Tax

Multistate Taxation – Factors to Consider

06.11.2019

Author

Jeff Aleixo

multistate taxation employment tax sui sit

If employers do business in only one state and all employees are residents of that state, their state income tax withholding obligations are relatively straightforward. However, more and more small businesses are expanding the geographical boundaries within which they operate.

When business operations expand beyond the borders of a single state, complexities can arise. Employers may have to withhold taxes for several states, depending on the employees’ states of residence and the location of their workplaces. This is why it is critical for them to understand multistate taxation.

Multistate Taxation Factors

Factors like determining how to track employees in other states and keeping up to date on taxation requirements that differ by state, make multistate taxation compliance challenging and create additional costs for employers. Furthermore, the threshold at which tax and withholding liabilities are triggered differs from state to state, which makes it even more complicated for employers and employees to stay compliant.

However, there are some multistate taxation factors that employers can take into account in order to avoid the costs and complexities of paying taxes and filing tax returns in different states.

Identify tax saving opportunities, ensure compliance and resolve tax complexities with this comprehensive guide.

The Concept of Nexus

US tax law uses the concept of nexus to determine tax obligations. This is a taxable connection to a particular state, usually some form of physical connection to that state such as having employees or property in that state, or obtaining sales from within that state. When determining tax obligations in a particular state, it is important to consider individual state law since there is no uniform definition of nexus across states. Moreover, definitions and rules for determining nexus change constantly. Court cases play a large role in establishing which activities lead to a nexus, so thresholds can vary among states. In South Dakota v. Wayfair, the Court eliminated the physical presence rule within the Commerce Clause as the standard for creating nexus in a jurisdiction. However, physical presence still creates nexus and is the first consideration in its determining. This means that employers need to look at each state individually when determining nexus and have to stay constantly on top of a set of changing regulations and interpretations.

Understanding the Interstate Commerce Tax Act

Another factor that has influence on multistate taxation is Public Law 86-272. Also called the Interstate Commerce Tax Act, this law dictates the solicitation of sales across state borders. P.L. 86-272 prohibits imposition of state income tax on an out-of-state company with state activities that are limited to solicitation of orders for sales of tangible personal property and delivery of the property if the orders are sent outside of the state for approval and fulfillment. Since some key elements of the law were not clearly defined, it has been changed considerably over the years in regards to what it means. That being the case, it is important that employers understand this law and prevent any potential complications related to it.

Apportionment

Businesses that file multiple state income tax returns must apportion their income between the different states in which they file to avoid paying state tax on the same income twice. The formulas take into account factors such as the proportion of payroll, property and sales in each state. Generally, taxable income is apportioned under either the three-factor formula or single sales factor. However, some states use varying apportionment schemes, which can make this a complicated calculation.

Since this factor is something to keep in mind when dealing with taxable income, employers need to understand the laws and regulations regarding the states in which they do business and carefully review information before filing it.

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Having the Right Technology in Place

Dealing with multi-state tax requirements can be challenging, but it is a necessity. Even though doing business in multiple states is a sign of growth and expanding business opportunities, it also adds risk and increases administrative burden. Given that employees can create tax liabilities every time they work in another state, employers need to understand their own state’s regulations as well as to take into consideration requirements in other states. However, if they have the right technology in place, employers can make sure that their company is compliant. An automated software allows multi-state and global tracking resulting in accurate compensation specific to different states and employer obligations. In addition to this, it is cloud-based so any changes to tax regulations are updated automatically in the system.

Multistate Taxation Compliance

Every business decision has a tax consequence, and conducting business across state lines is no exception. Consequently, it is critical for businesses to achieve compliance when it comes to multistate taxation.

Tax laws vary widely from state to state and usually lack clarity, which makes keeping up with multiple requirements and liabilities a significant challenge. Effectively managing every tax obligation in combination with state authorities in their pursuit of multistate taxation compliance can be a complicated and costly process. However, employers can simplify the administrative and practical burdens by automating the entire process. With an automated solution based on specific business activities and goals, they can develop a multistate taxation approach that maximizes savings, minimizes liability and allows them to remain compliant with all state laws, reporting requirements, and regulations.

Replace cumbersome tax management with an automated solution that allows you to become and remain compliant with various requirements for withholding taxes and filing returns.