With today’s tight budget issues, many states have become aggressive in locating businesses that are
not properly paying taxes in the states where they are doing business. Businesses that operate or have sales in multiple states are often caught off guard when they are notified that they have a tax liability in a state in which they never even considered filing a tax return.
This state tax issue has become such a concern as of late, that some of the larger states have opened offices in other states to locate unreported income. In addition to determining the liability, each state has its own set of income tax rules. Fifty different sets of rules make tax compliance even more of a challenge.
Smart Business spoke with Samuel L. Tuck, CPA, principal-in-charge of the Tax Department at Tauber & Balser, P.C., about what business owners should know about state tax laws.
What is ‘Nexus?’
In reviewing the income tax requirements for each state you will certainly come across the term ‘Nexus.’ Nexus is a company’s minimum level of physical presence within a state that allows the state to require the business to register in the state, as well as pay income, sales and payroll taxes. Nexus is the term that determines a company’s link or connection with a state.
How do I determine if I have ‘Nexus?’
Even though the determination of whether you have nexus in a particular state may appear similar in all states, each state may have specific rules that only apply to that state. In most cases, the due diligence in determining nexus is based on the following four questions:
- Do you have offices, distribution centers or sales centers within more than one state?
- Do you take orders, make sales, fulfill orders or supply services in more than one state?
- Do you file payroll tax returns, worker’s compensation taxes, or property tax returns in more than one state?
- Do you provide any sort of customer support, warranty work, or customer solicitation in more than one state?
How much is reported to each state?
If you determine that you have multi-state tax exposure, you will need to determine how your income will be taxed in each state that you have Nexus. The division of a company’s taxable income among the different states is called ‘apportionment.’ In calculating the amount of income to apportion to a state, there are three common factors. These factors include sales revenue within the state, property owned or leased within a state, and the amount of salaries and commissions paid within the state. Because of varying tax rates, and the states’ use of different criteria to compute taxes owed, a company may potentially pay less taxes by filing in multiple states rather than report all of the income in the state where the home office is located. On the contrary, if an outside state has a higher tax rate than a company’s home state, a company has the potential to pay taxes at the higher tax rate.
As state taxing authorities receive internal pressure to collect additional taxes, companies will be under the multi-state tax scrutiny of these authorities. With an increase in business being performed over the Internet, and perhaps even overseas, states are seeing a decline in traditional business and are forced to look at their neighbors for tax revenues. While conducting everyday business, companies need to analyze and apply the tax laws of each nexus state. With the increase in reporting requirements and technology, the states have a number of ways to determine if business is being transacted in their jurisdictions. It is pertinent that a proactive approach be taken as it relates to the proper state apportionment of income. It’s better to pay the proper amounts now than be penalized later.
SAMUEL L. TUCK, CPA, is the principal-in-charge of the Tax Department at Tauber & Balser, P.C. He has more than 15 years of experience with a strong concentration in taxation for real estate partnerships and developers and a variety of small to mid-size businesses. He has developed expertise in technology-based companies, S corporations and limited liability companies. Tuck has extensive experience as well with family limited partnerships, trusts, international taxes and estate planning. He regularly consults with clients to improve their business operations and economic and accounting issues. Reach him at (404) 814-4901 or email@example.com.