Recent advances in technology and logistics have allowed more businesses to reach and serve customers both nationally and internationally. But with expansion comes additional responsibilities, and with once-local companies now serving multiple states, it’s important to have a practical framework for tax compliance in place to avoid potential fines and penalties.
Some states, like California, have been increasingly aggressive in pursuing multi-state businesses with outstanding tax obligations, sometimes involving non-residents whose businesses have financial ties to the state. If your business is expanding rapidly, you may be unaware of some of the tax obligations you’re beginning to incur.
Let’s look at a few common tax issues faced by expanding multi-state businesses.
Defining a Multi-state Business: The Impact of Amazon
This one-time bookseller is now an international mega-corporation that can deliver its customers almost any item within days. So how did Amazon change the tax landscape for multi-state businesses?
Because Amazon lets consumers purchase products from a range of sellers and a range of locations, you can live in California but buy a blender made in New York. Under the old laws, that purchase would not be subject to California state tax, but this system put in-state sellers at a disadvantage because their items would still include the additional tax. So California, along with several other states, put in place laws designed to level the playing field between in-state and out-of-state sellers.
To accomplish this, a new set of laws introduced the concept of the “nexus.” If your appliance manufacturing business is located outside California, but your inventory must be warehoused or handled in California or by a California-based company (like Amazon), it is said to have a nexus in the state, and therefore to have a tax obligation to the state as well. Under the nexus system, your business may have an out-of-state tax obligation without you having any facilities or employees in that state. And worse, you may not even know your business has an outstanding tax bill, allowing fines and penalties to mount up.
A New Definition of a Multi-state Business: The Wayfair Case (Quill v. North Dakota)
Another set of laws changed the way multi-state businesses address their tax obligations. In the early 1990s, the judge in the case of Quill v. North Dakota ruled that a business had to have some physical presence in a state (office, warehouse, transportation hub, etc.) in order to be considered having a nexus within a state. States were thus limited as to whom and how much they could tax.
Many states were dissatisfied with the ruling and, as technology matured, states began searching for fresh ways to tax out-of-state businesses. So, new laws were introduced, such as that stating that if you operate through a third-party agent within a state, you are considered having a nexus within that state. This expanded the ability of states to pursue out-of-state businesses for outstanding tax. Interpreting what makes up an economic nexus has continued to broaden—so that companies that conduct significant marketing efforts in a state can now be deemed to have an economic nexus in that state. In South Dakota vs. Wayfair (2018) the U.S. Supreme Court overturned the ruling in Quill v. North Dakota, setting the stage for wider interpretations of tax law, resulting in a more complex tax landscape for expanding businesses.
Payroll Tax Issues for Multi-state Businesses
If you operate a multi-state business, and one that has workers in several states, your payroll tax picture is likely to be complex. Payroll taxes can be additionally complicated if your business works with third parties (such as agents, affiliates, or independent contractors). If your business works with a third-party entity, you may be considered to be “doing business” in that state, despite having no physical presence there.
When assessing your multi-state tax obligations, it’s important to look at both your business and its connections to other entities within each state you serve.
- Where is your production located?
- Do you maintain facilities in other states?
- Do you have paid employees in other states?
- Do you pursue marketing efforts in other states?
- Do you do business through third parties in other states?
The answers to these questions can help you begin to determine if you are a multi-state business and define your overall tax obligation. For example, if you work with contractors in multiple states, you may be letting yourself in for an unanticipated tax liability.
Tips for Staying Compliant
Given all these laws and regulations, and the changing nature of the economy, full compliance can seem a hard goal to reach. Don’t panic. Working with a seasoned tax professional can help.
At Moskowitz LLP, our team has the expertise to help multi-state businesses navigate even the most daunting tax landscape successfully. Let our tax professionals help you…
- Make sense of state tax laws
- Assess your multi-state tax obligations
- Assess payroll tax obligations for out-of-state workers
- Avoid unnecessary fines and penalties
- Minimize your tax obligations
- Meet compliance requirements without expensive overhauls to your shipping or fulfillment systems
If you have operations in multiple states, then as a multi-state business, you have expanded tax liabilities. Our team of tax attorneys, CPA’s, tax preparers, and enrolled agents can help you manage income, sales, and payroll taxes so you can concentrate on what matters most—growing your business. Contact us today!