Does your business have customers in more than one state? If so, welcome to the wild world of state income taxes! Forty-five of the fifty states plus Washington, D.C. impose some type of income tax, and no two states have exactly the same tax laws. Cash-starved states are seeking out and testing new ways to tax out-of-state businesses, and you could be on their radar. An exhaustive explanation of the nuances of state taxes is beyond the scope of this blog, but here are some things you should know about state income taxes:
- Physical presence means you probably need to file a tax return. By Federal law, states can only assess income tax if a business has substantial connection or nexus to that state. If your business has a physical presence in a state – real estate, equipment, inventory or employees – you most likely need to file an income tax return in that state.
- Sales of services don’t require a physical presence. These don’t have the same protection under federal law, so you might need to file a state tax return if you’re selling or providing services outside your home state.
- Economic nexus is gaining popularity. With growing budget deficits and more business moving online, states are seeking new sources of revenue. Physical presence is no longer absolutely required for income tax nexus. For many states, a threshold of $500,000 in sales to customers in that state means a company needs to file a tax return. And a number of states are looking at ways to tax cloud computing and sales of digital products.
- Net profit is not required before you need to file a state tax return. You might not owe tax, but you may still need to file a tax return. You might be able to use that loss to offset future net income in that state.
- You may owe other kinds of tax. Some states don’t tax income at all, and instead have franchise taxes on the privilege of doing business in that state, or taxes based on some other measure of activity.
- Nexus for sales tax and nexus for income tax aren’t always the same. Your business may have nexus for sales tax, but not for income tax.
- In the meantime, make sure your accounting system can track your sales by state.
Here’s more information on nexus from the AICPA. Be sure to call our office so we can look at your situation and make sure you’re taking care of all your state taxes.