State Business Income Tax Nexus 

Anytime your business has financial dealings in another state, you’re potentially establishing state tax nexus. This matters because a business with nexus has tax filing obligations for that additional state, involving sales and use tax, income tax, or franchise tax.

Sales and Use Tax Nexus

Until 2018, a business needed to have a physical presence in a state in order for that state to require filing and remitting sales and use taxes. However, the court decision in South Dakota v Wayfair established an economic presence standard for sales and use tax purposes.

If all states used the same considerations in determining economic presence, it wouldn’t be too complicated, but each of our fifty states has its own laws and threshold standards. Since Wayfair, many states have enacted laws using a threshold of $100,000 in gross receipts from sales into the state or 200 or more transactions in determining sales tax nexus. Because the 200-transactions threshold can be overly burdensome to small sellers, there’s a lot of debate about whether it’s appropriate, but currently 20 states and the District of Columbia use this measure.

State Income Tax Nexus

Factors that determine whether an out of state business has income tax nexus can include physical presence, economic nexus, or factor-based nexus. Therefore, taxpayers need to examine how their specific multistate activities or types of transactions may incur a tax liability in that state.

Transaction-Based Nexus Determinations for State Income Tax

And now two states – Hawaii and New Jersey have used the 200-transaction threshold to determine corporate income tax nexus. For tax years beginning in and after 2020, Hawaii considers someone who regularly engages in business in the state with 200 or more transactions as subject to Hawaii income tax. For tax years ending on and after July 31, 2023, the state of New Jersey considers that out of state corporations that derive receipts exceeding $100,000 from sources in New Jersey or had 200 or more transactions delivered to a New Jersey customer during the calendar or fiscal year is subject to state income tax responsibilities.

While two states out of fifty is not a trend, it is something to watch if your company conducts multistate business. If you have questions about your company, contact your Mize tax professional.

State by State News

Arizona

The recent Arizona Families Tax Rebate sent to eligible taxpayers is taxable for federal but not subject to Arizona income tax. Therefore, it should be subtracted from the federal AGI on the 2023 Arizona individual income tax return. The Arizona Department of Revenue is in the process of notifying taxpayers to access their 1099-MISC through the online portal in order to determine the rebate amount received. More information about the rebate can be found here.

Colorado

Taxpayer’s Bill of Rights (TABOR) Refunds for 2023 – The Colorado constitution limits the amount of revenue the state can retain and spend. Excess revenue is required to be refunded to taxpayers. For 2023, TABOR Refunds will be claimed primarily through the filing of Colorado Individual Income Tax Return (DR 0104). The refund is $800 for one qualifying taxpayer or $1,600 for two qualifying taxpayers filing jointly. More information is available by clicking here.

Indiana

Successor Liability – Effective January 1, 2024, if the owner of a business transfers more than half of the business’ physical personal property to another individual, the successor owner will be responsible for any unpaid sales, use, county innkeeper, and food and beverage taxes of the seller. A notice of transfer in bulk must be filed with the Indiana Department of Revenue at least 45 days prior to the transfer or sale of tangible personal property of a business.

Updates to Individual Income Tax Exemptions – The Indiana Department of Revenue’s January tax bulletin provides an inflation adjustment for the maximum income allowable for certain dependents and information relating to a new additional exemption for certain qualifying children. For Indiana purposes, the applicable eligibility tests are determined under 2017 federal guidelines.

Any individual filing an Indiana tax return may claim a $1,000 exemption for themselves as well as each of the taxpayer’s qualifying dependents. Qualifying dependents (as listed in the Tax Bulletin) cannot have gross income equal to or more than the dependent exemption as listed under 2017 federal law ($4,700 for 2023 after inflation adjustments).

Taxpayers can claim a $1,500 exemption for certain qualifying children who are the son, stepson, daughter, or stepdaughter of the taxpayer or an individual under the guardianship of the taxpayer (including adopted and foster children).

Additionally, beginning in 2023, a taxpayer is permitted an exemption of $3,000 for a child who qualifies for the first time for the extra exemption for certain qualifying children. To qualify, the child must meet the requirements for the $1,500 exemption and must be eligible for the exemption for any taxpayer for the first time.

A child is not eligible if any of the following are true: the taxpayer previously claimed a $1,500 exemption for the child, the taxpayer was eligible to claim the child but did not file a return for any reason, or the child was claimed previously or could have been claimed previously as a qualifying child by another taxpayer.

Business Tax Changes Related to the Tax Cuts and Jobs Act - For 2023 and later, Indiana will modify treatment of federal excess business losses and nonprofit separate trade or business losses when determining Indiana net operating losses, backing out some modifications that previously reduced Indiana adjusted gross income. Additionally, beginning in 2022, federally mandated amortization of research expenses over five years replaced immediate expensing. Indiana's 2023 law allows full expensing of these costs in the incurred year, with limitations to prevent deductions exceeding pre-2022 federal allowances. The change applies retroactively from January 1, 2022, with specific reporting codes for deductions and add-backs.

Washington

The U.S. Supreme Court has declined to review a Washington Supreme Court decision upholding a state 7% tax on annual long-term capital gains in excess of $250,000 after finding that it was appropriately characterized as an excise tax on the sale or exchange of capital assets rather than a tax on the capital assets themselves.

The Washington Supreme Court had held that because the capital gains tax is an excise tax, it is not subject to the state's uniformity and levy limitations under the Washington Constitution and is also consistent with the state's privileges and immunities clause and the federal dormant commerce clause. Washington residents had challenged the tax on the grounds that it violated the state's constitutional prohibition against nonuniform income taxes exceeding one percent, and because it taxed transactions occurring in other states and involving property outside of the state.

For more about State and Local Tax visit MizeCPAs.com