- Individuals with Multi-State Income
- Businesses with Nexus In Multiple States
- Federal Law PL 86-272
- Dual Taxation
We all know that we must file individual and business entity federal tax returns when specified income thresholds are met, and we will also need to file a return for our resident state if it has an individual or business entity income tax filing requirement.
But what may be overlooked is the possible requirement to file returns in other states as well. This can happen in a variety of situations. Here are some examples for individuals:
- If they earned wages in another state.
- If they have rental property in another state.
- If they receive gas or oil royalties from another state.
- If they are a partner in a partnership or stockholder in an S corporation doing business in another state.
Generally, investment income, such as income from interest and dividends, is taxable to a taxpayer’s state of residence only and does not require multi-state filings.
Business entities can also be subject to state taxes in multiple states and to filing requirements in states where they have a ”nexus.” Although a nexus is defined on a state-by-state basis, certain activities or conditions indicate when a nexus exists. A nexus is generally present in the following situations:
- Incorporation within a state
- Having legal domicile within a state
- Having a principal place of business within a state
- Having an office or other facility within a state
- Employment of capital or property within a state
- Providing services within a state
- Solicitation of business from within a state
Federal Law PL 86-272, enacted in 1959, blocks the various states from claiming a nexus if the only contact within a state is the employment of salespersons or independent contractors whose only purpose is to solicit sales of tangible personal property for out-of-state approval and fulfillment. This exception is very narrow and limits the activities of the salesperson or contractor; it doesn’t apply to solicitations for the sale of real estate, services or intangible property. All decisions and customer support must be handled outside the state or states in which the salesperson works.
Many states are extremely aggressive in their interpretation of a nexus, often leading to confrontations with state tax authorities. It is relatively easy for states to find delinquent tax filers by matching payroll, sales or property tax forms against required income tax filings.
Although filing multiple state returns means more paperwork, it does not necessarily mean more taxes. Generally, income must be either apportioned among the states, or where it is taxed by two states, generally a tax credit is provided, usually by the resident state, to offset the taxes paid to the other state. Any individual or business entity state-filing requirement is of course based on each state’s tax laws, and they vary widely.
If you feel you have a multi-state individual or business entity filing requirement based upon the sources of your income or nexus with multiple states in either the current or a prior year, please call this office so your particular filing requirements can be determined.