State and local tax issues are a big part of a company's tax liability. In fact, they are so impactful that a lot of companies actively decide to relocate to states that are regarded as low-tax states by the Tax Foundation, such as Florida, Nevada and North Carolina.
That said, businesses that choose to operate in more than one state must consider the tax-related issues that each state poses for them. As a business, here are three factors you should definitely consider:
Learning about nexus
Businesses must file state taxes for each state in which they do business. However, there are state-mandated rules for what exactly constitutes "nexus," which is a term for doing business in a state. These rules vary from one state to the next, and the locality of matters will influence the outcome of the rules. As an example, factors such as where the business stores inventory and where remote workers or commuting employees live are two main considerations that impact how nexus is determined.
Federal laws are another contributing factor. More specifically, a law known as P.L. 86-272 makes it impossible for businesses to be subjected to a net income tax, no matter what state they operate in, as long as the net income tax pertains to income that stems from interstate commerce. One other caveat of this is whether the only business activity within the state in question involves the solicitation of tangible personal property orders.
In that situation, the fulfillment of the orders has to take place outside of the state's borders in order for protections like this to apply. Now, the increased popularity of remote work — in addition to the significant pivot from shopping in person at brick-and-mortar stores to making purchases online — has altered the economy in numerous ways. Furthermore, the U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., has also impacted the timeline of nexus and when specifically it will be triggered.
Taking Wayfair as a prime example, the company gave the state of South Dakota permission to impose statewide sales taxes on remote sellers despite their physical presence, or lack thereof, in the state. The main stipulation was that the remote sellers' sales had to exceed a certain transaction threshold, but as a result of the company's decision, the far-reaching consequences of Wayfair are still playing out to this day.
For example, since the ruling, many other states have passed what are called marketplace provider laws and marketplace facilitator legislation to either categorize sellers in the same marketplace or combine all marketplace sales with the sales of companies within the marketplace so that the threshold of the state's nexus is reached if not surpassed.
A lot more guidance is required in terms of mandating and monitoring nexus. However, businesses must make sure they consider all the factors that contribute to the determination of nexus.
The taxing authority response to digital businesses
As mentioned earlier, the amount of online sales being made skyrocketed in the midst of the pandemic. In fact, according to the 2020 Annual Retail Trade Survey, sales relating to e-commerce transactions increased from $571.2 billion in 2019 to $815.4 billion in 2020.
Within no more than two years, e-commerce sales experienced a whopping 43% increase, and taxing authorities were amazed. Back in 2021, the Multistate Tax Commission revised how P.L. 86-272 is interpreted, with the new understanding being that, if states followed the law, then they would be able to eliminate the federal law's protections for most multistate sellers.
For instance, nexus could be triggered if post-sale assistance to in-state customers was provided via either chat or email. California is one example of a state that has officially adopted the new and improved MTC interpretation of nexus, while a number of other states are thinking about following suit.
Rules pertaining to apportionment
There are different rules for each state when it comes to allocating and apportioning multistate income. If companies are operating via a uniform method when determining multistate income, it is in their best interest to reconsider how they perform their calculations so that they are paying the proper amount of money per state as opposed to overpaying or underpaying.
Together, the three factors we have spoken about today are only the beginning when it comes to taxes that businesses operating in more than one state should consider. Don't forget that there are other considerations that must be addressed as well, including passive income and how it is handled.
Tax credits on the state and local levels are important to address too, as are any applicable incentives. Ultimately, the best advice for any business that is in the process of determining tax liabilities is to consult a tax law expert who is local to the business' state.
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