State and local tax considerations for 2024-year end
As we approach the 2024-year end, there are a few reminders for State and Local Tax (SALT) compliance. Every year, states increasingly assert their authority regarding tax filing and payment obligations following the Wayfair decision. The complexities have further escalated due to the widespread adoption of remote work policies post-2020, which has altered employee work locations significantly.
Income tax issues
More states are adopting economic nexus for income/franchise taxes (i.e., sales in the state = a filing requirement). While there is federal law that prohibits states from imposing income taxes on businesses that are only soliciting sales of tangible products in the state, this does not apply to services or situations where the businesses go beyond mere solicitation. Also, the federal law protections may not apply to certain internet related activities. Lastly, even if taxpayers have federal law protections, they may still have to file tax returns in some states.
Remote workers – Nexus and withholding requirements
Most states now say that remote workers create employment tax requirements (unemployment compensation, income tax withholding, workers’ compensation) and sales/income tax requirements. If your business has employees working remotely, we strongly encourage you to make certain you are in compliance with each employee’s state specific requirements.
State franchise/Gross receipts taxes
Some states, Ohio, Tennessee, California, Washington, Oregon, Nevada, to name a few, have franchise taxes or gross receipts taxes. Regardless of what a business is selling or doing, the business may be subject to such taxes even if they just have revenue from customers in those states. For example, Washington’s threshold is just $100,000 in gross income from Washington customers. While the tax due may be small, Washington does enforce compliance going back several years.
Income tax – Sourcing of receipts from services/intangibles
Most states now use market-based sourcing for receipts from services and intangibles, meaning they source them where the service benefit is received. If a business has customers or investors in other states, it’s those other states where the benefit is being received (regardless of where those providing the services may be located) and returns may have to be filed, and taxes paid.
Entity-level taxes
More states are allowing LLCs and S Corps to pay income tax at the entity level versus the owner level to minimize or avoid the impact of the $10,000 state tax limit on the individual tax return. Virginia passed a pass-through entity (PTE) tax law effective 2021 through 2025 (With President-elect Trump, this could potentially be extended). See AICPA Pass Through Entity (PTE) Tax Chart for a comprehensive list of states that allow PTE level taxes.
Sales tax requirements
All states (with the exception of Delaware, Arkansas, New Hampshire, Montana, and Oregon) now require out-of-state sellers of taxable products and/or services that meet certain sales thresholds or that have a physical presence in-state (including remote employees/traveling employees) to collect and report the tax on sales to customers in those states. Some services such as Software as a Service (SaaS), IT consulting, information services, webinars, subscriptions to learning and fitness courses, etc. are taxable in states other than Virginia. Additionally, some localities in other states have rules that differ at the local level than at the state level so while there may not be state sales tax requirements, there may be local tax registration and collection requirements. (e.g., Arkansas localities do impose a sales tax even though the state does not. In Colorado, localities may have different taxing rules.) If you are not in compliance and issue financial statements, a reserve may be needed. Also, if a possible sale of the business is in the not-so-distant future, you should consider a sales tax review to determine possible issues now versus in the sales/due diligence process, as sales tax is increasingly becoming a top issue.
Virginia sales and use tax audits
The Virginia Department of Taxation is conducting many audits, and assessments can be substantial, even for businesses who believe they are correctly collecting/reporting the tax. Reoccurring issues include use tax on in-state and out-of-state purchases, not collecting sales tax on services in connection with the sale of tangible personal property (like trip charges, mileage reimbursements, training services, etc.), and exemption certificates (not being complete or correct for the type of purchase/sale).
Abandoned and unclaimed property (AUP)
Many businesses are not aware of their requirements to report AUP (uncashed payroll checks, vendor checks, account credit balances, gift cards, etc.) to the states after the property has been dormant for a specified period of time (typically 5 years). Since the penalties for noncompliance can be quite high, we recommend that businesses (at a minimum) start evaluating their potential AUP exposure. Virginia has a limited B2B exemption that is helpful but with AUP, the property is reported to the state of the last known address of the owner, so states other than Virginia may come into play. This affects all types of businesses – professional services firms, doctors, retailers, wholesalers, nonprofits, etc. Gift certificates can be complex, and businesses should consult their tax professional regarding that property.
Business, Professional and Occupation License (BPOL) Tax
The Keiter State and Local tax team is seeing more audit activity in this area. We are also finding that some businesses are misclassified and paying too much. These errors can be corrected and often refunds issued for prior year overpayments. Recently, we helped a client obtain a refund from Henrico County for approximately $300,000 due to misclassification issues. However, the main issue to address is whether your business has a valid license.
Conclusion:
These reminders highlight the importance of considering the location of your clients or customers rather than the location of your organization or employees. Additionally, it is crucial to understand that providing services differs from selling tangible property.
As you prepare for the 2024-year end, Keiter’s State and Local Tax team is available to help navigate tax law for your organization. Contact your Keiter Opportunity Advisor | Email | or Call: 804.747.0000 if your business needs assistance.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
