Doing Business in Other States? You May Want to Check Filing Requirements.
If you run a small business, doing business in other states may create some additional state tax compliance requirements. Forty-six states and the District of Columbia impose some type of income tax on corporations. In addition to income tax, many states have a much lower threshold for creating filing requirements for franchise taxes and sales and use taxes.
The term nexus relates to creating an obligation to register and pay tax in a state. Simply put, it refers to both the quantity and quality of contacts, links, or connections between your business and a political jurisdiction. States have become more aggressive in their definitions of what creates Nexus. They look for in-state activities, relationships and assets of unregistered businesses with customers in the state.
What should you do to help you determine your state tax obligations? The October 2008 Journal of Accountancy provides some tips for businesses with multi-state activities.
Review “physical presence” law. The 1992 U.S. Supreme Court decision in Quill Corp versus South Dakota held that a seller must have a physical presence in a state before the state can require sales tax collection. The types of physical presence that create nexus, however, vary from state to state. Some have a very low threshold, that says even one day is enough physical presence to create nexus.
Know where property is located. Verify the location of inventory, goods out on consignment, leased property, real property, equipment, computer servers and delivery trucks. Just about any property in a state can create nexus.
Know the whereabouts and activities of employees and representatives. Employees, independent contractors, agents or representatives in a state may create nexus, depending on the nature of the relationship and activities. The activities may be sales, but may include broader activities which may be associated with your ability to maintain a market in the state for sales. Dealers who perform warranty work in many states are considered representatives and create nexus for franchise taxes, sales and use tax.
Examine the nature of transactions and relationships in the state. Some states have broadened the types of relationships that can create nexus. For example, a few states specify relationships that promote sales. Resident representatives who are commission based or even web page links from a dealer, or advertising through a dealer may be subject to sales tax collection obligations. Most states however, treat advertising alone as not creating nexus.
Take into account multistate operations and mobile customers. A recent ruling involved a tire dealer with locations in four states including Massachusetts and New Hampshire, which has no sales tax. The Massachusetts Appellate Tax Board held that the seller’s New Hampshire stores should have collected use tax when they installed tires on Massachusetts cars, since employees could readily tell from the license tag where tires would be used. Mobile service vehicles traveling out of state would be required to collect sales tax in states they travel to.
Always keep informed and inquire. Avoid past-due tax liabilities, penalties and interest by regularly informing your accountant about your business and Internet activities. New services such as on-site training might be offered, or new employees may work out of state and create new tax collection obligations.
Contact us if you have any questions concerning your own personal or business situation.
