If your business has grown beyond your state’s boundaries so that you operate in more than one location, this can trigger tax complexities you need to address. Here are some to consider:
Business Taxes When Operating in More than One State
State Income Taxes
If you operate in more than one state, how do you determine what to pay taxwise to each state? Things get complicated because of apportionment rules. Theoretically, you only pay tax on the income allocable to a state, so that you don’t pay tax more than once on the same income. However, different states have different apportionment rules; formulas are based on sales within each state, payroll allocable to the state, and property within the state. The Tax Administration has a list of state apportionment formulas for corporate income taxes for 2019.
Filing Business Returns
You must file tax returns in each state in which your business has a “nexus” (connection). This is so even if your business is a pass-through entity not subject to state income taxes.
If you are an owner in a pass-through entity, you must file individual income tax returns in the multiple states. This increases not only the complexity of filing, but also the cost of tax return preparation when using a CPA or other paid preparer.
Some states allow the filing of a consolidated return for all owners. But obviously, a sole proprietor must file in each state in which he or she has a business nexus.
Withholding Taxes for Employees
If you’re in one state but have employees working for you in another, be sure to check each state’s withholding requirements. For example, if you are a New Jersey corporation with employees in New York, you are not required to withhold New York income taxes from the paychecks of these employees. However, as an out-of-state employer, you can opt to do so for the convenience of your employers working in New York.
Generally, the sales tax rules for each state in which you’re located govern the obligations for collection and remittance. However, most states now require you to collect and remit sales tax on transactions to buyers within their borders, regardless of where you’re located. This follows a U.S. Supreme Court approved South Dakota’s use of an “economic nexus” for sales tax responsibilities. That state only requires sales tax if the seller derives gross revenues in the state exceeding $100,000 or has 200 or more transactions. In other words, South Dakota, as well as other states following suit, exempt transactions by small businesses. Find a list of states taxing remote sellers from Avalara.
Usually, you must pay state unemployment tax to the state in which the employee works. If you operate in more than one state and the employee works in more than one of your locations, then what? The U.S. Department of Labor has guidelines to help you determine the state to which you must pay unemployment taxes. These guidelines are designed to ensure that you pay only one state for all of the services performed by an employee.
Crossing state lines to do business may mean more revenue. But it also means more tax complexity. Be sure your CPA or other tax advisor is versed in the laws of the states in which you operate.