WHAT YOU NEED TO KNOW ABOUT THE CHANGING DEFINITIONS OF TAXABILITY
Companies must file income tax returns and collect sales tax in every state in which they do business — but the accepted definitions of what qualifies as “doing business” and what makes a corporation taxable are in flux.
Kathleen K. Wright and Ben Miller, coauthors of the CCH Expert Treatise Library: State Taxation of Income and Other Business Taxes, share some of the shifts that you need to know:
• Tax planning is becoming significantly more complicated. This is true even for companies that only operate in a single state because states are creating more specific standards for income and sales taxability, Wright says. In many states, the two are diverging significantly, with the minimum income tax filing threshold lower than the sales tax threshold.
• States participating in the Multistate Tax Commission have largely agreed that an online vendor selling more than $500,000 worth of tangible property in a state has created “economic nexus” for taxation. However, some states set the figure lower. Wright points out one critical exception: Federal law exempts a domestic company from state income tax if its activity in that state is limited to soliciting sales of tangible property. Thus far, courts have held that the law applies if a company’s only activity in a state is displaying a website, without performing other activities such as installation or repairs, Wright says. However, the definition of “soliciting sales” may change as funding-strapped states look for new ways to capture revenues. Learn more about nexus issues in this related article.
• In recent years, at least half a dozen states have begun to require multiple related corporations to file combined income tax returns. Although more than a dozen states have used combined reporting rules since the 1940s, it’s becoming more common as states attempt to close tax loopholes, Miller says.
• States are shifting away from calculating income taxes based on apportioning income evenly among property, payroll and sales, Miller adds. Instead, they’re double-weighting sales or even counting the sales factor alone.
• Finally, many states have begun to assign sales of intangibles to the markets where the customers are, as they do with sales of tangible property. Miller says this is intended to reflect the realities of a service-based economy.
Reliable reference materials are critical as you navigate the thicket of divergent and changing state taxation rules. Let the CCH Expert Treatise Library: State Taxation of Income and Other Business Taxes be your guide.