Empowering Healthy Business: The Podcast for Small Business Owners
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Empowering Healthy Business: The Podcast for Small Business Owners
61 Navigating State and Local Taxes with Greg Reed
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Most business owners don't think about state taxes until a letter shows up.
In this episode of the Empowering Healthy Business Podcast, Greg Reed joins Cal Wilder to break down what every business owner operating across state lines needs to know about staying compliant with state and local taxes.
In this episode, you'll learn:
- The difference between physical presence nexus and economic nexus
- Why one remote employee can quietly trigger tax obligations you didn't plan for
- How the 2018 Wayfair ruling changed the game for remote sellers
- What a voluntary disclosure agreement is and how it can reduce penalties
- The pass-through entity tax deduction that costs nothing but requires early action
- Why over 10,000 local tax jurisdictions make compliance harder than most owners expect
- Why year-end is the best time to review your multi-state exposure
Featured Guest:
Greg Reed — Tax Professional
This episode is brought to you by SmartBooks — outsourced bookkeeping, accounting, and tax for small businesses.
Thanks for listening!
Host Cal Wilder can be reached at:
cal@empoweringhealthybusiness.com
https://www.linkedin.com/in/calvinwilder/
Welcome And Sponsor Spotlight
SPEAKER_01This is the Empowering Healthy Business Podcast, and I'm your host, Cal Wilder. Each episode, we'll dive into topics important to folks who want to run businesses that are both nicely profitable, sustainable, and scalable, and who want to achieve balance in their lives and realize their potential inside and outside of work. The show is sponsored by SmartBooks, provider of bookkeeping and accounting for businesses. Let's get started. Greg, welcome back to the show. Thanks for having me back. So sometimes on Empowering Healthy Business, we talk about ways to make more profit and more money. I think today you're going to talk to us about how to stay out of trouble so you can keep the money that you made, right?
SPEAKER_00Yes, and this one's not with the IRS. This is with uh the state governments.
SPEAKER_01Okay. Yeah, you know, it's surprising, um, I think when some people start operating in multiple states, how uh complicated it can become since they're all different.
SPEAKER_00And it can it can catch up on you really fast. And in this day and age, um, you know, you hire one contractor or employee, and you find out they're working in a different state, and now you might have a whole bunch of filing responsibilities that you weren't even aware
Multi-State Growth Creates Hidden Filings
SPEAKER_00of. So where do you want to start? Um so you know, I think where I want to start is like, you know, where do you actually owe taxes? And and we call that nexus. Um, and so nexus is what like brings you into a state. Um, you know, what uh I guess what qualifies you to have to pay tax in that state, right? Um, you know, so there's there's two different kinds of of Nexus. Um, I think the one that everyone kind of knows about or you know at least has an idea of is what we call physical presence nexus. And that's you know, you have an office in a state, you got employees in a state, uh, you have inventory in a state. Um, you know, you you have a physical connection with that state, right? Um and then I think what we have seen over the last few years now um really pop up is what we call economic nexus. And that is hitting certain dollar thresholds in states or uh transaction thresholds in each state. Uh and every state's a little different on what those thresholds are. Uh so you have to you know really be aware of of where you're selling in and um and you know how how frequently you're selling in those states.
SPEAKER_01So if I'm remembering right, it wasn't all economic presence didn't used to be a big deal in most states, right? And then something changed maybe eight, ten years ago.
SPEAKER_00Back in 2018, yep, almost 10 years ago, yeah. Um so that was the whole wayfare ruling. And the Supreme Court um, you know, pretty much opened the door for states to tax remote sellers, um and you know, based on on sales alone.
SPEAKER_01So even if you have no employees, no contractors, no third-party warehouses, nobody's traveling to the state, simply selling a certain amount of revenue in into customers in that state, yep, would trigger the nexus.
SPEAKER_00Would trigger that nexus. And you know, some states have um,
Nexus Rules After Wayfair
SPEAKER_00like I said, every state's a little different. Uh I think like the common rule is about $100,000 in in sales or 200 or more, and or $200 or more transactions. Um, but you really need to check every state because um I know that there are some states that it's a zero-dollar floor. So as soon as you earn one dollar in that state, you know, you have Nexus in that state, and uh you have to, you know, file and register and and pay taxes. Um, and you know, those are the rules. Um, does everyone do it? Probably not. But um, you know, the state is actually able to go back and and um you know collect the those funds if um if they do find you. Um and so, you know, some people say, well, I'm not gonna file, um, which is fine because it's probably a low chance of getting caught. But if you don't file, the uh statute of limitations never opens up. And so, you know, fast forward 20 years, they could open up, you know, 20 years of of back taxes on you. And then what's the uh what's the penalty involved? Uh so I mean you haven't filed in say, you know, go back to my example, 20 years, um, you know, late late filing, late payment. Um, I have had several states now um just assess a you know an estimated tax, which is always higher than what um is actually supposed to be paid, because I think they're trying to get you to um to wake up and and register and and pay the taxes. Um they do have um a lot of states do have what they call voluntary disclosure agreements. So if you, you know, say you're three or four years in and you're like, uh oh, I really should have been filing. Um most states have like a, you know, you raise your hand, you say, sorry, I meant to do this, I didn't do this. They'll waive the um the penalties and fees and and stuff like that.
Penalties And Voluntary Disclosure Options
SPEAKER_01But the problem is they want the tax dollars, and you probably paid those same dollars to another state or your home state, or you didn't collect them from your customers or something. So you don't actually have the money that they want you to pay for.
SPEAKER_00Yeah, uh, you know, you didn't collect the sales tax from the customer to remit to the state, and so now unfortunately, you might be up a creek. Um, you know, which is why it's important to stay on top of this stuff. Um, you know, have a partner uh that is that is thinking about this stuff, because uh if you're not, then you know it it could be you know detrimental.
SPEAKER_01And so wouldn't you recommend clients kind of do uh an annual review of their operations in different states and see if something has changed since the last um formal Nexus study was done?
SPEAKER_00Yeah, um if you are operating in, you know, if you have clients in multiple states, it's probably good to have a more formal Nexus study done. Um you know, you should know where your clients are operating. Um I encourage clients to track in whether it's in QuickBooks or in um you know some other you know um income collection type software, invoicing, whatever, um to track you know sales by state, that's usually a great way to um because typically you're gonna get a sales tax nexus before you're gonna get an income tax nexus threshold. Um and so you know by doing so you're gonna catch the you're gonna catch that pretty quickly.
SPEAKER_01Okay, makes sense. And then when you decide that you
Registering Correctly With Each State
SPEAKER_01have Nexus somewhere and you want to become compliant, um how do you do it the right way?
SPEAKER_00Uh so this is where it you know it's it's not hard, but it's it's kind of annoying. Um and there are companies out there that will do it for you and um you know highly recommend that um, you know, unless you're you're very confident and or comfortable uh doing it yourself, um, you know, having a third party helping you out with this. Um, you know, first is uh registering with the Secretary of State to do business in that state. Um and then you're also gonna register with the state department of revenue. Um so now two separate branches of of government, right? Um and then once you're registered with those with the Department of Revenue, you're gonna um you know, you're gonna want to get like a sales tax permit, you're gonna want to set up your income and franchise tax accounts. Um, you know, if you have payroll or withholding, you're gonna want to set those accounts up. Um, just so you can start getting those tax returns filed, you know, as soon as possible.
SPEAKER_01And then in my experience, registering is a lot easier than deregistering, right? It's kind of like that old Eagle song, Hotel California, you can enter, but you can never leave.
SPEAKER_00Yeah, they don't they don't want you to leave. Um, you know, it's yeah, it sometimes it can be a little frustrating. I um I always advise clients that if you know you're like I'm never gonna operate in this state again, just you know, maybe give it a little bit of time. Um you know, you never know where you're gonna find an employee or you know, a customer or anything like that. Um you know, maybe just file zero returns for a little bit. Um if you aren't really operating in that state anymore, and you know, see if you really are um you know 100% out of that state. I mean, once you, you know, you gotta deregister and um you know make sure that you know the um you know you gotta get letters of good standing and make sure that everything's um timely filed and that you've made you made all your payments and then you know you gotta uh deregister with the Secretary of State. Um and there's usually fees that come with that. And then if you you know find out six months later that you know, oops, I still have Nexus, I have to still file. Um now you're you're back doing the
Sales Tax Use Tax And Audit Risk
SPEAKER_00the registration again. Okay, makes sense. Um so you know, I think in general you're gonna have um four different types of taxes to think about when you get into a new state. Um I think the the big ones are you know sales tax, um state income tax, but you also have uh use tax. Um and you have franchise and and gross receipts taxes, and then you have local taxes, which we'll talk about in a minute. Um but you know, use tax is often overlooked, and uh I know that it's something that you know you and I often talk about. Um it's basically, you know, if you are supposed to remit sales, or if you're supposed to pay sales tax on an item and you don't get charged sales tax for that item, maybe that your vendor doesn't uh you know isn't required to collect and remit because they're out of state. Um technically you are supposed to, you know, voluntarily remit that uh that sales tax.
SPEAKER_01Um it's basically self-assessing sales tax that you self-assessing your own sales tax. Nobody's eager to do that.
SPEAKER_00No. Um and you know, some people do get uh do get audited on it, and it's it's something to to be aware of.
SPEAKER_01Yeah, I know um, you know, anecdotally I've always heard companies that you know file and pay a large volume of sales tax are more likely to be audited because they may have tax exempt certificates and they may be more likely to buy you know be buying things for internal use and not self-assessing potentially.
SPEAKER_00But I know is that any merit to that anecdote or or yeah, I mean it it's hard to tell like how the states choose who gets audited and who doesn't. Um there's really no I mean uh what I will say is that the states are getting smarter, and it used to be that you know the uh one part of the government didn't talk to the other part, but now they're starting to get smarter. So maybe you are um filing and paying, you know, state income tax. Um maybe you are paying payroll taxes, but you're not paying sales taxes. They might turn around, you know, look at what your business type is, and they know that because you know the any N-A-I-C S codes. Um, and they might say, you know what, this business model should be filing some form of sales
Local Taxes And Personal Property Assessments
SPEAKER_00tax. Um and they might, you know, flag you for a potential audit.
SPEAKER_01All right, so let's talk more about local taxes. I know that's an issue that you wanted to tackle separately.
SPEAKER_00Yeah, local taxes are are tough. Um people are always surprised to hear that in the US there are over 10,000 sales tax jurisdictions. Um, and each one has its own set of rules. Um and so you need to really be aware of what the that local sales tax is. So, you know, common ones might be New York City. That's a that's a big one. Um but uncommon and maybe uncommon for for people outside of Pennsylvania, but um in Pennsylvania you have a a local tax as well that you have to pay in each um, I guess, county. Um and so not only are you filing and remitting your federal and state taxes, but you're also paying local taxes there as well.
SPEAKER_01Um that's I know here in Massachusetts, maybe it's common in other states as well. We have the personal property tax. You're supposed to list out all the office equipment and things like that.
SPEAKER_00Yeah, and that's becoming that's becoming more and more prominent as well as these states start to get um you know a little bit a little bit smarter, um, a little bit more efficient. Um they have time and resources to go after these um these types of taxes. So um especially, yeah, personal property tax is a is a big example. Um I that has definitely gotten more traction in the last couple of years, from what I can see. Um and typically states will you know do what I said, they will just send over an estimated assessment. Um and I think a lot of business owners will just get that assessment and pay it. Um but you gotta be careful because that assessment could be a lot higher than what you're supposed to actually be paying. Okay. Uh and as far as like the the business personal property taxes go, uh that tax return isn't necessarily burdensome. Um so as long as you keep a good record of of your
Beating The SALT Cap With PTE Tax
SPEAKER_00fixed assets and um you know you can build out a good template. I know the clients that I do it for, we have a a really good template and it's kind of just plug and play every year, and we're probably talking, you know, a couple hours of of time. Okay.
SPEAKER_01Um and so something else changed uh in the last decade, too, I think, that want to ask you about. Uh it used to be all these local taxes you could fully deduct on your federal tax return, but you can't do that anymore, can you?
SPEAKER_00Nope. Um, well, so yes and no. Um, but for the most part, and for the purposes of our conversation, let's just say no. Um and so yeah, uh back in 2017 when the um tax law capped the the state and local deductions for $10,000 for individuals for itemized deductions. Um and then they really raised the standard deduction, that was that whole like we're gonna simplify the tax return. Um unfortunately, for people in high-tax states, it kind of killed your your itemized deductions, and uh you ended up paying more in taxes on the at the federal level.
SPEAKER_01Um Right, because between, you know, if you own a home, you've got, you know, probably have mortgage interest.
SPEAKER_00You've got more mortgage bills, donations, um medical expenses. You know, people used to always keep track of their their medical receipts, and now it it doesn't matter anymore. Um it really hurt that really hurt um as a little side note, but that really hurt um charitable organizations because people used to, you know, donate to their local church or local food pantry or you know, what whatever. And then all of a sudden the the tax deduction went away and it became a lot less enticing to want to uh donate to these organizations. Um so what the states did um to to answer this, because um a lot of people in high-tax states started moving out to lower tax states, um, is they passed the pass-through entity tax law. And every state calls it something different. Um but basically what it is, is it allows S-corps and partnerships to pay the individual state tax at the entity level. Um, and it gives the entity a deduction on the federal return, which reduces the taxpayers' pass-through income on the federal return. Um, and it becomes quite a nice deduction.
SPEAKER_01Yeah, I'm always a little bit confused about that, and I have to remind myself it exists sometimes. Um, but you know, it's a meaningful way around that ten thousand dollar federal deduction cap, right? Absolutely. Um I mean that shouldn't every business owner be talking to their CPA about it.
SPEAKER_00Yeah, just they're doing it. And and you have to be proactive about this one because some states require you to um make an election earlier in the year. So um New York and California, for example, New York makes you elect, make an election by March 15th of the year that you're in. So um, for example, if I wanted to take it for the 2026 tax year, I would have had to make an election by March 15th of um of this year. So if I got a client this today that says they don't do that election, um sorry, but we'll we'll get it next year. Um California, same thing. Theirs is June 15th. So and California makes you pay a certain amount in as well. Okay. So uh things to things to be talking to your CPA about. This is why um, you know, I've been on the show before, always saying like talk to your CPA um throughout the year. And if they're not around or they're not responsive, then might be time to talk to a new CPA. Um because you know, this is a massive deduction. It literally costs the business owner nothing. It's just, you know, whether money comes from a business account or a personal account, um, it's a it's a no-brainer. Okay.
SPEAKER_01So probably the biggest takeaway so far is make sure you're taking advantage of that, pass through any tax to the maximum extent you can be. Absolutely.
SPEAKER_00Um, like I said, the rules have changed over the last couple of years. Um, you know, they they raise the cap to forty thousand dollars, um, but then it phases out as people's income goes up. So some some business owners it might not be an issue anymore. Um, but you know, if you are a successful business owner, you know, chances are um this still applies to you.
SPEAKER_01Okay. Okay. Anything else you want to mention regarding the pass-through entity tax before we move on?
SPEAKER_00Uh other than uh if you own a pass-through entity, then it's in and you you don't know about this tax, it's something that you should probably be discussing with your CPA to see if it's something that you should at least look into. Okay.
SPEAKER_01And then I know you wanted to also talk about uh different kinds of withholding taxes and
Payroll Registration And Withholding Pitfalls
SPEAKER_01Financial gotchas there.
SPEAKER_00Yeah. Um, so another one that you know a lot of people get um get you know kind of stuck with. Um you know, you you get a new employee, um even a new contractor withholding taxes, not so much, but um you get a new employ employee in a new state. Now um you have to register for um payroll withholding, um potentially um unemployment. Um it it can create a lot of added complexities. Well, there's paid family leave taxes in some states, but not in others. Pfml. Um, you know, and I will fully admit that payroll taxes is not my my forte. I strongly encourage my clients to go use a payroll company that you know is well versed in this area of tax. Um, they know exactly how to get you registered, what um the states are looking for during the registration. These registrations tend to be um what I, or at least for me, they tend to be the most um complex. And so um, you know, definitely want to have someone in your corner that is uh well versed in getting you registered in these states. Now, if it's just one employee, um it might be a simple registration, but you know, if you have several employees, maybe things start to get a little bit more difficult. Um and like I said, um I would always encourage my clients to use a uh uh a third party that's well versed in in this.
SPEAKER_01Okay. And then um another kind of withholding that's not very I don't see it very often, but every now and then it pops up is backup withholding from vendors. You know, it's one of the questions on the form W9, and most people think, well, I just need to get a W9 so I can get the tax ID number from the vendor so I can send them a 1099 if I have to. But the other thing that happens on that form W9, though, is the vendor has to declare whether they are subject to backup withholding. And if they are subject to backup withholding, you might want to choose another vendor because now you're gonna be in the you know tax withholding and remittance business for that vendor.
SPEAKER_00Yeah, and and you know, you gotta you are liable for that. So um if the vendor is doesn't realize that they should have backup withholding and you don't do any backup withholding, um you could potentially be liable for any backup withholding um in the future, like if the state were to come back and um you know retroactively assess you. Um the problem with that is you know, normally when you do backup withholding and you know everything's in order, you owe your vendor a thousand dollars and you hold back three hundred, you know, typically it's like thirty percent or so. Um for for backup withholding, great. You know, you just take 300 and goes to one to the state, and 700 goes to your vendor. Um but unfortunately, if it's been it's been a while, maybe your vendor's not even in business anymore. Uh trying to go back to them, trying to get them to, you know, give you some money back is is unlikely. So um, you know, I've had a couple of clients get burned with this. Um, and you know, definitely something you want to be aware of.
SPEAKER_01And the backup withholding really kicks in when somebody's gotten in trouble with the IRS, right? And they've been delinquent in paying taxes and the IRS punishes you with this, right? Is that how it works?
SPEAKER_00Yeah. Um and the uh and uh typically if you're dealing with like a foreign company. Oh, yes. Yep. Um scenario, right? Yeah, that would be the other scenario. Um you also have a lot of states that um are gonna assess non-resident um owner withholding. So if you are a partner in a partnership and you know you're operating in multiple states, uh you know, say like Connecticut does this, I know, um, they will require you to require the business to withhold on behalf of the partner and pass that. Um, you know, the withholding passes through to the the partner, um, but there is a withholding requirement there.
SPEAKER_01You know, this whole uh discussion is kind of depressing.
Credits Year-End Checklist And Closing
SPEAKER_01Just want to run run a business, not uh you know, worry about all these different kinds of tax problems that can come up.
SPEAKER_00Yeah. Um, you know, state and local taxes is not super fun. It's it definitely gets the back burner. Uh, I think you know, the the federal government usually is the the in the limelight there. Um but you know, as long as you have a good team behind you that's thinking about this stuff, it shouldn't be anything that you have to worry about. Um state taxes is one of those things that if you stay ahead of it, it never really is that burdensome or becomes that much of a problem. Um it shouldn't cost you a ton of money if you stay ahead of it. Um, you know, sales taxes is collected and passed through and remitted. Uh withholding taxes typically aren't your um, you know, they typically come out of like what you owe a vendor. Um, you know, of course, income taxes, you know, that is similar to you know your your federal income taxes. Um but um you do get and I didn't mention this before, but a lot of people are afraid of uh of filing, you know, registering and filing in other states. They think they're gonna end up paying more tax. Um there is definitely a case to be made that you could pay more tax in um by filing in multiple states, but keep in mind that you get a credit for taxes paid um in other states in your home state. Um so just something to keep in mind. Uh states will not double tax you. Now, if you're you know in a low-tax state and you're selling into California, which is a high tax state, um that could be uh an issue. But for the most part, you know, you are gonna get uh credit, so you know you're not getting double taxed. It's just really more um administrative work that you might have to pay for.
SPEAKER_01Okay, great. Well, thank you, Greg, for all this uh good advice. Gotta stay out of trouble, even if it's not the most exciting thing to worry about. Yes, yes. Any parting comments?
SPEAKER_00Uh, you know, we're coming to the end of the year. This is a a great time to, you know, get with your your tax professional, your your tax preparer, and you know, talk about these topics. You know, should you be registering? Should you be filing? Um, you know, you don't want to find out during you know filing season that you're actually in, you know, several different states that you weren't aware of. And um, you know, now you're filing more tax returns, you have to do all these registrations. So now's the time to do it. Now's the time to take a look at this, make sure you do have that data available. Um, because like I said, you certainly don't want to be doing it during uh tax filing season.
SPEAKER_01Yeah, I mean by now we've got nine months of the year under our belts, so probably have pretty good data about Nexus um at this point in the year. Or at least you'd have a good heat map of where to keep an eye on. Right, right. Awesome. Well, thanks for coming on the show again, Greg. Of course. Thanks for having me. Another exciting, hopefully, somewhat, a little bit, somewhere in that conversation, a little bit of excitement uh on the Empowering Healthy Business Podcast. Until next time. Another episode in the books. Thank you so much for tuning in. For show notes and more, visit empoweringhealthy business.com. If you would like to have a one-on-one discussion with me or possibly engage smart books to help with your business, you can reach me at calc at empoweringhealthy business dot com or message me on LinkedIn where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for business owners, signing off.
