The Many Types of State Tax


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There’s a lot of focus lately on the federal income tax changes for 2009 and beyond. Probably the biggest change, though, is going to occur at the state tax level.

Some states are already moving to enact new laws to raise revenues. And in a couple of cases, dropping state tax rates in an attempt to stimulate the economy.

Most, though, are looking for every way possible to collect more revenue without making headlines doing it.

Here are the top five state tax tactics you need to watch for your own state:

  • State income tax rate change. This one is easy and it’s probably the least likely one to occur, simply because everyone is looking out for it. NYC is probably the exception, doing a dramatic 2% increase for taxpayers with incomes over $500,000 who live in the city.
  • Reduced state deductions. We’re seeing this occur with more frequency. By changing what’s deductible, a state will collect more tax from you without ever raising the tax rate. In other words, less deductions means more taxable income. Besides the obvious issue with this (more tax), there is the added complication that you now have to prepare your tax return according to two sets of laws: the state and the federal government. And if you’re subject to Alternative Minimum Tax, add a 3rd one in there too. This will greatly increase the complication of returns.
  • Increase sales tax rate. This is another highly visible change. You likely know if this is happening in your home state or not.
  • Increased reach of sales tax. We now have states fighting over jurisdiction, especially for Internet sales. If you have a business in Florida, sell to someone who lives in Massachusetts, who gets to collect the sales tax. Right now, chances are no one. But look for this to change. And add in New York’s confusing “Amazon tax” and you have a NY sales tax on anything that touches NY in any way, shape or form. Other states will likely follow suit.
  • Increased sales tax base. More complications here. If a state doesn’t want to increase the tax rate, or won’t get enough revenue from that, chances are it’s going to be looking to increase the base of what sales tax is collected on. Nevada had rumblings of that. Looks like California will be taxing more personal services. We’ll likely see more here in the weeks and months to come.

And no conversation about states would be complete without a mention of nexus. Each state is trying to carve out their own piece of territory. It used to be simple to know where a business was: the corner grocery store in Alaska was in Alaska. But with personal service contracts, virtual offices, telecommuting, internet sales and companies just like this one at TaxLoopholes, it gets a little less certain. Where is your business located anyway? Pretty much every state is happy to give you their answer!



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