Yes, this is something you may expect to hear from your doctor, but from your tax advisor? While technology has made it much easier to provide services to customers all over the country or the world, it is also easy for business owners to find themselves in a tax quagmire. SALT in tax circles refers to State and Local Taxation and includes all taxes legislated and administered by state and local tax authorities including income, franchise, sales and use, property, real estate, payroll, business licenses, among others. Politicians can be ingenious at designing creative ways to raise revenue.
Traditionally, a business would need to have a physical presence in a jurisdiction through an office, store, warehouse, before it could be subject to state income or sales taxes. The definition of “presence” has been expanded to include seemingly innocuous items as telephone book listings, delivery trucks, and employees telecommuting, or temporarily at a client site. The ease of telecommuting from remote locations has created interesting complexities in determining physical or economic presence within a state. Most states consider the presence of employees located within their state sufficient to create physical and economic presence triggering income tax filing requirements, even if they are working from home for their own convenience and not that of the employer.
Given the opportunity, who wouldn’t want to operate their business from a warm, sunny location free from heavy traffic, whenever possible? Operating a business from a remote location may trigger taxation requirements from multiple locations, the state and locality where the business is based the location(s) where employees are located, and the location where benefit of services are received.
Thirty-five states have adopted market-based rules where economic presence is established simply by providing services to customers in the state, thus subjecting the taxpayer to income taxes in that state. The only contact with the customer is through electronic means, telephone calls, emails, etc.
Making these issues even more challenging is state and local tax laws are often written in a rather general manner, not crystal clear as to when an out-state/out-of-jurisdiction taxpayer will become subject to them. All too often, the issue becomes apparent when a notice is received, or an auditor shows up. Government contractors may be impacted if contract payments are held up due to non- compliance with all required tax filings and payment obligations to a state in which they have a contract. Service providers who are required to have state-issued licenses to do business in their field have also found themselves unable to obtain or renew a license if the state has determined that there are outstanding tax filings or balances due.
Companies seeking to do business out of state are well advised to seek professional guidance to understand how their particular business will be affected by SALT, before they engage in contracts in another state or jurisdiction. The hurdles are not insurmountable, but as the saying goes, know before you go!