Operating in one physical location is no longer ideal for businesses who want to remain profitable in the ever-changing landscape. To adapt, many businesses are straying away from traditional business models where they would typically operate in physical locations and moving towards virtual business models. As businesses expand their operations across states lines, it becomes increasingly complex for states to collect taxes.
In an effort to adapt, many states are making necessary updates to tax laws. For instance, several states have implemented the ‘economic nexus’ standard, which requires businesses to file a state tax return regardless of whether or not they have a physical presence there.
The AICPA defines economic nexus as the amount and degree of a taxpayer’s business activity that must be present in a state before the taxpayer becomes subject to the state’s taxing jurisdiction or taxing power. There are numerous business activities that can prompt a tax filing; below we have listed the most common. Consider which of these might apply to your business.
- Presence of employees, even without sales
- Execution of contracts
- Others acting in an ‘agent’ capacity
- Employees who work remotely
- Product delivery via a company-owned truck
- Data stored on a server
While the economic nexus standard can be helpful in determining if your business is subject to state tax, there is inconsistency between states who define economic benefit differently. To help provide some consistency, some states have gone a step further to set a ‘bright-line rule’. The purpose of such a rule is to define a standard, leaving little or no room for interpretation.
When determining if your business is subject to state tax, you must first identify which states you have a filing requirement in. Next, based on that states regulations, determine what income must be attributed to that state.
If you have questions regarding your state tax return filing requirements, please contact one of our professionals today.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.