In Which States Does Your Business Operate?
…are you absolutely sure?
By Angela K. Murphy, LSWG Manager
Given the increase in online sales, remote workers, an overall increase in the digital marketplace, as well as increased tax examinations and enforcement by the states, it is a good idea to consider the following:
It used to be relatively easy to determine to which states you would pay income tax for your business activity. That is no longer the case. Many states have adopted the market-source, rather than the cost of performance, method for determining where income is taxed. For example, let’s say you are an architect with an office in Maryland working on a project for a customer whose home office is in DC, and the project being constructed is in California… where should your income be taxed? Under the market source methodology, your customer ultimately receives the benefit of your work in California, where the project is being constructed, so income tax is due to California. Under the cost of performance methodology, you rendered the service from your office in Maryland, so you would pay Maryland tax.
Employment Taxes (Unemployment and Employee Withholding)
There are rules regarding in which states you are required to perform employee withholding on wages, and to which state(s) you are required to pay unemployment taxes for work performed by your employees. And, of course, those rules are very different from each other. If you have one physical location and all of the work performed by your employees is within that same state, then you are only liable for unemployment taxes and employee withholding for that one state, regardless of where your employees actually live. However, if your employees ever render service outside of your state, including working from home, or if you have locations in multiple states, then determining to which states you must report/pay unemployment and/or employee withholdings, and for which employees, can quickly become difficult.
If you sell goods to, or provide services in, multiple states you will want to make sure you are in compliance with the sales tax laws in those states. Each state has its own rules regarding what is taxable. For example, in Maryland, most services are not subject to sales tax, but in West Virginia most services are subject to sales tax. If you are an online seller, you must also keep the landmark Wayfair decision in mind.
Similarly, if you order office supplies online, and the invoice goes to your home office in Maryland, but the paper and printer toner are delivered to your office in Virginia, do you know if the online merchant collected sales tax, and if yes, whether they collected sales tax for the correct state?
Confused yet? We encourage you to have a conversation with your LSWG accountant regarding the logistics of the work you perform, the products/services you sell, and the purchases you make so that we can assist you in determining in which states you should file/remit these various taxes.
Angela Murphy, CPA, joined LSWG in 2005 and is a manager in LSWG’s Frederick office where she is responsible for providing tax, financial reporting, accounting, and payroll support to the firm’s business, nonprofit, and individual clients. You can reach Angela at 301.662.9200, or by email at amurphy@LSWG.cpa.