Considerations When Working Across State Lines
As a contracting business grows, it’s likely that it will eventually begin pursuing work in a neighboring state. When this happens, there are a number of tax, licensing and permitting issues to consider.
On the other hand, if your business already operates in more than one state, you should be aware that in recent years many states have become more aggressive in enforcing tax and licensing requirements. Many companies had performed work in neighboring jurisdictions for several years before realizing they were out of compliance â€• inadvertently incurring added penalties and interest.
Whether you are just starting to think of expanding into another state or are already a multistate business with concerns about compliance, here are some considerations for working across state lines.
In order to evaluate your exposure to various taxes in another state, you must first understand the concept of “nexus.” The term is used in tax law to describe a situation in which a business has a connection or presence in a state, and thus is subject to that state’s tax laws.
For income tax purposes, nexus is generally established if your company meets one of three triggers:
- It generates revenue in the state;
- It owns or leases property, inventory or equipment in the state; or
- It has employees working in the state.
Specific nexus requirements vary from state to state. But generally speaking, if your company meets any of these descriptions, you will be subject to that state’s income tax on a portion of your net revenues. Note that the methods used to determine the portion of your company’s revenue that will be subject to tax will vary from one state to another.
Sales and Use Taxes
For sales tax purposes, nexus traditionally was established only if your company had a physical presence in the state. That has changed somewhat in recent years, as some states are establishing broader definitions of nexus to include leasing or owning property in the state, or the presence of affiliated companies.
About half of all states currently impose a franchise tax, either in addition to an income tax or as a replacement. Many states impose various other non-income-based taxes, such as a use tax, business tax, margin tax, commercial activities tax or gross receipts tax. As with state income tax, it is important to understand the formulas that are used to determine the portion of your business that is subject to these taxes.
Withholding and Payroll Taxes
Employees who live in one state and work in another are generally required to pay income tax to the state where they work â€• which means your company must set up an account and withhold the required taxes in that state. Fortunately, many states have established reciprocal agreements with neighboring states, in which they agree not to impose income taxes on each others’ residents. These greatly simplify things for workers and employers alike, but you’ll need to check whether such an agreement is in place.
Business and Professional Licenses
If your company does not have a physical office in a state, it may be required to hire a registered agent in the state to obtain the necessary license to do business. As a construction business, you also will be subject to the specific professional or trade licensing requirements of the state and local jurisdictions where you will be working.
The initial license applications often must be accompanied by a financial statement, which in some cases must be audited by a certified public accountant. Experience requirements, examinations, forms and filing fees also vary from one jurisdiction to another. Let’s not forget that you must also comply with local project-specific permitting requirements.
The costs for the various fees, licenses and permits may not be prohibitive, but they’re not insignificant, either. What’s more, the administrative costs required to ensure compliance should also be factored in.
Dale A. Ruther?>
CPA, CIT, CDS, CCIFP
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