Conducting Business in Another State? Tax Implications You Should be Aware of
One common area of confusion and misconception when conducting business in multiple states is the tax and state laws. The U.S. tax system is very complex as there are essentially 50 different economies under one umbrella. The federal government has mandated tax laws, and each state has the ability to legislate its own tax laws, some of which have their own labor laws. Confusing, right? To help out, we recently quizzed Christy Woskobojnik, International Tax Manager at Dyke Yaxley, to find out her expert advice on how to navigate the U.S. tax system when doing business in another state.
My business is registered in New York but I want to start doing business in California, what are the implications of this?
If you physically move your business within the U.S. or expand into another state you create a Nexus, which carries extra responsibilities. You must recognize your chosen state’s legal laws and tax rules, which essentially means a new registration and additional tax requirements you must follow.
Each individual state taxes things very differently, some have minimum taxes and others don't. When you are taxed in the U.S. and conduct business in multiple states, you are your revenue, and you are not paying tax on the same profit in each state at their rates. To put your mind at ease over double or triple taxation, you have to obey or look at the rules of the particular state you wish to operate in but you do not have to pay triple the amount of tax on the same profit.
What does Nexus mean?
The term Nexus is when you create a taxable presence in a U.S. state. It can be viewed as either a physical or economic presence. The most common way to create a Nexus is via a physical connection, this can be created by paying someone directly to represent you, employing someone, or opening an office.
The other way to create a Nexus is via a economic connection. When we refer to corporation tax it's mostly always physical, but there are a few exceptions. Sales tax is more commonly becoming economic, that is why there are thresholds and why you should keep record of where your sales are going.
Due to COVID-19 we have witnessed a business exodus from high-priced states to those that offer incentives, such as Texas. Have you been speaking with many companies that have made the move?
At Dyke Yaxley, we have long-standing clients who decided not to renew their New York and California office lease contracts after the majority of their workforce continued working remotely due to COVID-19 restrictions. In New York City, rent is extremely high and there is a minimum amount of tax you have to pay to do business there. So even if a business is in a loss-making position, the state will find ways to tax you, and this will come out of your turnover. Additionally, if you pay rent over a certain threshold in New York; it's a big threshold, but eventually many businesses reach it, an additional filing is required and you are charged rent tax.
It seems likely that a lot of businesses are going to consider new states with lower operating costs post COVID-19, with Texas being a strong contender thanks to its corporate friendly tax laws. If you are only starting out your business in the U.S., you are not faced with a tax bill immediately, you have to reach a certain threshold of sales before you are eligible to be taxed in that state.
What are the tax implications if I move my business to another state during COVID-19?
Not only are businesses moving their headquarters from New York or California to lower-priced states, workers, particularly those who are higher earners, are also moving. Therefore, states with higher living costs are likely going to lose out on a significant amount of tax revenue and it is unknown how they intend to counteract that.
2021 is set to be an interesting year, not only for federal tax but also to witness how previously popular cities such as San Francisco and New York City are going to navigate the mass business exodus. For example, in San Francisco the government gathers taxes from wages paid and rent which can generate between $15,000 - $20,000 extra dollars per year in taxes as prices are so high in that area. What are these cities going to do when these companies realize they can operate outside the city, or move to a neighboring state and not have to pay them?
Have you any other questions on conducting business in another state?
If you have any other specific tax-related questions on doing business in another state reach out to Christina at Dyke Yaxley who will happily provide her expertise! We also have additional guidance on what you need to know when engaging workers in a new state, which you can access here.
Disclaimer: The information provided here does not, and is not intended to, constitute legal advice. Instead, the information and content available are for general informational purposes only.