles, with expertise across both Fortune 500 companies and high-growth startups. Thank you so much for joining us today, John.
Sherry: Let’s dive into some concepts of establishing local offices for managing tax compliance across various states. My first question to you for that would be, what is the primary motivation for companies to establish local offices in multiple states for tax compliance?
John Silverstein: Yeah, the main motivation… it’s kind of archaic in some ways, as the states have changed pretty drastically since 2018, which is when the Wayfair case, commonly known, took place. It changed the way nexus needs to be established. It’s not just physical presence anymore but the main motivation is to be compliant with each state’s tax regulations and requirements. Tax laws vary significantly from state to state. So if you’re in one state, it’s hard to understand how it varies in other states or even counties, for income tax, property taxes, and sales taxes. By having local offices, you understand those nuances more closely, and you can swiftly adjust to regulatory changes that are constantly shifting. We’ll go into that more shortly, but the old way was companies selling tangible goods had to collect or remit different sales tax rates depending on the state and even county. Local offices help ensure accurate sales tax handling, which can be especially complex in states with high variability in tax rates, such as California.
Sherry: And how do local offices help companies manage their nexus obligations for sales tax?
John Silverstein: Yeah, number one, nexus, like I just alluded to, used to mean a physical presence. Having a sufficient connection to a state obligates a company to collect and remit sales tax there. Establishing a local office creates that physical presence, which immediately triggers nexus requirements, regardless of the amount of business you do in that area. It’s important to make decisions based on understanding the nexus requirements because you might already have nexus, and it doesn’t matter how much business you do. If you have a physical presence, you definitely need to be sure you’re compliant with sales tax.
One example is a technology company that has offices in Texas and California. With a local presence, they can stay updated on specific nexus laws in each state, like which digital services are taxable. That’s challenging, especially with AI and technology. Keeping up with guidance, rulings, and court cases will allow you to stay on top of tax law changes happening regularly or annually. Digital tax laws are very different across states, so having that local presence and using technology can really help keep up.
Sherry: And in your experience, what are some specific challenges you’ve seen companies face when managing tax compliance on a state-by-state basis?
John Silverstein: It’s really difficult to keep track. U.S. compliance state by state is probably the most challenging in the world due to the nuances. Every good or SKU potentially has a different tax rate, depending on where you’re selling it to and from. Keeping the cost and complexity of maintaining consistent tax reporting while accommodating each state’s unique regulations is a huge challenge. Additionally, staffing each office can be expensive and resource-intensive. It’s not always feasible for every company to do. In the case of tech companies, you typically have hubs, so it doesn’t matter where you’re operating from. You could be selling to a state, and someone could find you online, so it’s hard to keep up and understand the rules immediately. You may have to register in almost every state for tax compliance because you can instantly become a U.S. company even though you’re not physically present in the state. A large retailer operating in 25 states might struggle to keep up with property tax laws, employment tax filings, and local income tax payments. It creates a significant administrative burden. Failure to comply results in penalties, making the challenge even more critical.
Sherry: And how does having a local office help companies handle state tax audits or disputes more effectively?
John Silverstein: Yeah, with a local office, it’s easier to work with auditors and handle state disputes. It allows for quicker response times to audit requests or disputes. If they come to the office, you can work directly with the auditor, which is much easier when you have a local team that understands the laws and possibly has relationships in the area. A manufacturing company with facilities in Michigan and Illinois, for example, may face an audit in Illinois due to its complex inventory tax laws. A local office enables the company to address questions from Illinois tax authorities more quickly. A remote team may lack the depth of knowledge needed to handle local tax nuances effectively.
Sherry: Can you also provide examples of how technology like ERP systems or AI can support compliance across multiple states?
John Silverstein: Yeah, this is critical today. It’s hard not to operate in multiple states, especially for tech or SaaS companies. ERP systems that are integrated with tax software help automate and update tax calculations, and the tax software continues to be updated with localizations that understand state-specific tax rules. This integration helps centralize data and gives finance teams visibility into each state’s tax obligations. AI can automate these tax calculations based on the history and information that’s continuously updated. AI also helps with error checking and staying compliant with deadlines—whether that’s monthly, quarterly, or annual filings, which can vary by state. An example of this is a SaaS company that sells to customers across the U.S. AI-enabled tax software can automatically apply the appropriate sales tax rates for each state based on the customer’s location. This streamlines compliance without needing a manual review for each transaction.
Sherry: And what alternatives do companies have if establishing a local office in every state is not feasible?
John Silverstein: Yeah, it’s probably not feasible to have a presence in every state. So companies often partner with local accounting firms or consultants to handle specific compliance questions and issues. Another option is to use cloud-based tax software that stays updated with the latest tax rules for each state, reducing the need for physical presence. It’s important to review the software regularly because things change, with new rules and regulations, or new cases, like Wayfair in 2018, which changed a lot. For example, a mid-sized e-commerce company selling to all 50 states might use tax software like Avalara or Vertex, which tracks each state’s tax laws and provides real-time compliance support. But this still depends on your data. If your item list isn’t set up properly in your ERP system, you might still calculate incorrectly. It’s important to have a review process to ensure compliance, especially when it comes to understanding the definition of your products—whether they’re services or SaaS, which can be taxed differently depending on the state. You might still need to work with local CPAs in complex states like New York or Texas to address tax issues or handle audits without needing a physical office.
Sherry: Thank you so much for sharing these insights, John, on managing tax compliance across states. It’s clear from this conversation that while local offices bring value to compliance management, technology, and partnerships also play a critical role in this complex landscape.John Silverstein: Absolutely, thank you for having me.
