How One Manufacturer Reduced Multi-State Tax Exposure and Recovered Significant Refunds
Quick Overview
- More than 10 states had potential income and sales tax nexus exposure.
- 27 unfiled state income tax returns were identified across 10 states.
- Voluntary disclosure helped limit exposure and avoid an estimated $25,000 to $30,000 in penalties.
- Corrected apportionment reporting led to approximately $200,000 in refunds, plus nearly $10,000 in interest.
- The client moved from reactive notices to a proactive multi-state compliance strategy.
Background
A well-established and growing manufacturing business with operations spanning multiple states engaged Wegner CPAs as a new tax advisor. As part of the onboarding process, our team began preparing the client’s extended income tax return while working to better understand their business model, revenue streams, and geographic footprint.
What initially appeared to be a routine first-year engagement quickly evolved into a complex, multi-state tax compliance matter with significant financial and operational implications.
Industry
Manufacturing
Location
Wisconsin
Engagement Type
Multi-state income and sales tax voluntary disclosure and compliance support
Entity Type
Corporation
The Challenge
During return preparation, the client received a notice from the State of California regarding missing sales tax filings. That notice triggered our team to do a deeper review of the client’s state tax footprint and uncovered a much broader issue:
- Income and sales tax nexus exposure in more than 10 states
- Over 20 unfiled sales tax returns across multiple jurisdictions
- 27 unfiled state income tax returns across 10 states spanning approximately four years
- Incorrect apportionment reporting in the client’s home state, resulting in overpayment of income tax
Left unaddressed, these issues could have resulted in:
- Extended lookback periods (potentially 10+ years in some states)
- Significant penalties and interest
- Increased audit risk
- Ongoing noncompliance across multiple jurisdictions
The client needed a solution that would reduce historical exposure, bring them into compliance efficiently, and protect the business as it continued to grow.
Our Approach
1. Nexus Analysis and Exposure Analysis
Our tax advisors first performed a comprehensive nexus analysis to determine where the client had established income and sales tax filing obligations. Once nexus was confirmed, we created a state-by-state income tax exposure analysis, prioritizing jurisdictions based on estimated liability.
This analysis allowed the client to clearly understand:
- Where exposure existed
- The estimated tax impact by state
- Which states posed the greatest financial and compliance risk
2. Voluntary Disclosure Program (VDP) Strategy
Based on our findings, we advised the client to pursue state voluntary disclosure programs (VDPs) where available. These programs are designed to encourage compliance by:
- Limiting the lookback period (typically 3–4 years)
- Waiving penalties in full
- Allowing taxpayers to resolve liabilities proactively, often anonymously
For a multi-state issue of this size, the reduced lookback period alone represented substantial risk mitigation.
3. Coordinated Income and Sales Tax Resolution
As discussions with the states progressed, several jurisdictions raised questions about both income and sales tax exposure. In response, our tax advisors worked closely with the client to address both tax types in parallel including calculating sales tax exposure and income tax , preparing filings, and communication with the states.
Together, we developed a prioritized roadmap and began addressing states one by one, starting with those representing the highest exposure.
4. State Negotiations and Compliance Execution
Our team spearheaded the negotiation process, which included:
- Preparing and submitting VDP applications
- Negotiating directly with state taxing authorities while maintaining taxpayer anonymity whenever possible
- Coordinating filing and payment timing across jurisdictions
- Requesting penalty abatements where states initially assessed penalties
In certain states, the client was not eligible for formal voluntary disclosure. In those cases, our team negotiated alternative resolution options and/or facilitated late filings where exposure was minimal.
Despite the scope and complexity, most states were collaborative and responsive once the client demonstrated a good-faith effort to comply.
Together, we developed a prioritized roadmap and began addressing states one by one, starting with those representing the highest exposure.
The Results
Through a structured, methodical approach, we helped the client resolve years of multi-state exposure while minimizing financial impact.
State Income Tax Filings Now in Compliance:
- Income tax liabilities resolved: Approximately $160,000 paid across multiple states
- Penalties avoided estimated: $25,000 – $30,000 across multiple states, before considering any additional benefit from limiting exposure to the agreed lookback period.
- Home-state amended returns filed, correcting apportionment errors
- Refunds recovered: Approximately $200,000, plus nearly $10,000 in interest
- Ongoing compliance established across income tax jurisdictions
State Sales Tax Filings Now in Compliance:
- Significant sales tax liabilities resolved – all tracked by the client in this situation.
- Penalties avoided similar to the income tax results
- Client established internal procedures to obtain and track exempt certificates proactively
- Ongoing compliance established across sales tax jurisdictions
Beyond the immediate financial impact, the engagement resolved past exposure and positioned the client to identify and address new nexus issues early, before they became costly problems.
Why It Matters
Multi-state tax issues often remain hidden until a notice or audit brings them to light. However, when addressed proactively, businesses can significantly reduce risk and the financial impact.
This case demonstrates how:
- Early identification of nexus issues can prevent long-term exposure.
- Voluntary disclosure programs can dramatically limit penalties and historical liability.
- A coordinated income and sales tax strategy leads to better outcomes.
Considering Your Own Exposure?
Navigating multi-state tax issues is far more effective when your advisor understands not only the tax rules but how your business actually operates day to day. An advisor with industry insight can anticipate where nexus risks are most likely to arise, while deep tax expertise ensures those risks are addressed strategically instead of reactively.
If your manufacturing business operates in multiple states and you’re unsure whether you have unfiled obligations, Wegner CPAs can help you assess risk, explore voluntary disclosure options, and develop a path forward.
Get in touch with a Wegner CPAs manufacturing tax advisor to learn more.
**This case study reflects one client’s experience. Results will vary based on individual facts and circumstances.
