It doesn’t matter if you’re selling a service or a physical product, you may have to pay attention to taxes when you cross that state line. Your LLC or S-Corp is your shield for taxes and can help guide you in how to take care of those taxes. Its very difficult to cover ever scenario, as your taxes can change from multi-State transactions AND how you/what are selling. Jacki and I chat about the basics of across state line taxes and how it might affect you.
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Listen to Our Last Episode Here
Jacki and I chatted last time about Taxes and how to avoid getting in trouble with the IRS.
Income Tax classification
Your tax classification changes the rules about how you will need to file taxes. The different business entities each have their own classifications. For example, an LLC and an S-Corp are handled different but both have flow-through entity rules. You don’t pay income tax on the business (entity) level, you pay on the personal level. Basically, what you earn at the end of the year.
If you have more than one member (owner) of the entity, you’re automatically labeled as a partnership for tax purposes. There are no maximum level of members for an LLC while an S-Corp is capped at 100.
https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
High Court Tosses Online Sales Tax Rule, South Dakota New Standard?
Virtually every state that administers a sales tax may follow South Dakota’s model after the U.S. Supreme Court established the state’s tax law as the new standard for online sales taxation.
The high court ruled June 21 in favor of South Dakota and threw out its 1992 rule in Quill Corp. v. North Dakota. Quill, which states like South Dakota for years have tried to “kill” through lawsuits and regulation, prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.
Read More: Bloomberg Daily Tax Report Article
Quick Notes from the Episode
- Register to do business with the state
- Sales and use tax versus income tax
- Rule of thumb: every state is different
- Nexus – level of activity to create presence; threshold for filing
- Allocation versus apportionment
- Ex. sold property in a state, gain allocated to that state
- Net income allocated based on activity in state using factors
- Apportionment factors
- Payroll – I think just employees so not 1099 contractors
- Property – net book value or cost, rent x 8
- Sales
- Apportionment formulas
- Evenly weighted 3 factor, 60/20/20
- Sales only
- Revenue sourcing
- Physical – tangible personal property
- Services – Cost of performance vs market based
- Digital, SaaS
- Prewritten “canned” software, custom made
- Leave and load, license
- Use sourced revenue for apportionment formula
- LLC versus S corp (partners/members, shareholders)
- Flow through entities, pay tax at individual level instead of entity level
- Some franchise taxes based on equity: GA net worth (over $100k), TN franchise (25% net worth, min $100) and excise (6.5% net taxable inc), AL report fee ($10) and privilege tax ($100), SC min license fee $25
- Separate s corp election in some states: NY and NJ; don’t follow fed, may just file as c-corp
- Withholding or composite taxes and returns; instead of filing individual returns for each partner, sometimes incl on s corp return
- Sign affidavit
- State of residence taxed on 100% of income
- Credit for taxes paid to other states, at resident state rate
- States that do not recognize s election, corp pays tax (not pay on behalf), then subtraction for income subject to tax
- (credit versus deduction/subtraction)
- Timing of payments; estimated quarterly taxes, extensions, pmts due with return
- Federal deduction for state taxes paid in year (new tax law limit $10k)
- State credit for taxes paid related to that tax year
- International – as US citizen and resident you are taxed on 100% of worldwide income, foreign tax credit (or deduction) for taxes paid to other countries