state tax

Article Dean Dorton

State tax laws continue to change rapidly throughout the country. Have you wondered about potential tax liability to other states? This survey asks just a few of the  questions states ask when determining whether a business is subject to its taxes – income, franchise, or sales and use. The weight of interpretation given to specific questions may vary from state to state.

Thinking of the states other than those in which you are already paying or collecting and remitting taxes, answer the following ten questions for each of state.

  1. Are you registered with the Secretary of State?
  2. Do you hold a business license?
  3. Do you have fixed assets or leased property?
  4. Do you have payroll in the state?
  5. Do you have independent contractors working on your behalf?
  6. Do you make sales via the internet, an app, a catalogue, or by phone?
  7. Does your total revenue from the prior year exceed $25,000?
  8. Does your total payroll exceed $25,000?
  9. Do your total sales exceed $100,000?
  10. Does your total property, total payroll, or total sales exceed 25%?

If you answered “yes” to any one of these questions, it is possible that you have a reporting or filing obligation in the state. While a lot of business owners say the prefer to “roll the dice,” that strategy can be expensive. To learn more about your potential exposure in other states, contact us or your tax advisor.

Contact your Dean Dorton advisor or other professional adivsor for more information.
If you don’t have an advisor, but would like to speak with us, send an email to:
insights@deandorton.com

Article Dean Dorton

By: Erica Horn, CPA, JD | ehorn@deandorton.com and Maddie Schueler, JD, LLM | mschueler@deandorton.com

State governments provide services largely by using taxes paid by their residents and others doing business in the state. It is no secret that Kentucky has borders with seven states: Indiana, Illinois, Missouri, Ohio, Tennessee, Virginia, and West Virginia. The borders with Indiana and Tennessee have the greatest impact on the state’s tax policy, but Ohio and West Virginia also play a role. Therefore, it is interesting to compare Kentucky’s sources of state tax receipts to those of Indiana, Tennessee, Ohio, and West Virginia.1 Here is what we found.

Except Kentucky, the states rely most heavily on sales and use taxes, followed by individual income taxes. For example, because Tennessee has no individual income tax, 64.0% of its state tax receipts are from sales and use taxes. By contrast, only 32.2% of Kentucky’s total receipts are from sales and use taxes, while 37.7% are from individual income taxes. Here is a comparison of the percentage of gross receipts by state for sales and use and individual income taxes.

https://deandorton.com/wp-content/uploads/2021/06/Reliance-on-Individual-Income-and-Sales-and-Use-Taxes-600×305.png

The role of taxes on business, whether based on income, gross receipts, or another measure, is less than 7.5% in all states except for Tennessee.[2] Business taxes comprise 19.7% of Tennessee’s total tax receipts. By comparison, the business tax receipt percentages for the other states are Kentucky— 5.1%, Indiana— 4.4%, Ohio— 7.4%, and West Virginia— 5.6%.

Transportation taxes, such as motor and special fuels, motor vehicle licensing fees, and similar charges make up at least 9.0% of total state tax receipts. West Virginia leads the way with transportation taxes equal to 16.5% of its total gross receipts. By contrast, Ohio’s and Indiana’s are 9.1% and 9.4%, while Tennessee’s and Kentucky’s are 10.3% and 11.6%.

Tobacco and alcohol taxes are less than 5% of total state tax receipts in each state. The highest percentages are in West Virginia and Kentucky, which come in at 4.8% and 4.2%. The other three states range between 2.7% and 3.4%.

Three additional observations relate to property, natural resources, and gaming taxes. First, the only state with state property tax receipts over 1.0% is Kentucky, where state property taxes were 5.1% of total state tax receipts. Second, West Virginia’s gross receipts from taxes on natural resources were 5.2% of its total, while Kentucky’s was 0.7%. Finally, Indiana had the greatest percent of gross receipts from gaming, with a total of 2.5%.

https://deandorton.com/wp-content/uploads/2021/06/Tax-Type-as-a-Percent-of-Total-State-Tax-Receipts.png

On a final note, here is a look at the raw dollars by tax type and a breakdown of the total state tax receipts on a per capita basis.3

Tax Type KY IN TN OH WV
Individual Income $4,765,235,522 $5,271,814,147 $57,641,855 $10,349,317,882 $1,386,571,000
Sales and Use $4,070,905,629 $8,234,288,437 $9,656,615,553 $11,018,498,537 $1,947,946,000
Business $639,305,779 $756,865,803 $2,978,925,918 $2,106,257,278 $290,031,000
Tobacco and Alcohol $536,316,748 $462,143,513 $452,301,117 $970,428,864 $246,501,000
Transportation $1,460,330,063 $1,610,918,000 $1,559,612,993 $2,587,643,289 $852,000,000
Other $1,168,354,882 $719,224,900 $393,900,663 $1,319,692,416 $439,480,000
Total Tax Receipts $12,640,448623 $17,055,254,800 $15,098,998,099 $28,351,838,266 $5,162,529,000
Population 4,505,800 6,785,500 6,910,840 11,799,400 1,793,700
Per capita $2,805 $2,513 $2,185 $2,403 $2,878

1 Our comparisons were made using data from the budget offices and departments of revenue of the states for their fiscal years ended June 30, 2020. We excluded local tax receipts and non-tax sources of revenue, such as state lotteries.

2 Note that most closely-held businesses operate in pass-through entities; in these cases, individual owners normally are taxed on business profits, and those taxes are included in individual income taxes paid.

3 Data source: Census Apportionment Results

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

Go to News & Views

Article Dean Dorton

By: Erica Horn, CPA, JD | ehorn@deandorton.com and Maddie Schueler, JD, LLM | mschueler@deandorton.com

Nearly two years ago, we published an article on the proliferation of dollar and other thresholds set by states that, if exceeded, would result in a business having to collect the states’ sales tax. Before a state can exercise its taxing authority over a business, the business must have “nexus” with the state. Nexus is a connection with a state, sufficient under the United States Constitution, to allow the state to require the business to pay tax.

The trend toward using dollar and other thresholds started with sales tax after the United States Supreme Court’s decision in South Dakota v. Wayfair. But, the states have expanded this approach to cover income and other taxes. This article provides an update on where the states stand on nexus for income taxes.

First, a little background…

Traditionally, states equated both sales and income tax nexus with a physical presence. This meant that unless a business had employees or property (i.e., an office, inventory, etc.) in the state, the business was not subject to the state’s income tax or required to collect the state’s sales tax. This requirement still exists in most states, but, as the economy has evolved, so have the states. States now have much broader nexus statutes. For example, XYZ Corp., located in State B, might have nexus in State A if XYZ has leased property, independent contractors, an interest in a pass-through entity, or attempts to sell goods or services in State A.

Now, to those thresholds

At least 25 states and two major metropolitan areas, Philadelphia and San Francisco, have adopted a “doing business” or “factor presence” standard. The “doing business” standard covers a broad range of business activity, and “factor presence” is a fancy name for dollar thresholds. These two standards are collectively referred to as “economic nexus.”

“Doing business” means everything from licensing intangibles in a state to leasing property, using independent contractors, or having an interest in a pass-through entity doing business in a state. “Factor presence” thresholds range from “any amount” of sales, property, or payroll to $500,000. For example, businesses have nexus for purposes of Tennessee’s excise tax (the state’s income tax equivalent) if they have more than: (a) $500,000 of sales into Tennessee or 25% of total sales into Tennessee, (b) $50,000 of property in Tennessee or 25% of total property in Tennessee, or (c) $50,000 of payroll in Tennessee or 25% of total payroll in Tennessee.

With many employees working from home due to the pandemic, the payroll factor has taken on special significance this year. An employee working from home in a different state than the employer’s office or plant location could create nexus for the employer by exceeding the state’s payroll factor. Almost half of the states have issued guidance on this issue.

What should I do to minimize my exposure?

To minimize your exposure, consider the connections you have in other states, such as property, people, and sales. These connections could create income tax nexus. If you think you may have an income tax liability for prior years, many states have a voluntary disclosure process where you can work with the state to comply with its tax laws. In exchange, the state agrees to limit the period for which you owe back taxes and may agree to waive penalties that would otherwise be due. A tax professional can help you evaluate your exposure and determine the best method for achieving compliance.

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

Go to News & Views

Article Dean Dorton

As we continue our analysis of the TCJA, this week’s newsletter will focus on some of the more important individual tax changes, specifically those pertaining to itemized deductions.

Every deduction indicated on Schedule A of your individual income tax return has been modified to some extent under the TCJA. Accordingly, if you’re a taxpayer that has historically itemized deductions, the changes discussed below will, to some degree, have an impact to your taxable income in the coming years.

Unless otherwise noted, these changes are in effect for tax years beginning after December 31, 2017 and before January 1, 2026.

Changes to deduction for medical and dental expenses

Under pre-TCJA tax law, the deduction for qualified medical expenses was allowed for qualified medical expenses exceeding 10% of adjusted gross income (“AGI”). This floor was reduced to 7.5% of AGI for taxpayers 65 and older, however that provision expired on December, 31, 2016.

Under TCJA tax law, for tax years beginning after December, 31, 2016 and before January 1, 2019, a taxpayer that itemizes may deduct qualified medical expenses, so long as they exceed 7.5% of AGI. As such, the new law extends the 7.5% through 2018 and retroactively makes it available to taxpayers that itemize, regardless of age, during this period.

Changes to state and local tax deduction

Under pre-TCJA tax law, taxpayers were entitled to a deduction equal to the state and local taxes (“SALT”) paid during the year. The deduction consisted of the following types of taxes paid:

  • State, local, and/or foreign real property taxes
  • State and local personal property taxes (i.e. cars, boats) and
  • State, local, and/or foreign income taxes

It is also worth noting that there were no caps or limitations on the amount of SALT deducted on Schedule A (unlike medical expenses).

Under the new tax law, no changes were made with regard to the types of taxes that a taxpayer may deduct, so long as they fall under one of the aforementioned tax types. However, the same cannot be said of the amount of deduction allowable on Schedule A. Unfortunately, the new tax law places a $10,000 ceiling on the SALT deduction. Since this has traditionally been one of the largest itemized deductions, it is anticipated that it will have one of the greatest impacts to taxable income.

Changes to mortgage interest deduction

Under the TCJA, mortgage interest on loans used to acquire a principal residence and/or a second home remains deductible, but only on debt up to $750,000. This represents an unfavorable increase of $250,000 since the limitation was $1 million under prior tax law. Taxpayers with existing acquisition debt, that is, debt acquired on or before December 15, 2017, would remain subject to the $1 million limitation, as the new law is not applied retroactively. Additionally, mortgage refinances after 2017 will be considered incurred on the date of the original mortgage so long as the refinanced debt does not exceed the original debt. This will afford taxpayers with existing debt the option to refinance without being encumbered by the new limitations.

Interest on home equity loans, regardless of when the debt was acquired, is no longer deductible under the TCJA. However, based on current guidance, it is not yet clear whether proceeds from home equity loans used for business purposes may be deductible elsewhere on a taxpayer’s return (i.e. Sch. E in the case of a rental or Sch. A in the case of investment interest). It is anticipated that the IRS will provide further clarification on this in future guidance.

Changes to charitable contributions deductions

Under the TCJA, the limit for cash contributions has been extended from 50% to 60% of the contribution base, which is generally a taxpayer’s adjusted gross income (AGI). However, payments made to a college or university in exchange for the right to purchase tickets to an athletic event are no longer deductible. This represents a divergence from pre-TCJA tax law, under which 80% of such payments were treated as deductible contributions.

Changes to miscellaneous itemized deductions

Under the new law, all miscellaneous itemized deductions that are subject to the 2% of AGI floor are no longer deductible. Such expenses include, but are not limited to, the following:

  • Unreimbursed employee expenses
  • Investment expenses (i.e. brokerage fees)
  • Tax preparation fees
  • Hobby expenses

Changes to personal casualty loss deduction

Under the TCJA, casualty and theft losses are generally only deductible to the extent they are attributable to a “federally declared disaster”. There is a limited exception for taxpayers who have personal casualty gains, whereby losses not attributable to a disaster may be used to offset such gains, but not below zero. For the purposes of this provision, a “federally declared disaster” is one that has been determined by the President to warrant federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

Additionally, the TCJA retroactively provides relief to taxpayers who incurred a disaster loss in tax years 2016 and 2017 by raising the $100-per-casualty limitation to $500 and waiving the 10% of AGI floor.

Changes to the deduction for gambling losses

Historically, gambling losses have only been deductible to the extent of gambling winnings. However, a 2011 tax court ruling in Mayo vs. Commissioner (136 TC 181) allowed taxpayers engaged in the trade or business of gambling to exclude certain non-wagering expenses (i.e. travel, meals, entry fees, etc.) from “gambling losses” and report them on Schedule C.

Given that this has long been a point of contention by the IRS, it should come as no surprise that the TCJA, for purposes of the limitation, broadens the definition of “losses from wagering transactions” to include any and all non-wagering expenses. As such, it is no longer possible to create a loss from gambling, regardless of whether it is considered a trade or business of the taxpayer.

Changes to the overall limitation on itemized deductions

Under pre-TCJA tax law, this provision, also known as the “Pease limitation”, was an overall limit on otherwise allowable itemized deductions of high income taxpayers. In an effort by congress to “simplify” the internal revenue code, this overall limitation has been completely repealed under the TCJA. It is unclear at this point whether taxpayers will really benefit from this change, since almost all itemized deductions have been limited or repealed individually (i.e. SALT, miscellaneous itemized deductions, et cetera).

Read All Tax Cuts and Jobs Act Articles