MTC Nexus Program - voluntary settlement process.

In December 1990, the Multistate Tax Commission (MTC), together with 21 participating states, instituted the "National Nexus Program." An important aspect of the Nexus Program is the "voluntary settlement process," which is designed to assist corporations with multistate operations in resolving potential state sales/use tax and income/franchise tax liabilities. The Nexus Program serves as the focal point through which corporations have the opportunity to anonymously approach states for the purpose of settling potential liabilities arising from past activities.

In recent years, many companies whose operations were traditionally limited to their home states have expanded, and are now engaging in business in two or more states. As part of this expansion, many companies have failed to register to do business in other states, and have also failed to comply with the tax laws of the other states. Typically, this is attributable to the administrative costs and complexities associated with reporting what is often perceived as an insignificant level of activity in the other states, or to the lack of familiarity by the business or its professionals with the other states' rules and regulations. Since states are under increasing pressures to raise revenues, companies with multistate activities that have outstanding liabilities in one or more states may be the subject of increased scrutiny as the states become much more aggressive.

For companies involved in multijurisdictional commerce, a state tax audit could result in the imposition of back taxes, penalties and interest owed to a number of states. Moreover, a state will generally not be barred by the applicable statute of limitations from assessing back taxes for any year in which the company conducted business in the state, and failed to file a tax return. if a company has not filed for five or 10 years, for example, the interest and penalties alone could far exceed the actual tax due. Thus, given the potential liabilities facing the company and the overwhelming administrative undertaking required to resolve the liabilities with multiple states, the Nexus Program is one very favorable alternative that companies should consider as a resolving multistate tax compliance issues.

The MTC is an agency of state governments that assists states in the audit of taxpayers with multistate business activities. The MTC created the Nexus Program to assist states and taxpayers in resolving complicated problems arising from the state taxation of a multijurisdictional business. It is designed to encourage state tax compliance, and to assist practitioners by providing a centralized taxpayer registration information service, a liability resolution process and information sharing among member states. By using the Nexus Program, it is expected that taxpayers and the states will frequently avoid the costly litigation process that might otherwise result in attempting to resolve state tax problems.

To use the Nexus Program, a company may approach the staff of the Nexus Program anonymously, through a representative, to register with the states in which it does business and for assistance in resolving potential past liabilities. On the basis of information provided, the Program staff will advise the company's representative on settlement alternatives that may be acceptable to a majority of states. In general, Program staff must be provided with a brief written description of the company's business operations, the facts giving rise to the offer to settle, the nature and extent of the company's business in the relevant states, whether the company has been contacted by any of the relevant states, proposed settlement terms, and a schedule of taxes owed, by tax type and year, for each state to which the offer is to be submitted.

Program staff, working closely with the taxpayer's representative, will then formulate a specific settlement offer. Once the terms of the settlement offer are finalized, a settlement agreement will be prepared for review and approval by the company. Once finalized, the offer will be forwarded to each state, accompanied by a schedule of potential liabilities owed to each state. Program staff will forward the settlement offer only to those states it believes are likely to accept. Program staff will not process a settlement offer with nonmember states or with states in which the company has previously been contacted or selected for audit, investigation or other review.

In addition to the settlement offer, a "Statement of Representations and Inducements" is required to be submitted by the company, and will be appended to the settlement offer. The Statement, which essentially contains the same information provided to the staff, will be used by the states to determine whether or not the settlement offer will be accepted. If a state finds any material misrepresentation in the Statement or in any other representations made during the negotiation process, the state may consider the agreement void and assess additional tax, penalties and interest as appropriate.

The states have an opportunity to modify the settlement offer, although it has been the experience of the Nexus Program staff that modifications are rare, and are typically minor, if made at all. Once a state agrees to the offer, it is asked to sign the offer indicating its acceptance. The state will then return the offer, whether accepted or rejected, to the Program staff, which will forward it to the company's representative.

At this point, the company has the opportunity to identify itself and complete the settlement process. Up until this point in the process, taxpayers involved in negotiations with the various states remain anonymous to the Program staff and, more importantly, to the states. Moreover, Program staff will not reveal a company's identity to a state that rejects the company's offer; only those states with which the taxpayer reaches a settlement will learn the company's identity.

Once the settlement offer has been accepted by the states and the company has determined that it will identify itself and complete the settlement, the company is required to return the completed agreements to Program staff with requisite registration forms. Any required tax payments must be made within 60 days of receipt of signed agreements from the states.

The MTC's National Nexus Program provides companies with multistate operations that have not complied with their registration and tax reporting obligations with an excellent opportunity to satisfy those responsibilities on an anonymous basis. Although taxpayers may be called on to satisfy significant tax liabilities (with interest), many states are likely to allow companies that come forward voluntarily to pay their obligation on an installment basis, and will waive penalties. Companies that wait to be contacted by the states rather than coming forward on their own are not likely to be the recipients of such favorable treatment. Through September 1993, the following 28 states are members of the Nexus Program: * Alabama * Arkansas * California * Colorado * Connecticut * District of Columbia * Florida * Hawaii * Idaho * Iowa * Kansas * Kentucky * Maine * Maryland * Michigan * Minnesota * Missouri * Montana * Nebraska * New Hampshire * New Jersey * New Mexico * North Dakota * Ohio * South Carolina * South Dakota * Texas * Washington