Howard, LLP

Howard Insights: Don’t Forget to Plan for State Tax

< Back

Dallas, Texas, March 2018 – With all the noise about federal income tax right now, it is easy to forget to plan for state income tax.  We are federally taxed with income tax, payroll tax, sales tax, and excise tax.  States want their piece of the pie too!  States tax businesses with income tax, sales tax, property tax, employment tax and even unemployment tax.  And it’s important to note, we expect to see some changes from the states in response to the federal tax changes. We are outlining the importance of planning for state income tax as it can be significant if not addressed ahead of time.

If you have a company doing business solely in Texas, the new federal laws should not have a significant state tax impact.  If, however, your business is national, you need to understand how the changes could impact your business.  Many of the state tax returns mirror the federal tax return but others have their own methodology for determining taxability.  Several states have only a franchise tax while others have an income tax.  Some states even have both!  These returns require calculation adjustments that cause state income to vary from federal income tax in most situations.

If you do business in different states, you will need to determine if your business has nexus in each specific state.  Unfortunately, every state defines these requirements differently so before you walk into a state, the research on nexus should be done.  Some specific tests can also determine if you are required to pay tax in a specific state like revenue limitations, property owned in the state, and employee locations.  There are a few indicators to look for to determine if you have exposure in a state:

  • Do you have sales in the state?
  • Do you pay sales tax in that state?
  • Do you own or lease property in the state?
  • Do you have employees in the state?

Over the last several years, states have become more aggressive in going after businesses for tax return filings.  State revenue agencies are matching state payroll filings with state income tax returns to see if a business is filing payroll but not reporting taxable income.  Some states require businesses to obtain a license to do work in their state.  Some states may also require withholding for out-of-state taxpayers, like North Carolina and California.  This will be an important item for planning during the year.

Please let us know if we can assist with any questions, or if need assistance with federal or state tax planning. Our team looks forward to the opportunity to help you appropriately plan to reduce your taxes.