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The Changing Landscape of State Taxes

August 14, 2017

As you know, the state and local sales and income tax landscape is constantly changing. Staying apprised of new rules and regulations and how they impact your business can be difficult. Plus, the available information can often be confusing. To help shed some light on this subject, below are some highlights of a few recent developments you will want to consider:

Physical Nexus Requirement
Many states are attempting to overturn the physical nexus requirement for sales tax and replace the current presence test with a new test based on sales or transaction volumes. It is important to remain aware of the issues and decisions being made, as they may impact your nexus and filing responsibilities.  

Sales Tax Reporting Requirements
Sales tax reporting requirements for Colorado began on July 1, 2017, for those sellers who do not currently collect Colorado sales tax and have annual sales of $100,000 or more. Penalties are being imposed if the seller does not have specific language on its invoice alerting the buyer of the need to pay use tax. There will also be penalties for failing to provide purchasers with a year-end transaction summary (customer making more than $500 in purchases), as well as for failing to provide customer information to the state.  

Since this law was enacted, a number of states including Kentucky, Washington, Vermont and Louisiana have enacted similar requirements; others will likely follow suit. This is a fluid issue with new emergency regulations being adopted quickly, with varying filing thresholds. Some states are choosing to enact penalties, while others simply have a use tax notification requirement.

Economic Standard
States are imposing an economic standard for any business conducted in a state that leads to an income tax return requirement. The "doing business" standard is generally:

  • $500,000 of sales into a state
  • $50,000 in either property or payroll in a state
  • Or an amount of activity in these categories that exceeds 25 percent of the company's total  

The minimum amount of sales, payroll or property in a state can vary depending on the state. Currently, the following states have all adopted similar definitions for "doing business":

  • Alabama
  • California
  • Colorado
  • Connecticut
  • Michigan
  • New York
  • Ohio
  • Tennessee
  • Virginia
  • Washington

Market-Based Method
Businesses who do not sell tangible personal property have been using an alternative revenue sourcing method for a number of years called "cost of performance." This rule was the standard in most states until recently. States are now beginning to source this type of revenue using a market-based method. This simply means the sale is attributed to the location of the customer and not where the work was performed. A large number of states have made this change, and many other states are jumping on board as well. When this change occurs along with the new definition of "doing business" as mentioned above, filing requirements and taxes may be due in states where taxpayers may not have previously filed. 

Moving Forward
It is critical to understand these key issues so you can prevent costly surprises as states begin to actively enforce these rules. Simply filing in a state in which a company has an actual physical location (office, employee, etc.) is no longer a valid course of action, and is considered an invalid excuse for the failure to handle sales and income taxes. To keep up on these changing laws, please visit our SALT Blog and contact your Eide Bailly professional or a member of our state and local tax team for additional information.