States no longer require taxpayers to be “present to win”

Businesses that perform operations in several states often ask me which states to file income tax returns for. The answer, as with most tax-related questions, is it depends. Taxpayers are responsible for complying with the laws enacted in each state independently. Whether a state can impose an income tax is based on each state’s “right” to impose the tax.

Each state’s right starts with a review of the taxpayer’s activity within a state and is then determined by whether or not the activity rises to a minimum level or connection that gives a state the right to impose an income tax.

The minimum level can vary state to state, but historically has been very low across the board; being even further reduced in recent years as a result of what is referred to as “economic nexus.”

Economic nexus can apply when a business exhibits a purposeful direction towards commerce within a state; including, but not limited to, website advertising, electronic distribution of promotional material, and having an outside representative in a state.

What does all this mean? Simply stated, it means that states no longer require taxpayers to be “present to win”. Economic nexus has provided an avenue for states to expand their right to impose the tax, regardless of a taxpayer’s physical presence.

How do states know when you are doing business in their state? Historically, three of the more common avenues in which states have received information that lead to taxpayer inquiry are through audits of a taxpayer’s vendors or customers, from disgruntled employees, or from competitors.

One of the newest avenues leading to a state inquiry is through a taxpayer’s website and social media content. Websites typically tend to advertise locations or service areas that may include states or geographic regions, making it easier for states to gather information and compare data in the electronic age.

Although an unexpected inquiry from a state taxing authority can occur at any time, an inquiry can be particularly problematic in certain situations, such as when a business owner is considering the sale of their business.

How can you find out which states you may be required to file in? Contact Laurie Murray @ 800-282-2440 x7505, or via e-mail, for more information.

Laurie Murray is a certified public accountant with Melanson Heath & Company, PC.