If you have a business and operate in multiple states, you may be unsure where you are obligated to pay taxes. The short answer is that every state has different tax laws. But there are specific requirements that hold across the board. We’ve broken down nexus and multi-state income tax filing so you can rest assured heading into the new year.
What is nexus?
In regards to taxes, a “nexus” refers to a business’s tax presence in a particular state or across multiple states. When a company has nexus in a state, the taxpayer must pay income tax on income generated in that state.
Nexus by state
Here’s where it gets more complicated. Each state deals with and determines nexus differently. However, you can rely on some constants for tax planning purposes.
For Income Tax
Each state’s income tax for businesses is, in part, determined by income generated in the state, employees in the state, and any owned or leased property.
For Sales Tax
Sales tax, of course, varies from state to state. Though there are some common cases you might have a sales tax nexus. These include when your business has a physical location, has resident employees, has property, or if your employees regularly solicit business (in sales, for example). The recent S. Dakota v. Wayfair court ruling has also given states the ability to develop rules regarding online sales.
Tips for multi-state filing
When you’re a business owner, you have a lot to consider in addition to taxes. Multi-state filing is a necessary, if slightly cumbersome, task. Remembering the following tips could help streamline the process for you.
Research income tax laws per state
As each state follows a different income tax law, it’s crucial to understand the law for each state in which your business generates income. You can find the state individual income tax rates and brackets for 2019 here.
Understand when to file in multiple states
Multi-state filing has some stipulations. You should file if you are an S corp shareholder “and the corporation does most of its business in a state other than the state where you live.” You must also file if you have an out-of-state partnership, own rental property in another state, or are a beneficiary of a trust or estate.
This is where it gets tricky, as your filing requirements depend on nexus. If you have nexus as a business, the business is required to apportion income to that state which will also likely trigger the individual to file in that state as well.
A switch to electronic communication
The digital age has come with some upsides and downsides for multi-state filing. The good news for anyone with a fast-paced business? More states have begun to communicate electronically, making multi-state filing and nexus tax all the easier.
In addition to this, a state sales tax nexus used to require business owners to be physically present in the state. As of June 2018, the Supreme Court ruled that “states have the right to require online sellers to charge and collect sales tax from all online buyers, not just buyers physically located in the state.”
Trust the professionals
Multi-state filing requirements are becoming increasingly complex. As with all of our clients, we encourage you to review your business operations to be sure you understand your filing requirements in each state your business operates. And, for these and any other tax needs, do not hesitate to contact our CPAs for assistance or guidance.