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Does your company operate in multiple states? If so, there’s a good chance that you owe some state and local taxes (SALT) outside your home state. But many small- to mid-sized businesses are unaware of their SALT liabilities.
While it’s sometimes difficult to determine whether sufficient business activity has taken place in another state to trigger SALT liability, this usually isn’t a valid excuse for nonpayment. The penalties for nonpayment can be steep, which makes complying with SALT obligations critical for businesses.
To know when SALT liabilities may be triggered, you need to understand the concept of nexus. This describes the degree of business activity that must be present in a state before your business is considered to have a presence there and becomes subject to that state’s taxing jurisdiction.
Taxes that could fall under SALT liability include income, payroll, franchise, and sales and use taxes. But what establishes nexus for one type of tax might not establish nexus for another. Let’s take a closer look at nexus for income tax.
If your company has income tax nexus in another state, you must file an income tax return and pay income tax in that state. Your company doesn’t have to maintain a physical presence in a state for nexus to kick in. A number of situations can trigger nexus from an income tax standpoint, including:
In general, if your company generates income from any source located inside a state, nexus could be triggered if sales are generated. The activities of a salesperson may not create nexus, but keep in mind that their activities may establish it for other taxes, even if income tax nexus does not exist.
To provide some degree of consistency in defining nexus for income tax liability, the Multistate Tax Commission has created an optional model statute that defines nexus based on a certain amount of economic activity. Among the states using the model statute are California, Colorado, Connecticut, Kansas, Michigan, Ohio and Washington.
According to the commission’s “Factor Presence Nexus Standard for Business Activity Taxes,” nexus applies for income tax purposes if, during the tax period, a company 1) possesses at least $50,000 of in-state property, 2) processes at least $50,000 of in-state payroll, or 3) makes a minimum level of sales into a state. The sales minimums vary from one participating state to the next, ranging from $250,000 to $500,000. This model also applies nexus for income tax purposes if at least 25 percent of a company’s total property, payroll or sales occurs in a state during the tax period.
As states and municipalities seek to boost revenue, many have prioritized the collection of taxes from out-of-state companies. Some states have created new departments devoted exclusively to finding out-of-state companies that should be paying SALT, but aren’t.
In addition, more states are taking advantage of cross-border agreements with other states’ departments of revenue. They also are sharing audit findings with each other and collaborating with federal customs agents.
In this environment, it’s critical businesses understand their SALT obligations and pay all taxes due in a timely manner. If you’re unsure whether your business is in compliance, rely on Doeren Mayhew’s SALT specialists to help analyze your out-of-state activities to identify potential exposure and steps to minimize any related liabilities.
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