© 2020 RSM US LLP. All rights reserved.
Is your business paying taxes to the correct jurisdiction? Sourcing can be complicated.
Planning, structure and recordkeeping are vital
Sourcing your income and tax attributes for state and local tax purposes may sound easy. It’s simply a matter of deciding which jurisdiction gets to tax what. But there are more than just the 50 states and the District of Columbia involved. In the United States, there are more than 8,000 state and local sales tax jurisdictions and more than 5,000 state and local income tax jurisdictions. Sourcing gets complicated.
As far as income tax is concerned, the U.S. Supreme Court has ruled income must be fairly apportioned among the states in which a taxpayer does business. But if you think that’s a matter of applying a simple formula, such as sales in that state as a portion of a business’ total sales, think again. The courts allow states to apply differing rules and methodologies concerning the apportionment of income.
Sales and use taxes
Sourcing for sales and use taxes can be just as complicated as income taxes and involves more than a question of whether you have nexus in a jurisdiction.
If the transaction is occurring within a state that authorizes local rates, what local rate should apply: the origin or destination rate? If a service is substantially performed in one state, but the benefit of the service is in another state, which state may tax the transaction ( i.e., what state has jurisdiction to tax the activity)? Does your business pay sales tax to out-of-state vendors in states your business does not have any connection with? Is your business also accruing use tax on transactions that should be subject to a sales tax?
When multistate software is involved, some states look at first use to determine sales and use tax obligations, while others look at a percentage of use or percentage of licenses in the state. Structuring your transactions appropriately can help you to avoid sales and use tax liability in multiple jurisdictions on the same transaction.
Thankfully, property taxes are more straightforward. For real property, it’s simply a matter of location. However, for mobile personal property, accurate recordkeeping is important. If your company has trucks or other mobile equipment that travels through multiple states over the course of the year, it’s vital to keep accurate records about where your equipment was and how it was being used in order to accurately determine property tax sourcing and compliance.
The bottom line? Sourcing is complicated and there are literally thousands of taxing jurisdictions, all of which are hungry for revenue. Planning, structuring and effective recordkeeping are the keys to helping you accurately determine what is taxable where, to avoiding compliance issues, and to ensure you don’t pay more tax than you should.