Tax planning will – and should – look different for each and every business. And when your business operates in more than one state, that tax plan could get complex.
Lots has been happening in multistate taxation over the last few years. Let’s review some of the latest trends, including:
Understanding these concepts in multistate taxation will help you build your tax plan for 2024, 2025, and beyond.
Nexus is a bit of a tricky concept, but let’s try to simplify it.
According to the Due Process Clause in the United States Constitution, a business is subject to a jurisdiction’s tax laws and filing requirements when it has established a sufficient connection – or nexus – with that state. When it comes to sales taxes, nexus laws have been on the move for decades.
Prior to the ecommerce boom, jurisdictions levied their sales tax laws on out-of-state businesses only if those businesses had some sort of physical presence in their state (e.g., they had employees traveling into the state, they stored inventory in that state, etc.). Today, physical presence will generate nexus, but so will economic presence.
When economic presence laws first emerged, most states determined that businesses had nexus for sales tax purposes if they either (1) made a certain dollar amount of sales within the state, or (2) completed a certain number of sales transactions within the state. In recent years, states have been simplifying their economic nexus laws by ditching the number-of-transactions test. Let’s look at two recent examples.
Because economic nexus laws keep changing, we recommend that you review your sales tax filing responsibilities annually.
As of May 2024, nearly 40 states have created a pass-through entity tax (PTET). PTETs may be great options for you and your business, but they can be complex. Let’s review what PTETs are and how they can help.
PTETs were created to solve a very specific problem.
Beginning in 2018, the Tax Cuts and Jobs Act placed a $10,000 cap on state and local tax (SALT) deductions for individual taxpayers. Individuals who pay more than $10,000 of state income tax and/or property tax won’t be able to deduct the full amount. To help their residents with this problem, many states created a PTET.
PTETs are entity-level income taxes that partnerships and S corporations can elect to file in lieu of passing taxable income down to their individual owners. PTETs effectively help circumvent the $10,000 SALT deduction limit because the business will pay the state income taxes directly and deduct them without limitation. Effectively, PTETs transform an individual SALT deduction (which is limited to $10,000) into a business SALT deduction (which has no limitation).
In 2023, Montana and Hawaii joined 34 other states in offering a PTET. Out of the remaining six states that offer an owner-level income tax on business income, only four have not yet proposed a PTET. Clearly, PTETs are trending, and if your business hasn’t considered how to use them, 2024 is the time to talk with your tax advisor about your options. A few things you’ll need to think about are:
For years, three-factor apportionment was the most common method jurisdictions used to tax out-of-state business taxable income. Multistate businesses would be required to calculate an apportionment percentage based on the (1) sales, (2) property, and (3) payroll that were generated in that state, then calculate their state tax liability using that percentage. However, in recent years, we’ve seen a shift away from three-factor apportionment. More and more states are implementing single sales factor apportionment methods.
Shifting away from three-factor apportionment toward single sales factor apportionment may not alleviate filing responsibilities for businesses, but it could change the amount of income that’s sourced to those states.
Since the COVID-19 pandemic, we’ve seen a trend toward remote work. It’s estimated that by 2025, one in five Americans will work remotely. Having remote workers can be beneficial for your business, but it does pose a problem when it comes to your tax filing responsibilities. If you have employees who live in different states, you may need to:
It’s this last issue we want to discuss. When would an employee’s presence in a state create an income tax filing responsibility for your business?
Generally, businesses are subject to a state’s tax laws if they have employees located in and working from that state. This is unlikely to change. Even as remote workers are becoming more and more common, states are unlikely to waive filing responsibilities for businesses that have remote workers residing in their state.
However…
Their remote presence may have less of a tax impact than they previously had. Let’s look at Ohio as an example.
Ohio recently implemented a modified apportionment formula when determining multistate tax liabilities. Instead of apportioning income into Ohio based on the location of their employees, businesses can apportion income by using their employees’ “reporting location,” which can be any place owned or controlled by the employer. If an out-of-state business has an employee living in and working from Ohio, their presence in Ohio may not affect the apportionment percentage that sources business taxable income to Ohio.
Put more simply, while a remote employee’s presence is likely to create a filing responsibility, it may not generate an additional tax liability.
Our team of experts at Meaden & Moore is dedicated to helping you navigate the complexities of multistate taxation and develop a comprehensive tax planning strategy tailored to your business's unique needs. We stay up-to-date with the latest tax laws and regulations to ensure your business remains compliant and optimized for growth. Reach out to us today to learn how we can assist you in managing your multistate tax obligations and creating a robust tax plan for the future.