As many changes that were made to the federal tax law this past year, I think the most significant is on the state side. States are broke, and unlike the feds they can’t fire up the printing press to make more money. Although California did make an attempt at that with their CA IOU program for workers, disability payments and contractors.
What this really means is that you can count on three things from the most states:
(1) Higher tax rates or broader interpretations of what is taxable
(2) Over-reaching to claim nexus on companies from other states
(3) Aggressive audits and enforcement
Any of those could be devastating for a small business. Put them in conjunction with each other, and it could mean the demise of a business.
For example, there are a number of states fighting over who gets to claim jurisdiction when it comes to sales tax. New York’s ‘Amazon’ tax is a great example of that. If you have a business in California that sells a product to someone living in California, then you must collect and pay CA sales tax. But if you use an affiliate in New York to help with the deal, New York says you must also collect and pay NY sales tax. What do you do? Your customer doesn’t want to pay two times the sales tax. And I’m sure you don’t want to either. And neither state is about to budge. New York isn’t the only state with the Amazon tax. North Carolina and Rhode Island have added it and others are considering it.
There is also the issue of nexus when it comes to paying your state income tax (or gross receipts in the case of Hawaii, New Mexico and Texas, among others). If you have a foothold in another state, you then have to calculate the amount that is taxable in each state. The problem is that the calculation varies from state to state. In fact, I ended up having to prepare a return this year that had 102% of the profit of the client subject to state tax. The income was earned in two states that didn’t have the same definition of how to calculate the tax.
The definition of what is considered nexus is also changing. If you have an employee in a state, you have nexus in that other state. So consider carefully what risk you might be adding when you hire a virtual assistant from another state. Some states have included nexus status if you simply hire an independent contractor from another state.
You don’t even have to make money in another state to have nexus. For example, one company recently got nailed for holding free, information only seminars in outside states. That was enough to create nexus.
As you get ready to start year-end tax planning, add in possible tax issues from outside states.