8/16/2016 - By Zachary Farrington
With all the responsibilities you have as a business owner, it’s easy to overlook your company’s state and local tax (or SALT) liabilities. These taxes vary widely from one locality to another, and business owners are often unaware that they have SALT liabilities outside their home state. Figuring out what’s owed where can be complicated.
In tax law, “nexus” is a connection to a particular locality that triggers a tax liability. Determining whether your company has nexus in a given state is not always straightforward.
If you lease or own an office or warehouse in a state, it’s likely you have nexus there. Similarly, if you have employees, contractors or agents in a state who sell, install or deliver products and services, you probably have nexus there.
Keep in mind that you can have nexus in a state or municipality even without a physical presence there. Also, nexus is defined differently for different types of taxes.
Forty-five states collect sales tax. If you ship goods into these states in your own trucks (instead of common carrier), you may be required to collect and remit sales tax there. If you are selling goods online, you may have to collect sales tax for the states you ship to.
Online retailers should also be aware that many states have passed legislation in the form of so-called “click-thru” nexus laws that significantly reduce the physical presence requirements for nexus. Website linking or click-thru arrangements can create nexus, although most states have a dollar threshold that must be met before taxes are due.
Generally, if your company derives income from sources within a state, has a physical presence there, or has employees who live there, your business is subject to income tax in that state. But defining “sources within a state” is not always simple.
For example, states can’t collect income tax on revenues derived from a salesperson employed in a state if he or she does nothing more than solicit orders, and the orders are approved and fulfilled in another state. Note that this regulation applies only to the sale of tangible personal property — not to the sale of services.
Companies are generally required to collect and remit payroll taxes in every state where employees are located. If employees live in one state and work in another, your company may owe payroll tax in both states, although some neighboring states have reciprocation agreements.
The Mobile Workforce State Income Tax Simplification Act of 201, still being debated by Congress, would require an employee to work more than 30 days in another state before being subject to withholding and income tax in that state.
Some states charge franchise tax for the privilege of being chartered or operating in the state. The amount of tax is not calculated on income, but rather on assets, net worth or capital stock of the company.
States are becoming more aggressive about collecting revenue they believe is due to them. Neglecting a SALT liability can result in significant penalties and interest, so it pays to pay attention to SALT.
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