Year-End State and Local Tax Planning Perspective

In recent years, there have been significant changes to the State and Local Tax nexus requirements. The longstanding physical presence nexus rules have been superseded by economic nexus. Almost all states have adopted economic nexus concepts, under which merely making sales into a state can result in a filing obligation, even if the business has no employees or property in the state.

The U.S. Supreme Court in Wayfair upheld the concept of economic nexus for both sales tax and income tax. In 2023, New Jersey became the first state to officially adopt the economic nexus standard (i.e., $100,000 sales or 200 transactions) for both corporation business taxes and sales taxes.

Economic nexus presents risk and opportunity for taxpayers. States use differing source rules and methodologies to assign sales to a particular state for multistate businesses. Although a business might have economic nexus in a state, with proper planning, income tax burdens can be alleviated or reduced with a sales-sourcing analysis, which ensures sales are correctly apportioned among the states. As states continue to adopt single-factor sales apportionment coupled with market-based sourcing, many businesses are actively reexamining their sales sourcing approaches to reduce state taxes.

With economic nexus here to stay, sales and use taxes can be a significant financial burden if proper procedures are not in place and appropriately maintained. The issues of taxability review, the use of marketplace facilitators, and exemption certificate management have garnered more analysis in a post-Wayfair world. Companies should periodically review their sales and use tax process and procedures, including, but not limited to:

As a result of client requests to frequently identify where they have nexus for sales tax purposes, Withum has developed a Sales Tax Nexus Determination Tool. Use our interactive tool to determine where your business has established nexus.

Withum’s Nexus Determination Tool will allow you to identify states where your business may have nexus for sales and use tax by answering a few simple business questions. Determining sales tax nexus is crucial for a business for several reasons:

Determining where your business has established nexus is the first step towards identifying what actions you should take to become compliant with sales tax.

A business should be considering state and local income tax nexus and sales sourcing assessment, if:

In the past two years, 17 states have enacted corporate or personal income tax rate changes. Generally, these changes have lowered the top tax rates for businesses and individuals. Following is a summary of the rate changes enacted:

In the aftermath of Wayfair, the Multistate Tax Commission (MTC) has targeted one of the remaining legal barriers that businesses have to shield themselves from state assertions of income tax economic nexus – P.L. 86-272.

On August 4, 2021, the MTC voted to adopt a revision to its “Statement of Information” whereby a business could lose P.L. 86-272 protection solely by engaging with customers through the internet. In 2022, New York and California issued guidance that they were adopting the MTC’s revised Statement of Information. Effective July 31, 2023, New Jersey adopted the MTC’s P.L. 86-272 revisions. It is expected many other states may adopt the MTC’s guidance implicitly through their MTC conformity provisions. The loss of P.L. 86-272 protection may result in income tax filing obligations for many businesses. The federal law known as P.L. 86-272 was passed over 60 years ago, and it prohibits a state from imposing a net income tax on businesses that only sell tangible personal property (TPP) and whose activities in a respective state do not exceed the solicitation of orders. For many years, even preceding the Wayfair case, for income tax, it has been generally accepted that economic nexus has been the law of the land unless a business was otherwise protected by limiting its activities to those outlined in P.L. 86-272.

AMTC’s guide provides examples of when the use of an interactive website will tarnish P.L. 86-272 protection, which activities include:

One of the centerpiece provisions of the 2017 TCJA was the $10,000 cap on state and local taxes (SALT) that individuals (including pass-through businesses) could claim as an itemized deduction on their federal income tax returns. The SALT deduction limitation profoundly impacted many business owners and residents in high-tax states such as NJ, NY, CA, CT, and MA.

States responded by enacting pass-through entity taxes (PTETs) as a workaround to mitigate the impact of the SALT deduction limitation for the owners of pass-through entities. As of October 2023, 36 states have enacted PTETs, making the availability of PTETs the rule rather than the exception. In theory, the utility of PTETs will cease on January 1, 2026, when the $10,000 SALT deduction limitation expires, but we anticipate that some states may retain their PTET elections in the event the SALT deduction limitation is extended or to bring AMT relief.

Prior to making a pass-through entity election, there are several key issues that businesses need to consider:

As the economy continues to evolve, widespread telecommuting, the looming economic downturn, and state budget shortfalls have increased the focus on state taxes. Although telecommuting raises many concerns, some of the central issues put into focus are:

Nexus, with respect to telecommuting, is generally straightforward. An employee’s presence in a state creates nexus unless protected by P.L. 86-272. For income tax apportionment, in some states, the consequence of an employee working from a different state could affect sales sourcing, payroll, and the property factor. For example, the New York City UBT (for non-corporate entities) uses cost-of-performance sourcing, which can lower taxes if employees leave New York to telework in nearby states. Such sourcing is generally determined based on where the services are performed.

Payroll withholding also presents challenges. Most states source employee wages to the state where the employee performs the services; however, with “Convenience of the Employer” rules, such as those in New York, there is added complexity. These rules, some of which preceded the pandemic, essentially require non-resident wages to be sourced to the state’s office where the employee is assigned, even if the employee works remotely in another state.

This could result in double withholding requirements for the employer. Some of the key issues impacting payroll withholding decisions include:

Employee mobility and telecommuting are here to stay, and businesses must adapt and plan for the many tax issues that arise.

Now that working from home has become more common, are you considering a move to another state? Perhaps to a low-tax or no-tax state? If so, you are not alone, and here are some of the things you should be considering for income tax purposes.

In order to change one’s domicile, an individual must physically move to a new jurisdiction with the concurrent intent to make the new jurisdiction their fixed and permanent home. Individuals domiciled in a state are subject to that state’s taxing authority on all their income. An individual who is required to pay tax as a nonresident in a state, even though they are domiciled elsewhere, is only subject to tax on income derived from sources originating outside his or her state of domicile (e.g., wages earned while working in a nonresident state, pass-through entity income).

Domicile is the place you regard as your permanent home — the place to which you intend to return after a period of absence (e.g., a vacation, a short-term business relocation, educational leave). As a practical matter, you can only have one domicile at any point in time, although you may have multiple residences. Once established, domicile continues until you affirmatively establish a new domicile.

Individuals establish a new domicile by moving to a new location with the concurrent intent to establish a fixed and permanent home there. However, moving to a new location, even for a substantial period of time (e.g., a multi-year work assignment), does not create a change of domicile if the move is not intended to be permanent. Individuals who move outside the country face additional scrutiny as to whether their immigration status in the foreign country allows them to remain there permanently.

Individuals who moved out of their primary homes during the pandemic with the ultimate intention of moving back generally remain domiciled in their original home states. However, some moves that were originally intended to be temporary have now become permanent, and these individuals need to determine when they severed their old domicile and established a new one – which is as much art as it is science. Individuals with multiple homes may also find that they are statutory residents of a state if they spent substantial time (e.g., 183 days) in a state other than their domicile where they have a residence.

Determining where an individual is domiciled requires a subjective analysis of several factors, including, but not limited to:

Additional factors demonstrating an intent to permanently move include voter registration and obtaining a driver’s license and vehicle registration in the new state. The burden of proof is upon the person asserting a change of domicile. They must maintain sufficient records to demonstrate an intention to abandon their previous domicile and establish a fixed and permanent home in a new one. Proper planning and understanding of the residency rules in the states the taxpayer is leaving and moving to are critical for individuals contemplating a change of domicile.

Additional considerations when planning a change of domicile include:

Authors: Jim Bartek, CPA | [email protected]; Rebecca Stidham, CPA | [email protected]; and Jonathan Weinberg, JD, LLM | [email protected]

Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.