Effective Structuring in 2019 to Avoid SALT Exposure
by Barry Horowitz, CPA, and Stephen Basiaga, JD, L.L.M., WithumSmith+Brown –
January 8, 2019
As states seek to alter and (in most cases) increase their applicable taxes for both individuals and businesses to adjust and incorporate the federal Tax Cuts and Jobs Act (TCJA) as well as meet their budgetary goals, the management and evaluation of such state impact to a company can be just as important, if not more so, than the federal impact of such changes.
Changing state tax benefits and detriments can chip away at the profit margins and the competitive advantages of operating in certain states. Effectively evaluating and monitoring these changes is becoming vital rather than optional as the business tax climate in all states becomes more demanding and complicated. Following are some of the key focal points accountants can pass onto their clients to minimize state and local tax exposure and, potentially, avail themselves of certain benefits.
Evaluate the Total Tax Picture
If the business borders several states, evaluate what taxes the business and the owners/partners/shareholders will be subject to, including:
- Entity-level taxes
- Variations in sales and use taxability on what is sold among several states
- Business personal property taxes and/or other excise taxes unique to the business’s industry
- Excise taxes related to the business or industry
A nexus study performed by the company’s internal tax staff or by the CPA firm can provide a comprehensive snapshot of nexus, revenue sales taxability and other associated tax impacts (think New York City’s commercial rent tax) that are rarely given much attention beyond the year of a company’s formation.
State of Commercial Domicile
Many companies may incorporate or form in Delaware or Nevada, but commercial domicile (think the “residency” of the business) is based on where the locus of decision-making and control is based, which is often the state of headquarters.
To the extent that the company has multiple offices where different officers may sit, you need to rest on where ultimate decision and control (and likewise books and records) will reside.
Further, note that the company’s industry or location can be tied to a number of changing credits, incentives and economic zone-type programs that are meant to offset the impact of operating and centralizing the business in certain states.
Solicit Remotely or Send for Approval
Even seemingly innocuous business development activities can establish nexus for state tax, particularly if the company is engaged in the solicitation of services. Further, though Federal Law P.L. 86-272 provides that sole solicitation for the sale of tangible property (under the listed protected solicitation activities, and which does not apply to services) can limit the applicability of income taxes on a company despite their operations, those same states that apply gross receipts, profits or other types of taxes do not prevent the establishment of nexus for those purposes. Often, the same activity that avoids income tax nexus under P.L. 86-272 will nevertheless establish sales tax nexus and along with it collection and remittance on customers based in that state.
To the extent that the company can solicit remotely or limit out-of-state activities to trade shows and very intermittent state solicitation, the nexus footprint contracts dramatically.
Evaluate Sourcing Methodology
Whether sourcing the sale of property, services or intangible revenues, companies often fail to properly source to the state in accordance with their rules.
The typical company defaults to sourcing its sales, no matter what is being sold, to the billing address where their invoice is sent.
Beware the Use of Amazon!
The use of Amazon, both as a direct vendor for products (as a third-party logistics provider) and solely as a marketplace seller, can establish nexus comprehensively for income, sales and potentially other taxes. Amazon may store a company’s titled property in their warehouses across the country, and their operations as a marketplace provider can at the very least establish sales tax nexus.
Pay Attention to Wayfair
In addition to the TCJA and independent state needs, states are further following the lead of South Dakota’s economic sales tax nexus law template held by the U.S. Supreme Court as constitutional. Though the law of the land has been for physical presence to be a necessary requirement prior to a state imposing sales taxes upon a company, the case’s result and subsequent implementation by a host of states uses annualized sales of $100,000 or more and/or 200 or more transactions into a state as the measure of whether a collection and remittance obligation exists.
Barry H. Horowitz
Barry H. Horowitz, CPA, MST, is a partner and team leader of WithumSmith+Brown’s state and local tax services group. He is a member of the NJCPA State Taxation Interest Group.
Stephen Basiaga, J.D., L.L.M., is a tax manager at WithumSmith+Brown's state and local tax services group.
This article appeared in the Jarnuary/February 2019 issue of New Jersey CPA magazine. Read the full issue.