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So I Want to Talk About the Recent Case history that has impacted the multi-state landscape and how we got to the place that we’re at today so the first case I want to talk about is complete auto transit versus Brady so complete auto transit versus Brady basically set up a system where the states are free to make independent judgments about what goes on in their state borders absent any sort of federal preemption so what that means is if the federal government hasn’t ruled that something is a national activity and it falls under the Commerce Clause of the Constitution that essentially the states can control what’s in their own borders so that was the first major case because it gave the states the power to basically operate as they see fit within their borders the second case is a case called quill quill was a Supreme Court case in the nineties and quill is significant because well basically ruled that unless a company or an individual had sufficient minimum contacts with a state that the state couldn’t charge sales or use tax and so this was significant because for the first time it mandated that company at least had to have some basic physical presence or some substantial contact in order for a state to mandate that a charge sales and use tax so quell was an extremely unpopular decision it states.

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Multi state tax issues don’t just impact businesses. In fact they impact people probably a lot more than they impact businesses. The reason for that is people move around a lot more than businesses do. So think of it this way. You have a situation where you have a client who’s in one state and they travel back and forth frequently between let’s say California and Texas, California has a 13.3% individual income tax rate, Texas has a 0% individual income tax rate. So the amount of tax that the taxpayer pays based on their movements between different states is going to depend on the residency of the particular taxpayer. Now residency is closely tied with domicile, which is a legal term. The domicile is essentially somebody’s home base so once you move into a home and take steps to establish your domicile in one state, that state becomes your tax home however until you establish a domicile in that state or until you more specifically move your domicile outside of a state, that’s where you run into problems. So take for example California that’s been super aggressive in dealing with some of these issues.

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I Make Sales to Customers in Multiple States. Do I Owe Tax? Well you might owe tax and the reason for it is a lot of us are used to the old way which was shipping products into another state and not charging tax because you’re not in that state why would you charge tax but the way that the legal framework has really shifted is in allowing States to collect tax against companies even if they don’t have physical presence within their borders there’s been a lot of lost revenue for states with the proliferation of business being done on the internet you know we’re talking about billions and billions of dollars in lost revenue so the states have responded by creating these very broad statutes that are designed to allow them to collect tax against out-of-state businesses if they have a certain level of activity in their state so it’s really important from a state perspective that you go through your business activities and figure out if you have sufficient minimum contacts with that state and whether those minimum contacts would obligate you to collect either state income tax or state sales tax.

What are the risk factors for doing business in multiple states? Well, when you operate in one state, your circumstances are pretty easy to control. The facts of just your business, you have control over how those change. You’re only worrying about your state’s law. And it’s a much smaller scale. The problem is with a growing number of businesses today, a growing number of businesses are reaching out and having contacts with multiple states. So there’s a number of different ways that this creates risk for businesses.

Number one is shifting facts. So as you widen your net, as you get broader and bigger, and as your level of contacts increases with different states, you can’t always control the facts of your situation. So for example, if you have an employee in your company and they move to a different state, well, now you’ve just created nexus in that state for circumstances that are really kind of beyond your control.

The same thing with vendors. If you’re using vendors in multiple states, then you have to be worried about their contacts and their practices to make sure that their activity is not creating nexus for you in a state that you didn’t intend.

The next part that’s really complicated and that creates a lot of risk is the changing laws. So
nexus laws and the laws around multi-state businesses, number one, they’re very actively changing at this moment because a lot of states are trying to broaden their tax base. They’re trying to create as many taxpayers as possible to fund the revenue coffers of their state.

So the laws are changing in these areas, but it’s not like you’re dealing with one set of laws either. You’re dealing with laws for all 50 states. And while a lot of states do things similarly, there are some very pronounced differences between the different states. There’s not only difference from the law side of things, but there’s also differences from the enforcement side of things.

So you take a state like California, California is very, very aggressive towards out-of-state businesses and very unforgiving when an out-of-state business claims ignorance to California’s laws.

So that’s kind of the overall landscape of why multi-state taxation creates risk for businesses that operate in multiple states. And the best thing that you can do is try and protect yourself from that risk by understanding it and taking actions to mitigate it.

So the first thing that you should do is not contact the states. I can’t tell you how many prospective clients that I talk to where somebody has reached out to a state Collections officer or somebody in the out of state compliance unit and inadvertently stuck their foot in their mouth by something that they said, which the state may or may not have known ahead of time. So it’s not a good idea to call them and volunteer information to the states. Rather the first thing that you really need to do is assess what your risk is. So you want to look at your level of contacts and your sales volume in the states that you think you have liability in. You want to kind of gather that information together so that you can better assess what your risk is and then even after you assess what your risk is, you really want to speak to a multi-state taxation expert. Speak with an attorney and have them go through and outline what your options are. A lot of people are too quick to say, “well we have Nexus in a particular state, we owe money in a particular state so let’s just go ahead and give this state all this past tax liability.” What they do by doing that is they inadvertently subject themselves to more liability and more risk than what they would have owed if we had created a measured multi-state tax strategy and executed that ahead of time. So a lot of people are very quick to jump into action and what I would encourage you to do is measure twice and cut once. Really solidify what your risk is, solidify what your options are and then pick the best option for your organization in order to minimize your liability and create a compliance path so that you have a platform to operate off of in the future. It’s not just the past tax liability you have to worry about, it’s about creating stability for your organization in the future so that they can continue to make sales and not have to worry whether they’re going to get into trouble or not. So number one it’s about mitigating liability and number two it’s about creating a compliance plan going forward.