Operating a business across multiple states can be challenging and requires adhering to state laws such as withholding employee taxes, filing annual reports and registering in various locations.
As each state imposes their own income, sales, property, and employment taxes, it’s wise to conduct a nexus analysis in order to identify potential tax exposure from out of state sources.
Sales taxes are collected by retailers on purchases made at retailers and then distributed to state, county and local governments for collection. Each state, as well as some cities and counties within them, may have their own sales tax rates that vary considerably between jurisdictions.
Questioning whether or not a business must collect sales tax in a given jurisdiction depends on whether it has established nexus with that government, such as through physical presence such as offices or warehouses; employing significant numbers of workers there; having significant customers/transactions within that state.
Many states include apportionment formulas in their business tax returns that divide income among various states based on factors like sales, payroll and property ownership. It’s important to carefully evaluate these risks when operating in multiple states; consulting a tax advisor specializing in sales and use taxes could be especially helpful.
Corporate Income Tax
Manufacturers that conduct business across multiple states must also account for state income taxes. Rules vary between states; the key point being whether or not their company has “nexus” in each one based on activity levels in that state or if significant assets reside there.
C corporations differ from flow-through entities like partnerships and limited liability companies in terms of nexus rules; most states impose a corporate income tax that’s determined based on taxable income, which comes from gross revenue less deductions.
State laws differ regarding how property is factored into corporate income taxes. Some use an average value for all tangible properties in their state while others may based it on percentage of total real and personal properties that are used within each state.
Many states levy employment taxes, commonly referred to as payroll taxes. This money pays for various local government programs like workforce development and disability insurance. Each state varies in terms of whether employees’ work in another state triggers withholding requirements or has tax implications within that jurisdiction.
Typically, sole proprietorships and pass through entities (S-Corps and LLCs) do not owe income tax at the business level. If such entities make any income in another state however, if certain nexus criteria are met then state employment taxes may become due from those entities.
Your employee’s presence in a new state for over 30 days or making sales or service calls may establish nexus; there are ways to avoid double taxation such as reciprocity agreements and using apportionment or throwback rules to minimize this effect. A company should consult with its accountant regarding what its employment tax obligations in this new state might be.
Comparisons between state business tax rates and burdens are of considerable interest, often using collections per capita or as a percentage of total revenue as measures of comparison; however, such methods do not accurately portray the relative burdens businesses experience in each state.
Dependent upon state laws, it may be possible to incur tax liability in another state by simply setting up an entity there (corps) or qualifying as a foreign entity (LLCs and LPs). But generally speaking, nexus determination involves whether activities generate enough income in that particular state.
This could involve anything from simple tech support calls across state lines to more in-depth work such as training and warranty service agreements. Due to different allocation methods and recent court and administrative rulings scrutinizing allocable income positions in depth–particularly regarding capital gains taxes — avoiding double taxation may prove challenging; consequently a comprehensive nexus study is critical.