2024 SALT Update – Keiter Knowledge Sharing

Key takeaways from Keiter’s State and Local Tax seminar

Keiter hosted a State and Local Tax (SALT) seminar, led by our experienced tax professionals Kay Gotshall, Emma Sowers, Yuting Chen, and Katie Christopher. This seminar provided clients and attendees with insightful updates on state and local tax issues, including income apportionment, sourcing revenue, economic nexus, and telecommuting tax considerations. Below is a summary of key topics discussed at this event:

Income apportionment

Businesses operating in multiple states must allocate income based on formulas that generally consider the average of the following three factors:

• Payroll: the wages in each state
• Property: the average of real estate assets and rental fees in each state
• Sales: the shipped sales or services performed in each state

Revenue sourcing

Sourcing rules for tangible property, services, and intangibles vary by state, with a growing emphasis on market-based sourcing. Recent court cases, such as Apple Inc. v. Dept. of Revenue (FL), highlight how states are addressing sourcing rules for digital products and services.

Businesses offering SaaS or licensing intangibles should review sourcing rules carefully, as these vary significantly across jurisdictions.

Economic nexus: Wayfair’s influence expands

The concept of economic nexus, originally associated with sales tax after the landmark Wayfair decision, is increasingly being applied to income taxes. Many states now impose bright-line thresholds based on sales, property, or payroll. This means companies with property, payroll or sales in a particular state above certain thresholds are presumed to have nexus in the state and are therefore required to file income tax returns and pay tax in that state.

Federal protections under Public Law 86-272 are becoming narrower, especially as states adopt new interpretations related to digital commerce. Businesses must monitor economic presence and revenue thresholds in every state where they operate to avoid unexpected filing obligations.

Pass-through entity taxes: SALT workarounds

Under the Tax Cuts and Jobs Act (TCJA), up to $10,000 of state and local taxes paid can be deducted on federal income tax returns. The Pass-Through Entity (PTE) law effectively allows qualifying pass-through entities to make an annual election to pay an entity level income tax for the period covered by the return at an individual income tax rate.

In the below example, also shown during the SALT seminar, the Keiter team demonstrated the tax savings realized by Virginia and Georgia residents utilizing PTET structures.

Business owners should consult tax professionals to evaluate potential savings and navigate the complexities of PTET elections, especially in light of the potential sunset of the $10,000 tax limitation.

Telecommuting and traveling workforce

The rise of remote work has introduced additional compliance challenges for businesses. Withholding rules often require taxes to be paid based on where the services are performed, not the state the employee resides in.

There are some exceptions to this rule, creating additional complexity. For example:

• Reciprocal agreements may relieve employers of their withholding obligations when individuals are allowed to work in another state without having to file a nonresident income return. They are typically made between neighboring states that share borders, like Virginia and Maryland. However, this rule does not apply to all neighboring states, like Virginia and North Carolina, as an example.
• States like New York, Pennsylvania, Connecticut, Delaware and New Jersey enforce “convenience of employer” rules which collect payroll and wage withholding based on the office the employee reports to, not where they work.
• States without income tax would also fall under the exception.

Compliance reviews should be conducted if your business employs out-of-state or remote workers.

Keiter’s SALT team is here to help you navigate these challenges and identify opportunities to optimize your tax strategy. To learn more or schedule a consultation, please contact Your Keiter Opportunity Advisor or Email | 804.747.0000.

You can now watch the full recording of this seminar online.