IMPACT OF OTHER STATES’ TAXES ON WASHINGTON BUSINESSES
Even if a business is headquartered in Washington, it may have customers, salespeople, or other activities in other states. Thus, the business should consider not only the state and local taxes imposed by Washington jurisdictions, but those of the other states in which it operates as well. The major types of taxes to consider are as follows:
Entity-Level Income and Franchise Taxes. Most states impose a corporate income or franchise tax on corporations doing business in the state. Although “doing business” can be defined in a variety of ways, states have become increasingly aggressive in taxing out-of-state companies, even those without a physical presence in the state. For example, California imposes its franchise tax on companies with at least $500,000 of receipts from customers in the state, regardless of whether the company or its representatives ever set foot in the state. Many states’ corporate taxes are imposed on net income, based on total income apportioned to the state according to a statutory formula. Historically, most states’ formulas were based on three factors: relative property, payroll, and receipts inside and outside the state. However, the recent trend has been toward using only the receipts factor to apportion income.
Many states also impose a net worth-based tax on businesses. Like a corporate income tax, these taxes must allow apportionment so a multi-state business pays only on an appropriate share of its overall worth. Some states and local jurisdictions impose taxes based on gross receipts or gross margins that operate similarly to the Washington B&O tax.
If a business is organized as a pass-through entity (an S-corporation, limited liability company or partnership), many states and local jurisdictions will follow the federal treatment and not impose an income or franchise tax directly on the entity itself. However, to the extent the business has a taxable presence in a state that imposes a personal income tax on individuals (which all but seven states do), the owners of the entity may be required to file personal income tax returns to pay tax on their share of income from the company attributable to its operations in that state. The entity is typically required to file an annual tax return with the state to calculate the income that is taxable to the owners. Some states require the entity to withhold tax on the owners’ income and remit this withholding to the state to minimize the revenue loss from owners that refuse to file individual state income tax returns.
Individual Income Taxes on Mobile Employees. If a business sends its employees to other states for business-related purposes (such as soliciting sales, performing services, installing products, or training customers), the company may be required to withhold and remit individual income taxes on the share of the employees' salary attributable to the time they spend in that state. Some states have minimum withholding thresholds, so withholding may not be required on short visits. However, state rules vary significantly in this area, so businesses should understand these rules if their business model relies on a relatively mobile workforce. Although personal income taxes are the responsibility of the individual, an employer can be held directly liable for any personal income tax that it was required to withhold on employee wages but failed to do so.
Sales and Use Taxes. As described above, all but five U.S. states impose a general sales / use tax. To be required to collect and remit the tax, a vendor must have some physical presence in the state; however, the required presence can be established by a brief visit by a single employee, or even by a third-party representative conducting an activity in the state on the company’s behalf. Thus, businesses with multi-state operations should make certain they understand those states’ sales tax rules and consider whether they need to collect sales tax in any or all of the states in which their customers are located. States tend to be quite active in pursuing assessment of uncollected sales tax from out-of-state companies that have established some sort of physical presence within their borders.
To the extent that a business establishes a facility in another state, it may also have use tax considerations similar to those described above for Washington businesses.
Entity-Level Income and Franchise Taxes. Most states impose a corporate income or franchise tax on corporations doing business in the state. Although “doing business” can be defined in a variety of ways, states have become increasingly aggressive in taxing out-of-state companies, even those without a physical presence in the state. For example, California imposes its franchise tax on companies with at least $500,000 of receipts from customers in the state, regardless of whether the company or its representatives ever set foot in the state. Many states’ corporate taxes are imposed on net income, based on total income apportioned to the state according to a statutory formula. Historically, most states’ formulas were based on three factors: relative property, payroll, and receipts inside and outside the state. However, the recent trend has been toward using only the receipts factor to apportion income.
Many states also impose a net worth-based tax on businesses. Like a corporate income tax, these taxes must allow apportionment so a multi-state business pays only on an appropriate share of its overall worth. Some states and local jurisdictions impose taxes based on gross receipts or gross margins that operate similarly to the Washington B&O tax.
If a business is organized as a pass-through entity (an S-corporation, limited liability company or partnership), many states and local jurisdictions will follow the federal treatment and not impose an income or franchise tax directly on the entity itself. However, to the extent the business has a taxable presence in a state that imposes a personal income tax on individuals (which all but seven states do), the owners of the entity may be required to file personal income tax returns to pay tax on their share of income from the company attributable to its operations in that state. The entity is typically required to file an annual tax return with the state to calculate the income that is taxable to the owners. Some states require the entity to withhold tax on the owners’ income and remit this withholding to the state to minimize the revenue loss from owners that refuse to file individual state income tax returns.
Individual Income Taxes on Mobile Employees. If a business sends its employees to other states for business-related purposes (such as soliciting sales, performing services, installing products, or training customers), the company may be required to withhold and remit individual income taxes on the share of the employees' salary attributable to the time they spend in that state. Some states have minimum withholding thresholds, so withholding may not be required on short visits. However, state rules vary significantly in this area, so businesses should understand these rules if their business model relies on a relatively mobile workforce. Although personal income taxes are the responsibility of the individual, an employer can be held directly liable for any personal income tax that it was required to withhold on employee wages but failed to do so.
Sales and Use Taxes. As described above, all but five U.S. states impose a general sales / use tax. To be required to collect and remit the tax, a vendor must have some physical presence in the state; however, the required presence can be established by a brief visit by a single employee, or even by a third-party representative conducting an activity in the state on the company’s behalf. Thus, businesses with multi-state operations should make certain they understand those states’ sales tax rules and consider whether they need to collect sales tax in any or all of the states in which their customers are located. States tend to be quite active in pursuing assessment of uncollected sales tax from out-of-state companies that have established some sort of physical presence within their borders.
To the extent that a business establishes a facility in another state, it may also have use tax considerations similar to those described above for Washington businesses.