In our updates of July 21 and October 6, we cautioned about scams and solicitations from private entities that send official looking notices that appear to be from state agencies. They ask for money to assist the company in "corporate compliance" or other apparently legitimate purposes. We noted that these can be safely ignored.
But there is some correspondence from states that should not be ignored. This correspondence is in the form of a questionnaire. It never asks for money, but the purpose is most certainly financial. Ignoring the questionnaire or answering carelessly can cost your company.
Why are states sending these questionnaires and how do they decide who to send them to? The answer is based on your activities in a state.
When a company transacts business in any state other than its state of organization, it may be required to file tax returns and/or “qualify to do business” in that other state. So, if your company is a Delaware corporation but has its offices and manufacturing plant in Illinois, your company would be required to file tax returns in Illinois, obtain a certificate of authority to transact business in Illinois and appoint an agent in Illinois who can accept service of process if your company is sued in Illinois.
In cases where a company has offices in another state or does significant amount of business in another state, it is often easy to determine that the company must file tax returns or to “qualify to do business” with that state. However, what if your company has a one time event in another state? Or what if your sales people occasionally enter a state to solicit orders for your products? Does your company have to “qualify” to do business in that state? Does your company have to file a tax return in the state? The costs in each state can add up, and may be unnecessary. Unfortunately, there is no "bright line" test applicable to every state. Although there are factors common to most states, each state has its own laws that govern when a company must qualify.
In tough economic times such as these, states often send out questionnaires to companies that might be transacting business in the state. Each state would like your company to be qualified and registered for taxes in their state, because additional taxes and fees are generated.
The questionnaires contain questions that, while seemingly innocuous and matter-of-fact, are very critical. For example, a question that asks when your company started "doing business" in the state is a very loaded question. As noted above, "doing business" can depend on a variety of factors and can be different for qualification and for tax registration. Likewise, overly broad answers will not help your company. Broad answers can result in a letter from the state assessing significant amounts of tax or demanding that the company qualify to do business in that state - even when the company’s activities do not require qualification. Also, many state questionnaires may only have boxes to check with optional answers that favor the state, and not the business. Companies receiving these questionnaires should view them as the state's efforts to find additional taxpayers for the state. Answering incorrectly could result in major exposure to taxes, penalties, interest and filing fees. A company receiving such a questionnaire should consult with its tax advisers and attorneys to assist in preparing an appropriate response.
In short, these questionnaires can be a trap for the unwary and the unaware. Don’t allow careless answers to these questionnaires be used against your company.