State Business Income Tax Filing Requirements: A Changing Environment
Recently a number of states have changed their Business Tax Laws in an effort to capture business economic activity conducted in their respective states and subject such activity to income tax. “Nexus” is referred to as the standard which, when satisfied, will subject a business to file and pay income taxes in a state. Prior to the ever evolving world of technology in which we currently exist, nexus was commonly satisfied for almost all states when there was some form of “physical presence” in the state (i.e. an out of state business that had offices, employees, agents, or property in the state). As a result of e-commerce and other technological advances, the “physical presence” test traditionally applied as the standard for capturing out of state business activities has become outdated and has resulted in many states changing their approach to an “economic presence” standard.
Economic presence nexus is generally based on whether a business has an economic presence in a state by directing economic activity in the state, by having income from sales to customers in the state, or receives income from intangible property in the state. There are over forty states that have economic nexus standards that vary in their criteria for determining if a business has substantial economic presence which would result in a company’s requirement to file a tax return. Under the current state tax environment, a number of states have adopted a “factor presence standard” which was approved of by the Multistate Tax Commission in an attempt to make state taxation more uniform. Under this factor presence standard a business is considered to have substantial economic nexus in a state, if any of the following thresholds are exceeded during the year:
- $50,000 of property,
- $50,000 of payroll,
- $500,000 in sales, or
- 25% of the businesses total property, total payroll, or total sales
States that have adopted a factor presence standard include:
- Alabama
- California
- Colorado
- Connecticut
- New York
- Ohio
- Tennessee
- Washington
Some of these states have adopted or replaced the traditional physical presence standard with the economic presence standard, while others have adopted both.
Although there are arguments being made as to the constitutionality of the changes that are being made in various states, the federal government (i.e. Supreme Court) generally does not get involved in state tax nexus cases, therefore those legal battles will inevitably be litigated at the individual state level over the next several years.
As a result of the current state tax climate and more importantly the changing laws in many states, we are recommending that you evaluate the potential multistate tax compliance requirements of your company. Specifically, in your review if you believe that you may be subject to the economic presence standard as communicated herein, we recommend that your company fully comply with the respective state filing requirements. In failing to do so you will potentially subject your company to significant penalties and interest. If you would like our assistance in evaluating your multistate filing requirements please contact our office to set up a meeting to discuss your specific circumstances.
