08/ 27/ 2004
by Jeffrey Moses
Small businesses that operate or have sales in more than one state are often surprised by notification that they have multi-state sales tax and corporate tax liability. With the budget crises in many states today, state agencies are becoming more aggressive in locating companies that may owe taxes. Instead of receiving an unanticipated letter demanding an audit, be aware of tax obligations in advance, file all required paperwork and pay all taxes.
The following questions can help determine your company's potential multi-state tax liability. If you answer “yes” to any one of the questions, you should consider consulting with a knowledgeable tax attorney or accountant.
- Do you have offices, sales centers or other facilities within more than one state?
- Do you take orders, make sales, fulfill orders or supply services in more than one state?
- Do you file payroll taxes, property taxes, workers' compensation taxes or other taxes within more than one state? (These can be used by state officials to locate companies that have operations within a state but are not paying taxes.)
- Do you provide any sort of customer solicitation, customer support or warranty work within more than one state?
- Do you have personal residences in more than one state and do business in those states?
If your tax adviser determines that you may have multi-state tax exposure, you will want to work with state officials to determine the method of computing taxes in each state. This division of tax liability between states is called "apportionment" and is usually based on standard criteria of total sales revenue within the state, along with the amount of property owned or leased within the state and the amount paid to salaried or commissioned employees within the state. Frequently, a company's total taxes paid to multiple states are less than what was paid to the state in which the company is domiciled. This occurs because states use different means to compute taxes owed. Of course, total taxes paid may be more than what is paid to the state of domicile.
Some companies operating in a number of states try to negate tax liability by stating that the majority of sales revenue is sent out of state to the home office. This argument usually fails because a company is normally exempt from taxes within a state only if all sales are approved and shipped from another state.
Instead of trying to wiggle out of multi-state tax liability, it's often better to face the obligation head on. This is the best way to minimize penalties and interest on unpaid taxes.
