Northwest Arkansas Democrat-Gazette
Branching out can snarl a business
Complying with local laws complicates efforts to expand
NEW YORK — As small companies expand their business into more towns, cities and states, that growth often carries with it higher expenses from taxes and other government obligations.
Many companies find they have new fees to pay or must comply with requirements like mandatory paid sick leave. They may have to collect sales tax on the goods or services they sell — taxes that often differ from place to place. There’s also the expense of hiring employees, accountants, lawyers and consultants to handle the administrative chores, including keeping track of frequently changing laws.
In many municipalities, companies must obtain a business license and pay a fee to operate. Mike Patton’s flooring company, DSB Plus, does business in about 50 municipalities in the San Francisco Bay area, costing it about $5,000 a year in licensing fees. Many of the fees are based on a company’s revenue and go up as business gets better, so Patton’s license expenditures went up 20 percent in 2015 from the previous year.
“It has just been a slow, constant drip of erosion as business gets more costly,” Patton said.
Before companies start doing business in new locations, they need to understand the legal and financial requirements, said John W. Sullivan III, a tax attorney based in New York. For example, working in a new state may require a company to register with the secretary of state; not doing so can mean thousands of dollars in penalties. Or, sending an employee to do work in a town just over the state line could require a business to start collecting sales tax or pay income tax. Often, business owners don’t know what their new obligations are, Sullivan said.
“You want to be having a conversation with someone who has expertise,” he said.
The customers for Dan Micic’s medical supply company are primarily nursing schools, more than 500 across the country. That requires Chicago-based Medical Shipment to comply with varying sales tax laws in the states, counties, cities and other municipalities in which his customers are located.
Although nursing schools don’t pay sales tax because they’re educational institutions, there’s still paperwork relating to their tax-exempt status. It’s handled by Micic’s bookkeeper, accountant and an outside consultant; Medical Shipment paid nearly $30,000 in 2015 to comply with all sales tax laws.
“That’s higher than my health insurance costs,” Micic says.
Sales taxes are particularly problematic because there are an estimated 10,000 jurisdictions that charge taxes, and governments don’t all tax the same goods. For example, clothing is taxed in many states, but isn’t in others, or only garments priced above a specified amount such as $110 are taxed.
LawnStarter, which helps people contract for lawn care services, pays licensing fees and sales tax in metropolitan areas in Texas, Florida, North Carolina and Washington, D.C. Sales tax can be a moving target; a municipality might change its tax or what it taxes but won’t necessarily notify everyone who does business there.
“Our office manager and our accountant have a heck of a time keeping track of it,” said Ryan Farley, chief operating officer of the Austin, Texas, based company. It also subscribes to services that watch out for sales tax changes.
Ashley Hunter’s insurance company, HM Risk Group, must pay income taxes in each of the 15 states where it operates. She relies on her accountants to handle the paperwork, which can vary widely from one state to the next. Hunter describes the emails from state tax authorities as endless; when she gets an email, she immediately forwards it to one of her accountants.
“I just can’t stress out over taxes. It’s the last thing I need to be thinking about,” said Hunter, whose company is based in Austin, Texas.
Hunter pays her accountant more than $4,000 a year to keep up with the roughly $10,000 in tax she pays every quarter.
A growing number of states and cities require employers to give employees sick pay based on the hours they work. Even if a company is based outside a city that mandates sick time, if employees work in the city — for example, on a construction job — their hours must be tracked. And the requirements, including paperwork and the hours employees must work to accrue sick time, vary from one jurisdiction to another.
Mark Carpenter’s roofing company is based in Tualatin, Ore., but does work in nearby Portland, Seattle and Tacoma, Wash., and California. Each place has its own sick-time law and requirements.
“We may work only 25 hours in an area in a year, but if we do we want to make sure we are perfect,” said Carpenter, owner of Columbia Roofing & Sheet Metal. He has 60 employees, a full-time human resources manager and a controller who work on keeping track of sick time.
“It is next to impossible to comply with all laws,” Carpenter said.