Why is state tax compliance so complicated?
50 states mean 50 sets of rules. Add in cities, towns and counties then multiply by type of tax and you have state tax complexity. Sherri York and Jonathan Weinberg look at why state compliance is difficult and what you need to know when operating in multiple markets.
Why is state tax compliance so complicated? What you need to know...in a nutshell
State and local tax compliance can be complicated. It's important to understand the rules, especially if you have a growing business.
What are the basic principles of state and local tax compliance?
There are three basic principles to state tax compliance. There's nexus, apportionment and tax base. Of course, each state applies those principles differently and when those principles conflict, there are dangers and opportunities.
Nexus is an evolving concept, and every state applies nexus principles differently. It's important to not only know what your business is doing, but how your business is doing it in every single state. Certain minimal activities, such as attending trade shows, or even just having receipts derive from sources in the state can lead to a company having nexus.
It is important to understand which tax you're dealing with: income, franchise, sales and use, or property taxes. In the case of income tax, understanding the federal consolidated rules is a starting point. Many states adopt the federal consolidated rules, but many deviate or do not follow them at all.
How states treat goods and services matters a great deal from a transactional perspective. Understanding how the states track treatment of goods and services and how it differs is critical.
You always want to source your income fairly amongst the states, but if you don't understand how the rules are around allocation apportionment work, it's possible to be subject to double or even triple taxation in various states.
Getting it right
Your tax team needs to include a state and local tax specialist. A specialist who follows the rules that are constantly changing in all the states and can track these changes for your business as it grows.
It's important that you look at your nexus footprint every year and understand the changes in your business before you file your extensions or your tax returns or your estimated payments. You want to make sure you're getting this right as your business continues to grow.
When there are major changes in your business like an acquisition or a merger, you want to make sure that you're doing a full nexus study so you can capture all the new activities that the company may have. It's important to get in front of this so that you're filing appropriately and mitigating risk.