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Part of 7 points worth checking on state business tax
5 pointers on state business tax requirements
Five pointers on state business tax requirements: what a state can tax, who writes the rule, how to read the rules, when to recheck and where to check.
Federal tax is one system with one authority. State business tax requirements come from dozens of systems, plus the cities and counties that can levy their own. The requirement that applies to you is whichever of those has a claim on your business, and each of them publishes its rules in its own place and its own words.
State tax rules can change which business expenses are deductible on your state return. They can also change how you substantiate mileage: the federal standard mileage rate is not automatically the state figure. Most states start from a federal number — federal taxable income for corporations, adjusted gross income for many individual filers — and then publish a schedule of modifications, the additions and subtractions that make the state figure different. Check that schedule before you assume a federal deduction or the standard mileage rate carries over, and keep your mileage log and receipts at the level the stricter return requires.
When you work through these pointers, keep your deductions and mileage records in hand. That is where the state layer meets this site's focus.
What to take away
- A state can tax a business several ways at onceon income, on the privilege of existing there, on gross receipts, on sales, on payroll. Which apply depends on the state and on what you do inside it.
- State rules are written by the legislature and interpreted by the department of revenue. The department's own page is the source, not a national summary.
- Being registered, being required to file, and owing tax are three different questions.
- The five pointers below are the methodwhat a state can tax, who writes the rule, how to read the rule, when to recheck, and where to check.
- Your state's department of revenue publishes the current rule, and a CPA licensed there decides how it applies to your facts.
Pointer 1: the kinds of claim a state can make
| Kind of tax | What tends to trigger it | What to ask |
|---|---|---|
| Income or franchise tax on the entity | Doing business or being organized there, as that state defines it | Does my entity type pay it directly, or does it pass through to the owners? |
| Gross-receipts or privilege tax | Revenue from customers there, sometimes with no regard to profit | Does it apply in a loss year? |
| Sales and use tax | Selling taxable goods or services to buyers there | Am I required to collect, and on what? |
| Withholding and unemployment | People working there, including remotely | Where do my people physically sit? |
| Local taxes | City or county rules layered on top | Which localities do I touch? |
The trigger is the word to watch. Each state defines its own, and those definitions have shifted as work went remote and selling went online. A business with no office in a state can still owe it something. Whether yours does is a question with a specific answer, and only the state's own rules give it.
Two federal landmarks sit under most state triggers. Under P.L. 86-272, a state cannot impose its net income tax on a business whose only in-state activity is soliciting orders for tangible goods; the protection is narrow, and it does not reach sales tax. Under South Dakota v. Wayfair, the Supreme Court held that a state may require an out-of-state seller to collect its sales tax even with no physical presence, once the seller passes the economic threshold the state wrote for itself. Those thresholds are dollar or transaction tests, each state sets its own, and each publishes them on its department of revenue site.
States do not all speak the same way. The Multistate Tax Commission and the Streamlined Sales and Use Tax Agreement exist to align some of these rules across states, but only for the states that join, and neither one replaces the statute your state enacted.
State tax types and triggers
Income/franchise
- Trigger
- Doing business or organized there
- Key question
- Entity pays or passes through?
Gross-receipts
- Trigger
- Revenue from customers there
- Key question
- Apply in a loss year?
Sales/use
- Trigger
- Selling taxable goods or services
- Key question
- Required to collect, and on what?
Withholding
- Trigger
- People working there
- Key question
- Where do people physically sit?
Pointer 2: who writes the rule and where it appears
- The legislature passes statute. A change from a session usually takes effect on a date the act names, not the day it passed.
- The department of revenue issues regulations, rulings, bulletins and notices, and publishes the annual list of changed figures. Look for its "what's new for businesses" or "legislative changes" page; that is where a change is announced first. The agency has a searchable name: the California Franchise Tax Board, the Texas Comptroller of Public Accounts, the New York State Department of Taxation and Finance, to take three.
- Courts change how "doing business" is read, sometimes for every state at once; South Dakota v. Wayfair is the clearest example in sales tax.
- Cities and counties add their own layer, published on their own sites. A city business license tax and a county business personal property tax are real obligations, and neither one appears on the state's page.
The Small Business Administration's guide to paying business taxes explains how the federal and state layers fit together and points to the state agencies. Use it to find the door. Once inside, read the department's page, not the guide.
Pointer 3: how to read a department of revenue page
- Which tax. Departments organize by tax type, not by business type. Read the page you came for, then the neighboring ones, because the tax you did not know about is on one of them.
- Which entity. Many state pages split by corporation, pass-through entity, and sole proprietor. Your federal classification usually decides which page is yours, but not every state follows the federal election; the entity tax treatment page explains where they diverge.
- Effective date. State pages often show the current and prior rule side by side. Check which one covers your year.
- Registration, filing, and payment. Three obligations, three due dates. A state can require a return from a business that owes nothing.
- The forms and instructions link. As with the IRS, the instructions govern how the form is completed, and they carry a year.
Pointer 4: when to recheck
State rules change when a session ends, figures reset, or a court decides a case, and the state publishes the first kind.
Your rules change when your footprint moves: a hire in a new state, a shifting customer base, a warehouse, a move. Nobody publishes the second kind, which is why they cause trouble.
Recheck when any of these happen, and once a year regardless:
- You hire or contract with someone who works from another state. That is a payroll tax question before it is anything else.
- Sales into a state grow, or you start selling through a marketplace. The sales tax obligation can arrive before the income tax one.
- You register an entity anywhere new, for any reason.
- You receive a notice from a state you have never filed in.
Pointer 5: where to check the rule
Source / Use it for
- Your state's department of revenue
- The current rule, the current figures, and the forms
- Your state's business filing office
- Registration status and the annual report that keeps the entity in good standing
- The department's legislative update or bulletin page
- What changed this year and when it took effect
- A CPA licensed in that state
- Whether the rule reaches you, and what to do if it does
Finding the right department is the tedious half of the job. The IRS keeps a directory of state government tax sites that goes to each one without a search engine in the way, and the SBA guide above points to the same agencies. Register and file through the state's own portal, not a third-party filing site. When the question is what the rule means for your facts, take it to a CPA licensed in that state — your state's society of CPAs can point you to one.
One more office to know: registration and the annual report usually sit with the secretary of state or the state's business filing office rather than the revenue department, and they run on their own schedule, separate from any tax return.
Common questions
I registered years ago. Am I still required to file?
Registration does not lapse on its own. Check the annual report and the filing obligation separately, against the tax deadlines the state publishes rather than the ones you remember.
The state says I owe something in a year I lost money.
Some states tax some entities regardless of profit. Whether yours is one is on the department's page for your entity type. Do not ignore the notice, and do not pay it without understanding it.
Does filing federally cover the state?
No. The state return is a separate filing with separate rules, even where it starts from the federal figures.
I sell online into many states. How do I find out where I owe?
The connection a state needs before it can tax you is called nexus, and it can be physical or economic. Ask a CPA for a nexus review. It is a defined piece of work with a written result, and it is not something to do from a blog post, this one included.
