While the overall economy is improving, state finances have been much slower to recover from the loss of funding and programs. States with a need to raise revenue have become more aggressive in enacting tax measures and have intensified the enforcement of these tax laws.
In recent years, state and local taxes (SALT) have become more prevalent with increasing impact on business decisions and strategies. How does a business stay in compliance while also looking for ways to minimize exposure/risk? It’s first helpful to understand what SALT is and what factors define it.
It’s impossible to discuss SALT without talking about nexus, for it is nexus that creates a state and local filing obligation for a business entity. Simply put, nexus means a business entity has established a direct or representational presence within a particular state or jurisdiction. There are different definitions of nexus, depending on whether it is associated with sales tax or income tax. Both will be covered in more detail in upcoming blogs in this series.
Sales Tax Nexus
Nexus is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state. This presence gives the state the right to require a company to pay or collect and remit certain taxes. Say you have an employee travel into a state to call on a customer. In many states, that will create a “sufficient physical presence”
In addition to physical presence, there are two new standards that states are enacting to address the nexus issues created by remote sellers. We’ll address “click-through nexus” and “affiliate nexus” and other Internet tax issues in a future blog.
Income Tax Nexus Income tax nexus is not as straightforward as sales tax nexus. Let’s say your business solicits sales in a state for tangible personal property purposes—federal law will protect you from having to pay taxes there. However, the same does not hold true if your business provides a service in various states. Many states have begun adding to the physical presence nexus standard by adopting an economic nexus standard. So, if you have a certain amount of property, payroll and /or sales in a state, the business would be determined to have a nexus. We’ll cover this in more detail in an upcoming blog.
Because of the ever-changing nexus standards, it is important for a multistate business to take the time each year to determine if nexus has been created with any new states and if so, what steps are required to be in compliance.
The increase in the state and local tax burden can impact an organization’s competitive position. As states become more driven to find streams of revenue, it becomes more important than ever for business owners to stay up to speed with changes in compliance requirements and be ever vigilant of risk.
Staying aware of state and local taxes is crucial to growing your business. Take the next steps with our free e-book: State and Local Tax Issues That Affect Your Business.