Multi State Taxes: A Complete Guide for Businesses

As your business expands, so does your state tax obligation. Whether your business is an e-commerce store, a consulting practice, or a multi-store retail chain, operating in multiple states means a deep understanding of Multi State Taxes obligations is imperative to avoid running afoul of the law and paying fines. With more than 12,000 various tax jurisdictions, U.S. businesses must find strategic methods to comply with increasingly complex and inconsistent tax laws.

The complexity of multi-state tax law is only getting more complicated due to landmark Supreme Court cases and the increasing prevalence of remote working. This guide is a resource to clarify your understanding of multi-state tax law and compliance. While the IRS handles federal tax obligations, state tax authorities operate independently with their own rules, making multi-state compliance a dual-layer challenge for businesses.

How Multi-State Taxation Differs from Single-State Taxation

Tax obligations in a single state are simple; you pay tax in the one state in which you are operating your business. Things are not so simple with multi-state taxation. If your business has operations in multiple states, you are likely to face:

• The burden of multiple filing due dates and differing tax rates
• Organizational apportionment income allocation
• Inconsistent and conflicting state tax regulations
• The risk of being taxed twice in the absence of proper planning

Unlike single-state operations, multi-state businesses must track where income is earned, where employees work, where property is located, and where sales occur to adequately allocate tax obligations.

Understanding Tax Nexus: The Gateway to Multi State Taxes Obligations

Tax nexus means the responsibility of business owners to pay taxes for the business activity in a given state or local jurisdiction. It also means that your business has a physical or economic nexus in that state or jurisdiction. Once a nexus is established, a business must comply with the state’s local business taxes.

Some of the activities that create nexus can be:

• Holding a physical or economic presence in that state or local jurisdiction
• Having employees or contractors
• Having a physical location or office
• Having business operations that exceed the economic nexus threshold
• Selling or providing services to the state or local jurisdiction

How Nexus Is Determined Across Different States

Each state defines the nexus threshold differently. Due to that, compliance is difficult for business owners. Since the 2018 South Dakota v. Wayfair Supreme Court case, the statewide economic nexus has been defined primarily by sales volume or the count of transactions rather than by physical presence.

Nexus Types Comparison:

Types of Taxes Subject to Multi-State Regulations

Multi State Taxes incorporate several tax categories:

• Income Tax: Taxes on earnings for corporations and individuals
• Sales and Use Tax: Taxes on the sale of goods and services to customers
• Franchise Tax: Taxes on the privilege of being able to operate a business, done annually
• Payroll Tax: Taxes related to unemployment insurance and tax withholdings
• Property Taxes: Taxes on the real and personal property of a business

How Apportionment Works in Multi-State Taxation

Apportionment is the term used to indicate how business income is split or divided among the states where the business has nexus. Most states have a three-part formula, which includes property, payroll, and sales. Several states, however, have moved to a single sales factor formula, which can have a dramatic effect on the tax.

The three traditional factors formula is where the modern approach often lies. In the three-factor approach, each factor is evenly split: property, payroll, and sales. In modern approaches, typically one factor carries more weight alongside sales, benefiting states where products are sold at the expense of states where products are produced.

Filing Requirements for Nonresidents and Multi-State Filers

Once you have established nexus, it is important to understand that each state has specific requirements that you must adhere to, including:

• Register with the state’s tax authority
• Submit returns (may be monthly, quarterly, or annually)
• Pay the tax due by the stated deadlines
• Keep all required documentation and records
• Submit year-end reconciliation returns

Remote non-residents may have to file income tax returns in every state where they have worked, which adds even more complexity.

Common Multi State Taxes Challenges

Businesses with Multi State Taxes experience many challenges, such as:

• Tracking nexus for each state/jurisdiction where you have business activities
• Dealing with different tax policies and rates
• Managing to avoid paying tax multiple times through credits and deductions
• Keeping up with the changing laws
• Managing multiple state audits

Multi State Taxes Considerations for E-Commerce and Online Sellers

E-commerce businesses have their own set of multi state taxes challenges. The Wayfair decision has changed the game for online sellers and how they deal with sales tax. Even with no physical presence in the state, online sellers must collect and pay sales tax for those states where they cross the economic nexus threshold.
Online sellers need to understand sales tax registration for each state they sell to, marketplace facilitator laws, automated sales tax systems, and auditing documentation to avoid tax-related headaches.

How Business Structure Influences Multi State Taxes

The type of your business entity will be crucial for your handling of multi-state taxation:

• C Corporation: Will have a corporate income tax for every state they have nexus
• S Corp and Partnership: These business entities are pass-through entities, and the owners report income as part of their income
• LLC: Depending on the state, tax treatment may vary and is determined by the election
• Sole Proprietorship: Income is reported, and the business owner does this on their individual income tax return

Calculating Your Multi-State Tax Liability

There are several steps to take in order to calculate multi-state tax liability. The first is to determine global business income. The second step is to determine every state of nexus. The third step is to calculate the tax and apportionment of state income. The fourth step is to deduct tax for states in which credits would be considered. When it comes to accurate state tax calculations, many businesses either hire a tax professional or use accurate multi-jurisdiction tax software.

Strategies for Managing Multi-State Tax Compliance

Some strategies on tax compliance include:

• Tracking expenses on sales, payroll, and property in each state
• Regularly conducting nexus studies
• Filing and tax calculations using automation tools
• Clarifying internal processes and setting defined roles
• Organizing records by jurisdiction
• When applicable, engaging in voluntary disclosure

When to Hire a Tax Professional

Tax advisors specializing in multi-state compliance are essential when a business begins out-of-state operations, audits are encountered, a business is subject to complicated tax allocation, a business has a high tax exposure, or a business lacks internal resources, time, or expertise. A multi-state tax advisor can service audit defense, tax risk and compliance planning, as well as tax minimization strategies and multi-state compliance facilitation.

EasyFiling is a service that simplifies multijurisdictional compliance, expert assistance, and automated solutions to meet compliance requirements.

Staying Updated: New Tax Laws and Changes Across States

To remain up to date with laws and regulations about state tax laws, you may want to consider subscribing to newsletters issued by state tax authorities, following tax publications, joining tax-related professional organizations, choosing compliance software with updated tax laws, and remaining in contact with tax professionals working on or tracking changes in your state tax laws.

It is in your best interest to periodically audit your multi-state tax positions. You want to take advantage of newly favorable laws and stay in compliance with newly unfavorable laws.

Conclusion: Navigating Multi State Taxes With Confidence

While every state has its own unique laws and tax codes, which can result in some complexity, building and refining your understanding of the tax code, along with the fundamental laws of tax nexus, apportionment, and state tax compliance, will keep your business on the right side of multi-state taxation.

Make sure your business avoids unnecessary spending by staying compliant with tax codes. Be sure to understand your laws for multi-state taxation, and your business will be able to grow without limitations crossing state borders.