State Tax Questions as We Move Back to Business
As businesses start to reopen, we look to the future imagining what the new “normal” will look like. During the crisis, most states have been taxpayer-friendly, extending filing deadlines and payment due dates. As things normalize and states are facing budget deficits, empathy for taxpayers begins to fade. Here are some of the questions and issues facing businesses related to state taxes:
- How will the benefits brought about by the CARES Act impact state tax liabilities?
- Will the state adopt or decouple from federal changes, such as the modification the interest expense deduction limit, the elimination of excess business loss limitations, and exemption from income of debt forgiveness through the Paycheck Protection Program?
- How will retroactive changes impact state filings, do previously filed returns need to be amended?
Stay-at-home orders required a mass move to telecommuting. Employees began working in states and cities where they live. Does this cause nexus for the businesses in those states and cities creating state tax liabilities? Some states have addressed this question by providing a temporary reprieve during the period a stay-at-home order in effect, but what happens when the order is lifted and the employees still want to work from home?
Before the COVID-19 virus derailed the economy, states had begun to move to an economic nexus standard in determining when a business is liable to collect sales taxes. The economic nexus standards look at bright-line tests such as dollar value of sales or number of individual transactions in creating the connection that allows a state to impose sales tax collection responsibility on a business. States will be looking at every opportunity to replenish their coffers. Businesses need to understand where their tax exposure exists and have a plan to mitigate exposure.
Franchise tax, net worth tax, excise tax, gross margin tax, gross receipts tax, and the list goes on! You may be thinking, “There is no way my business is going to make a profit in 2020, so why do I need to worry about state taxes?” The answer: not all state taxes are based on income! It is important to understand the type of tax imposed in a state and how the liability is calculated.
The sourcing of sales of services is an area that causes an incredible amount of frustration for taxpayers. This has been one of the areas where there have been many changes in recent years. States have moved from cost-of-performance sourcing, which looks at where the costs were incurred to market sourcing that asks where the customer received the benefit of the service. When you consider engineering, tech, and call center services that are being provided to customers with locations all across the U.S. by employees working from their homes across the U.S., the complexity of tracking becomes evident.
These are just a few of the issues businesses face. Managing the pace of change can be a daunting task! States have changed rules and methodologies in the pursuit of capturing economic business activity.
Clayton & McKervey’s State and Local Tax Team can assist you in developing a plan to address the state issues impacting your business.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.