Or Am I a Multi-State Business?
Executive Summary
- Multi-State issues can be overwhelming, but know some basics and know when to call in an expert.
- If you didn’t form your business in that state, you are considered a “foreign” entity.
- If you or your employees are physically in another state, check the state’s rules. You might be doing business there.
- If you have assets (buildings, inventory, equipment) in another state, I would check the state’s rules about what constitutes doing business there.
- If you sell a lot of product to another state (greater than $100,000 or 200 transactions in the prior or current year) you might have economic presence and would have nexus for sales tax.
- Catch nexus issues early before they become a financial nightmare.
If you do business in a state for very long without registering, they will find you.
If you think Brexit is a mess, the U.S. has 50 states with its own laws regarding business and employment activities and taxation that any business (small or large) must abide by if they are “doing business” in that state. It’s also called Nexus and you could easily devote a decade of your life to understanding the laws and nuances involved in determining if you have it and where. But let’s not do that. Let’s spend ten minutes learning some basics and learn when to call in the experts.
Nexus in this instance refers to having a business presence in a state’s or jurisdiction’s boundaries that is substantial enough to subject the business to their tax rules and obligations. So “Sales Tax Nexus” means a business has a business presence significant enough to be subject to the state’s or jurisdiction’s sales tax laws. “Income Tax Nexus” means being subject to the state’s or jurisdiction’s income tax laws. And, recognize that Nexus for each type of tax or activity can be different within the state. You can easily have “Sales Tax Nexus” in a state and not have “Income Tax Nexus,” for example.
The Big Three
Each state has three main agencies that care whether you are doing business in their state or not. Honestly, there are more, but let’s stick with the Big Three for now.
- The Secretary of State (sometimes known as the Division of Corporations). This department handles registration of business entities and fictitious names, issues certificates of authority to do business, and registers “foreign” entities. In state language, a “foreign” entity is any entity that was not created in that state.
- The Tax Department (sometimes known as the Revenue Department or Comptroller’s Office). This department is usually responsible for all state level taxes, including sales, income, cigarette, liquor, franchise, and withholding taxes.
- The Unemployment Commission (sometimes known as the Employment or Workforce Division). This department is responsible for everything regarding unemployment in the state, including collection of unemployment tax, job and training programs, and payment of unemployment claims.
The good news is all these state agencies now have an online presence. (Don’t laugh – some of them are pretty new!) They often have a link to “Doing Business In Our State.” And many (but not all) registrations can now be processed online.
Symptoms of Multi-State Activities
Remote Employees
If you hire an employee who works in another state, you are doing business in that state. To be clear, we don’t care where your employee lives. We care where they work.
Your business needs to file with the Secretary of State, the Tax Department (for withholding tax), and the Workforce Commission for unemployment. You must also comply with the state’s laws on labor and worker’s compensation.
As a side note, some businesses utilize used remote workers and pay them on a contract basis (also known as “1099’ing” them) to avoid “doing business in that state.” This is NOT a solution, because the IRS doesn’t allow it and the state is going to look at the nature of the activity rather than how it is compensated.
Salespeople Working in Other States
If the salespeople accept orders that do not need corporate approval, you could be considered doing business in that state. That would involve registering with the Secretary of State and Tax Department (for income tax & sales tax). If the salespeople submit the order to the corporate office for approval and processing, you probably aren’t doing business there.
Installers or Repair Personnel in Another State
If an employee (or a contract employee not operating as a company) performs services for your business in another state, then, yes, you are doing business in that state. That would involve registering with the Secretary of State and Tax Department (for income tax & sales tax). Usually your employees will not be considered to work or have payroll in that state, so you don’t need to register for withholding tax.
Remote Office or Warehouse
This one is not as clear cut. It depends on what the warehouse or office is doing. If sales activities are taking place there, you are doing business there. That would involve registering with the Secretary of State and Tax Department (for income tax & sales tax).
If the office or warehouse just displays model products or is used for storage, maybe not. However, I will add that the county cares because it will want to collect personal property tax on the items held there.
And don’t forget the people working in these locations. Are they employees?
Selling to Customers In Another State
If you have a physical presence, you have nexus. For example, if you deliver to another state using your own trucks, repair the product that state, and install the product in that state, you have Sales Tax Nexus.
Since South Dakota V. Wayfair in 2018, if you have an economic presence, you have Sales Tax Nexus. South Dakota defined economic presence as greater than $100,000 or 200 separate transactions in the prior or current year. States are busily updating their sales tax laws as a result, so this is an evolving landscape. Check the state’s tax department website for the latest updates. Wolters Kluwer also has a Nexus Chart to help with these thresholds.
Employees Temporarily Working in Another State
Some states set a minimum time or earnings. Some say one day of work is enough to subject your employee to income taxes in that state (and you to withholding and unemployment taxes). Check with the state in question.
Everything Else
From the Secretary of State’s perspective, you could be considered doing business for all sorts of varied and crazy reasons. The answers to most of these questions are found in the state’s court decisions versus the actual state code. The courts have looked at everything from the amount of sales to the frequency of a salesperson’s visits to determine if a company is doing business in their state.
In general, maintaining a bank account or owning property in a state is not enough in itself to be doing business in most states. But, combined with other activities, it might.
Risky Business
The most obvious risk of not recognizing your state nexus responsibilities is not paying the taxes due to the state, whether they be sales, withholding, or income taxes. These taxes can add up, particularly over the course of years. Businesses have had to close their doors over their significant tax liability to a state that they couldn’t pay.
The other major risk is not having your entity recognized by the Secretary of State. This could result in not having access to the state’s courts in the case of a lawsuit. It could also result in business liabilities falling to the owners personally, since in the state’s eyes, the entity doesn’t exist.
The States are Always Watching
If you do business in a state for very long without registering, they will find you. They hire investigators who do nothing but look for unregistered business. These investigators attend trade shows and sales events, they watch who is advertising in their state, and they look at online re-sellers.
But it isn’t always that hard. The states also have access to IRS information, so if the address on your business or individual tax return is in that state, the state is going to assume you are doing business there. And they will send you a little note to find out more.
Call A Doctor
The states will be glad to help you determine if you are doing business in their state. Seriously. If you can’t find it online, give the department a call. (But as a practice, I don’t give them a business name. Just describe what the business is going to be doing.)
And if the activity will be significant and the state’s rules are unclear, I would get some help from an accountant or attorney who handles multi-state issues.
Hey! We put together a handy list of the Big Three for every state.
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And yes, Biz Hippo can help you determine if you have nexus and can prepare the registrations in the appropriate states. Contact us to learn more.
