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SALT - Multi-State Income and Franchise Tax

Plan to Minimize Multi-State Taxes
States do not use a standard tax system when imposing their taxes on business entities. Differences occur according to the type of tax imposed, the base on which the tax is assessed, the type of return required, which entities are included in the return, how receipts are divided among the states, and when returns are due.

With virtually every state imposing its own version of an income, franchise, or privilege tax, the multi-state entity's greatest asset is knowledge. If your business has advance knowledge of state tax laws, you can plan properly to minimize or eliminate additional tax costs.

Nexus: The Cause of State Concern
If your company has a minimal presence, or nexus, in a state, that state may legally impose their particular tax laws on your business. A Federal Public Law and a U.S. Supreme Court case establish some uniformity to state income tax nexus. However, the limitations on a state's ability to tax protect only pure solicitation activities, and only if the items sold are tangible in nature. If these conditions are met, an out-of-state business entity may actually have a resident sales employee or independent sales rep residing in a state without being required to file that states' income tax return.

Other physical presence or in-state activity performed by either an employee or an independent agent will create an income tax filing requirement. Examples of in-state activities that would create a filing requirement include:

  • Owning items such as a warehouse or office space, including an employee’s home office 
  • Repairs (including warranties) or installations 
  • In-state inventory whether actual, consigned, or held in a public warehouse. 
  • Ownership of any other property in that state. 
  • Possibly ownership of intangible rights in that state.

Franchise tax is generally a transaction or privilege tax based upon capital values. Its nexus is similar to the income tax standards, with one major exception. Most states will impose their franchise tax obligations on businesses with any physical presence in their state – even a sales person performing pure solicitation activities. Franchise taxes are generally imposed for the privilege of doing business. Therefore, any in-state representation of the out-of-state business entity will normally create a franchise tax reporting obligation.

How We Can Help

  • Nexus reviews 
  • Audit representation 
  • Voluntary disclosure agreements 
  • Relocation analysis 
  • Due diligence analysis related to buy-sell agreements 
  • Corporate restructuring issues and planning (i.e. unitary or apportionment)

The Hedberg Group, LLC is not a licensed CPA firm.

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Gilbert AZ 85299-0592

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