A reader asked a question about doing business - and paying taxes - in more than one state. As usual, the answer to this question is more complicated than you might think, so let's take it step by step:
Let's say you have an LLC registered in Iowa and you have customers in Illinois and Wisconsin. First, you must determine if you have a tax nexus (a presence) in each of those states. Tax nexus is different for income tax and sales tax purposes.
Income Tax Nexus
For state income tax purposes, you have an income tax nexus in a state if your business:
- derives income from sources within the state,
- owns or leases property in the state,
- employs personnel in the state in activities that exceed "mere solicitation,"
- or has capital or property in the state.
The requirements vary from state to state, but in general if you do business in another state, you have an income tax nexus in that state.
If you have an income tax nexus in a state, you must register as a "foreign" company within that state. In our example above, you are considered a domestic LLC in Iowa (your home state). You must also register as a foreign LLC in both Illinois and Wisconsin and pay state income taxes on the income you generate in each of those states. The same designations of "domestic" and "foreign" apply to partnerships and corporations, too.
Sales Tax Nexus
For sales tax purposes, the determination of nexus for sales tax is more loosely defined, and determined by each state. In general, you have a nexus in a state:
- If your business has a physical location in the state
- If there are resident employees working in the state
- If your business has property (including intangible property) in the state
- If you have employees who regularly solicit business in the state.
If you think you might have a nexus in another state, go to that state's department of revenue for more information and to register and pay sales tax. Note that sales tax has nothing to do with your business type; all types of businesses, including sole proprietorships, must pay sales tax.
Confused? Don't know where to start? If you are doing business in several states, you may need to get help from an attorney to determine if you need to register as a foreign entity in another state, and to get help with sales tax registration. You will also need a CPA to help you figure out how to pay and submit taxes for these states.
For More Information