Tax Considerations Before Doing Business in Multiple States
If your growth plans include expanding into new states, you must understand your responsibilities for starting and doing business in those other states. What does “doing business” in a state mean?
“Doing business” in a state generally refers to regularly conducting business activities in a state or the company availing itself of a market within a state, not just an occasional visit or other de minimis activity.
Each state has its definition of what represents “doing business.” Some examples of activities considered doing business in a state are selling goods, providing services, building and constructing, installing, or project management. A physical presence, such as having a remote employee, owning or renting real/personal property, or using independent contractors or agents, can impact the determination of whether the activity constitutes doing business.
If your company’s activities are considered doing business, you may need to “qualify” to legally transact business in the state. Qualifying can include registrations, fees, and additional reporting requirements that are a necessary ongoing cost of doing business. Complementary to the legal requirements are the tax compliance requirements. State and local taxes represent a significant business cost for companies operating in multiple states, which can impact net operating or project margins. When looking to hire remote employees or seek new customers, a business needs to consider the employee location or the customer and/or project location before deciding. Being proactive and aware of the implications of doing business in other states can prevent unintended consequences and can assist in a successful growth plan.
There are steps that a company must follow for starting or doing business, and each state has its own requirements. These additional obligations may seem burdensome, but failure to comply can result in penalties and a problematic start-up. Once penalties are assessed for noncompliance, the company is not in good standing. It is always less expensive to come forward and address any omissions you discover as early as possible. State authorities tend to be more lenient when a company reaches out proactively to address an unintentional situation rather than waiting to be discovered by a state. Before reaching out to a state, consult with your tax advisor or attorney on any mitigation options to alleviate penalties.
Is your company starting and doing business in other states? Avoid costly consequences and gain an understanding of your state’s operating obligations. Be informed, know the rules, and know the costs!
Join us on our upcoming webinar to learn about starting and doing business in multiple states. We will also be covering state and local tax reminders, remedies, and recent developments.