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 protected].
