Top Trends in Multi-State Taxation for AE Firms

September 12 2019 | by Shane Finn

Architectural and Engineering firms of today are experiencing growth opportunities like never before, including expanding their projects into multiple states. But this level of no boundaries business comes with its share of complexities and possible consequences. In this blog, we’ll discuss some of the areas that can cause problems for firms whether you are doing business in 2 or 50 states.

Cost of Performance to Market-Based Sourcing Transition

In recent years there has been a significant trend of states adopting a market-based sourcing apportionment methodology v. cost of performance. When calculating a state corporate income tax apportionment, the sale of services is associated with where the benefit of the service is received and not where the service is performed (cost of performance). States have elected to use this method since it’s a better reflection of the taxpayer’s market and where their customers are located rather than where the service firm is doing the work in their home office state.

Sourcing sales under a market-based sourcing methodology can be challenging, largely due to the complex process of determining where the taxpayer’s market is. State and local taxes tend to be subjective and requires a CPA to review each state individually to determine the location(s) of your customer base and market. As of today, thirty states have adopted market-based sourcing for state corporate income tax.

South Dakota v. Wayfair Impact

As a result of the U.S. Supreme Court ruling and the rise of the Internet and technology age, doing business in 2019 looks very different than it did in 1992. Immediately after the Supreme Court decision, South Dakota and a majority of other states changed their minimum standards to either $100,000 in sales or 200+ transactions over a 12-month period. Out-of-state companies that meet these minimum standards may be required to charge, collect, and remit state sales tax.

Since its decision in 2018, the South Dakota v. Wayfair decision has echoed throughout the United States, causing a trickle-down effect impacting the imposition of state corporate income tax and state gross receipts tax, on top of state sales taxes upon out-of-state companies. The bottom line is that economic nexus, which once was overlooked, is now under a microscope. With these new state and local taxation rules in place, state and local government taxation departments have significantly increased their collection efforts upon firms doing business in their state.

Why Should I Be Concerned?

AE firms need to be aware of the ever-changing landscape of state and local taxation because the days of flying under the radar of compliance are over. We’ve seen firms take risks with state taxing authorities. Going this route is strongly discouraged. For the past few years, the trend has been to invest in personnel and technology to increase collection efforts based upon the shift from a cost of performance sourcing to market-based sourcing, and the imposition of sales tax economic nexus due to the South Dakota v. Wayfair decision. Don’t take a chance; states are going after firms and doling out hefty past due invoices, plus imposing fines.

In the coming years, states will continue to adapt to the evolution of business and technology and its impact on the overall state and local tax environment. Consequent of the magnitude of missed revenues by the various states, the enforcement dates of these newly enacted laws have already begun as of the date of this blog post. AE firms should start to change or implement processes to ensure compliance with each jurisdiction to avoid high penalties and interest for non-compliance along with years of filing requirements from previous years.

Next Steps

Please join Stambaugh Ness’s State and Local Tax Services Practice as we review multi-state tax planning and what’s trending in the AE industry. Furthermore, we’ll discuss the impact of landmark sales and use tax case, South Dakota v. Wayfair, and the states reactions in light of the Supreme Court’s decision, providing practical insights on what the decision means to your firm and help you determine your next steps.

Topics to be discussed

  • Mandatory Combined Reporting
  • Gross Receipts Taxes
  • Transition to Market-Based Sourcing for Service Providers
  • Single Sales Factor Apportionment Formula
  • Elimination of Capital Stock Taxes
  • Reactions to SALT Deduction Cap
  • Income Tax Nexus After Wayfair
  • Sales Tax Planning for AE Firms

Shane Finn- Stambaugh Ness

Shane Finn, Strategic Tax Advisory Manager

As a leader of SN’s State and Local Tax (SALT) Practice, Shane applies his significant experience to help clients navigate the complex SALT environment, ensure compliance, and enhance profitability. Working with clients in a wide range of industries including Professional Services, Construction, Real Estate, and Manufacturing, Shane has specific expertise in Credits & Incentives, Excise Tax, Income & Franchise Tax, Mergers & Acquisitions Due Diligence, Property Tax, Research & Development Tax Credits, Sales & Use Tax, and Unclaimed Property.

Connect with Shane on LinkedIn.

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