Attorneys advising clients on business organizations and reorganizations always should consider the state sales tax pitfalls and planning opportunities. Consolidated reporting on a single federal income tax return often eliminates federal tax issues. But for state sales tax purposes, transactions between related entities are usually recognized as taxable events.
A potential pitfall of creating multiple affiliates is that transactions between the affiliates may become taxable when the transactions would not be taxable if performed within a single entity or by an unincorporated division of an entity. For example, services performed by an employee of a company are not taxable to the company. But if the employee performs the same services for an affiliated company, the services could be subject to sales tax. This situation can arise when an affiliate provides back-office services, maintenance services or other centralized services for related companies.
