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Doing business in multiple states can be intimidating at first, but we can
certainly help guide you through any pitfalls that may await. The first
thing you need to understand is what exactly constitutes "doing
business" in a particular state.
If you are simply sending goods
through a common carrier into another state, you generally do not have to
register in that state or file sales and income tax returns.
However, if you begin sending a salesperson into that state or acquire any
property there, you almost certainly will be subject to income and possibly
sales taxes there. If you use independent sales reps in that state, you
should be able to avoid filing income taxes there, but the key factor in any
multi-state discussion is that almost all states will vary at least slightly in
their rules, so it pays to investigate before making any costly assumptions.
Nonresident Individual Returns If your business operates as a sole
proprietorship (a Schedule C business on your 1040), you will have to file a
nonresident tax return in any state you venture into. Multi-state taxation
is a little more complicated for sole proprietors because the rules can be more
complex and your home state is likely to tax all of your income and force you to
take "credits" for any taxes paid to other states on the same business
income.
Corporate and Partnership Returns
Fortunately, most states are fairly consistent in how they ask you to
apportion your income on a corporate or partnership return. Most states
use a "three-factor" formula consisting of your company's sales,
property and payroll within each state. Basically, you calculate your
sales within each state as a percentage of your total sales company-wide.
You also perform the same percentage calculation on your business property and
employee payroll. The three percentages are added together and divided by
three (although some states require you to count the sales factor twice and
divide the total by four) to determine your percentage of "business"
within each state.
As an example, let's assume your company is incorporated in State A, but also
does business in States B and C. You have sales of $1,000,000 in State A,
$500,000 in State B and $500,000 in State C. Your total company sales are
$2,000,000 and your sales apportionment factors would be 50% in State A
($1,000,000/$2,000,000), and 25% in both States B and C
($500,000/$2,000,000).
If all of your property is located in your home
state (not uncommon) and 90% of your payroll is in your home state, then your
home states apportionment factor would be 80% ((50% + 90% + 100%) / 3).
This calculation assumes your home state doesn't double-weight the sales factor.
Separate Accounting
Many states will allow you to actually keep separate books for your
operations there, but its not a common practice due to the required time and
expense. Using separate accounting can save you money however, if you can
use it to prevent business income from being allocated as heavily to a state
with a high tax rate. We can assist you in working through the numbers
with this decision.
Combined or Consolidated Returns
The "unitary theory" provides that corporations and all of their
subsidiaries should be taxed in a state because each corporation is dependent to
some extent on the others. For example, many parent companies operate as
nothing more than an administrative entity with no sales. Again, there is
substantial room for tax strategies in the decision that a state may allow you
in filing either a combined or a separate return.
Doing business in multiple states can give you a tax advantage if those
states have a lower tax rate than your home state. In many cases, you may
actually consider shifting some employees or operations to another state simply
because of the tax savings involved. Please contact us if you would like
to discuss this issue further in relation to your company.
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