If your product enters another state or you have a remote employee working in another state. You may have a tax liability to states other than the state your business is in. Failure to collect and pay the appropriate tax can lead to additional payments, interest, and penalties.
In this episode, Jeff Dvorachek, a tax partner, shares the information business owners need to determine their sales payroll and income tax liabilities to other states.
Many business only operate in their home state, but did you know that if you sell your product in another state, you may have a tax liability in that other state? This may be true even if you never step foot in that other state. And with states looking for additional revenue wherever they can find it, they are actually looking for you.
SO THEY CAN TAX YOU EVEN IF YOU NEVER ENTER THAT STATE?
- Yes in some cases as long as your product enters the state. Today’s conversation is going to be really broad just to give a business owner a way to recognize if they may owe tax in another state.
WHAT KIND OF TAXES ARE WE TALKING ABOUT?
- We are talking about sales, payroll and income tax.
- Your business may owe sales tax to a state where you ship product to even if you never enter that state. This is a result of a 2018 court case South Dakota vs Wayfair.
- Your business may owe payroll tax if you have an employee that spends time in a state or you hire someone to work remotely. This happened a lot during Covid.
- Or your business may owe income tax. This is a little harder hurdle to jump since you need to actually have a physical presence in that state.
LET’S GO BACK TO SLAES TAX.
- The Supreme Court ruled back in 2018 that if your business ships product into another state, even if it is by a third party such as USPS or UPS/FedEx, you will owe sales tax to that state.
- It’s just like when you sell you product in your home state, if you were required to charge your customer sales tax, then you would be required to charge that other state’s sales tax to your customer.
- The saving grace for many businesses is that you have to do quite a bit of sales in that other state to be required to do this.
- In many states the threshold is $100,000 of sales into that state or 200 or more separate transactions. But each state is different.
HOW IS INCOME TAX DIFFERENT?
- In order to have income tax nexus in a state, you must have a connection above and beyond just shipping product to a state. This is higher threshold.
- This is a result of a 1992 US Supreme Court case – Quill
- A business needed to have a physical location or presence in a state
- They needed to have employees in the state that can make contracts with customers. Or if they have employees that make regular trips to the state.
- A company would need to have inventory in the state
- Deliver product into the state with their own trucks (not common carrier)
- If a company has any of these, the may be a strong case that they have income tax nexus
WILL A COMPANY END UP PAYING MORE TAX IF THEY HAVE TO FILE IN MULTIPLE STATES?
- In many cases, this will not cost additional taxes to the business owner.
- They will still pay a similar amount of total tax, but rather than paying it to one state, the tax will be shared by multiple states.
WHAT IF A COMPANY SHOULD BE PAYING TAXES IN ANOTHER STATE, BUT THEY DONT?
- States are getting better at finding companies doing work in their states.
- Normally a state has a three to four year statute of limitation, but if the company does not file in a state when they should have, the statute never starts to run.
- State can go back to the beginning to assess tax and assess interest and penalties.
Be sure to talk to one of our professionals if you have any questions regarding your business owing tax to another state.