With changes in tax regulations and business models, companies need to pay careful attention to state and local tax (SALT) requirements. For many companies, effective SALT compliance is hampered by common myths that can lead to costly misconceptions about a company’s obligations and regulatory expectations.
Be sure to avoid these SALT myths:
Myth #1: “I only do business in one state, so I don’t need to worry about other states’ taxes.”
Reality: In today’s digital age, you may have a filing requirement (i.e., nexus) in multiple jurisdictions without realizing it. Factors that can create nexus include:
- Remote employees
- Online sales
- Storing inventory in other states, such as an Amazon FBA or 3PL warehouse.
Quick Tip: Map your business activities, including the locations where your employees work, where your customers are located, and where you have inventory (regardless of how that inventory is managed).
Myth #2: “I’m not subject to sales tax because I only sell services.”
Reality: Many states tax a widening range of services, and the rules change constantly. For example:
- Texas has taxes on data processing services, including software as a service (SaaS).
- Hawaii and New Mexico tax all types of services, with very few exceptions.
- Washington taxes digital automated services and remote access software, regardless of how they are provided to customers.
Quick Tip: Review your service offerings against the latest tax laws in states where you have customers.
Myth #3: “I don’t have state tax liability because I’m in a federal tax net loss position.”
Reality: Profitability doesn’t always determine tax liability.
Consider the following:
- Some states impose business taxes based on gross receipts with little or no deductions or exemptions (e.g., Washington’s Business and Occupation (B&O) Tax, Texas’ Franchise Tax, or Oregon’s Corporate Activity Tax).
- Many states have minimum taxes based on factors other than the business’ net income or loss position that range from $50 to $15,000.
- Businesses that do not collect and remit sales tax properly can be held liable by the jurisdiction, which can impact a company’s cash flow.
Quick Tip: Review your tax obligations using a taxable base other than net income. Don’t let business operating losses lull you into a false sense of security.
Myth #4: “I’m a flow-through entity, so multistate taxes don’t matter outside of my state of residency.”
Reality: Non-compliance in other states can create legally valid double taxation (i.e., the same income being taxed twice) for owners on their personal income taxes.
Flow-through entities can create complex tax situations:
- The entity may have nexus and filing obligations in multiple states.
- Owners may need to file non-resident returns in states where the entity has customers or remote employees.
- Some states, such as Texas and Washington, impose entity-level taxes on partnerships and S-corporations.
Quick Tip: Consider entity-level and owner-level tax implications when operating across state lines.
Myth#5: “I only have employees in one state, so I don’t have a multistate tax issue.”
Reality: Filing only where you have employees doesn’t guarantee full multistate tax compliance.
Consider:
- In the last five years, most states have changed the way income is assigned to a state to shift the tax burden from in-state taxpayers to out-of-state taxpayers.
- States are not required to have the same thresholds for determining when a business is subject to a filing requirement.
- Recent legal changes (like the Wayfair decision) have created lower thresholds for when a business has a filing requirement.
Quick Tip: Review your business activities regularly against evolving nexus standards in all states where you have customers or operations.
When it comes to SALT, knowledge is power—and protection. Our SALT professionals partner with your company to ensure accurate multistate tax reporting and compliance, identify saving opportunities, and mitigate multistate tax risk. We understand and monitor the complex SALT landscape to help you understand regulatory expectations today and the implications of new laws and decisions across the United States.
Take our 5-Minute Nexus Assessment to help you understand your business’ risk. For additional support, contact us.
