Because it's the most convenient option, the majority of businesses start up in their home state. For some companies though, business activities aren't quite as straightforward as that. Perhaps your business has opened branches or franchises out-of-state, or you happen to have a business partner or employee who lives in another part of the country. Even serving customers in other states can complicate matters when tax time rolls around.
Though doing business in multiple states is rewarding, it can also be difficult if you don't have a firm understanding of the regulations that may affect you. In this post, we will address some of the most frequently asked questions that businesses have about multi-state business affairs and taxation.
Must I register in multiple states?
Before we can address the topic of whether or not your business is subject to tax in multiple states, we must determine if the business has “nexus” with a state. Nexus is determined by the degree of activities you're conducting in a particular state.
The state in which you primarily conduct your business affairs will cause it to meet the nexus standard and is definitely where you should be registered. If, however, the business has “activities” in another state, you may need to obtain a certificate of authority or register as a foreign business with the states in question. Generally, "business activities" extend to situations wherein:
- You have established a physical presence in that state
- You have hired employees in that state
- You are soliciting business in that state
Because different states have different definitions of what constitutes as "doing business", it's best to contact the state's business registration office, or consult with a trusted professional.
If it is determined that I am doing business in multiple states, how do I pay my taxes?
In many cases, the state in which your business was originally registered is the location where most of your income is generated. As such, this state will tax the bulk of your business's earnings and profits. Other states where a sufficient amount of activity occurs will also tax the income that was actually earned in that state. Most states use some sort of formula to determine what portion of the businesses’ total income the state can grab. For example, many states are now “apportioning” income based on a percentage of the sales shipped to that particular state to the total sales for the entire business.
Companies organized as flow-through entities (S corporations, limited liability companies or partnerships) present different issues for state tax collectors. In many cases, the state will put the burden for paying the tax on the owners of the business, similar to the Federal income tax rules. In those cases, the entity may be required to remit income tax payments on behalf of its owners. Again, as mentioned above, each state is different, so the rules and regulations must be verified.
Bear in mind that there are some states that don't collect income tax, but instead impose a gross receipts tax. For example, Ohio and the state of Washington collect a tax on the amount of sales or revenue derived in the state as opposed to the business’ net income Or take Texas as another example where the state tax is based on one of three alternatives ranging from a gross receipts approach to a gross margin concept.
Might my business activities qualify for an exemption?
Exemptions for business activities will, again, vary by state. Depending on the location, you may find that exemptions are available to you if your enterprise is conducting infrequent transactions, is generating sales solely through a web site, or for other reasons that the state may determine. If you believe that you may qualify for such an exemptions, make sure you can document reasons supporting the position.
Because state tax offices are cracking down on compliance issues, it's best to have your affairs in order. If you're doing business in multiple states, you should give thought to hiring an accountant that is knowledgeable about multi-state taxation and the concept of nexus. Should you have any doubts about your ability to handle multi-state taxes, be sure to get in touch with a reputable professional.