Guest Blog by Monika Miles, President of Miles Consulting Group
If your company is interested in services such as R&D tax credit assistance, IC-DISC and other tax credits and incentives, there’s a good chance you also might find yourself exposed to multi-state tax issues as well. Here are some of the top things to keep in mind from a multi-state tax perspective in 2017:
- Nexus: “Nexus” continues to be key in starting any multi-state tax discussion. Nexus refers to the sufficient connection that an entity must have with a state in order for the jurisdiction to be able to impose a tax, or in the case of sales tax, the requirement to collect the tax. “Substantial physical presence” as defined by the 1992 US Supreme Court’s ruling in Quill essentially said companies were required to have presence, in terms of people or property, in the state before the state could assert a sales tax collection responsibility. Currently, several states are aggressively passing legislation to challenge the concept of physical presence – requiring collection of sales tax when a certain minimum amount of sales are made in the state rather than a physical footprint (i.e. Alabama). We anticipate additional states to join that movement if Congress doesn’t take federal action within the near future. Click here for a Nexus Primer.
- On-line sales: Related to nexus and Quill, we wonder out loud whether 2017 will be the year that Congress finally makes some legislative decisions about the “online sales tax” debate. They’ve been contemplating legislation such as the Marketplace Fairness Act, the Online Sales Tax Simplification Act, and some related bills over the course of the last several years. Click here for our recent pros/con analysis of previously proposed legislation. With a new President and new Congress, what should we expect? Stay tuned. If something DOES get passed, it will affect most companies who engage in on-line sales.
- SaaS: Software as a Service, or “SaaS”, has become a mainstream way of business – both for the companies who provide it and their customers. The name itself, however, causes some understandable angst in the sales tax world. Are companies providing software (which may be taxable or not, depending on a variety of factors, including the method of access), or is it really a service? Many states have taken a position on its taxability as either the sale of tangible property or as a taxable service. New York, Texas and Massachusetts all come down on the taxable side, whereas California, Florida and Georgia do not tax the SaaS platform. But some states are still undecided. Here is some additional information about the treatment of SaaS companies. Stay tuned for additional information as this industry continues to develop.
- New Sales Tax Rates: As the calendar changes, often sales tax rates change as well! Most companies have some sort of automation in place or software to calculate their sales tax. But not everyone! Be mindful of changes – particularly in your company’s home jurisdiction.
- California: We’re partial to updates on the Golden State’s economic incentives, since our company is headquartered here.
- The “California Competes Tax Credit” is still available to businesses expanding within the state. The latest application period is open now through January 23rd. $100 million is available to be allocated to companies growing organically within California and/or expanding into the state from elsewhere. Twenty-five percent (25%) of the total for each application period is earmarked for small businesses. If your company is planning to add significant headcount or property within California in the upcoming year(s), consider applying for the program.
- Beginning in July 2014, California allows a partial exemption for sales tax on the cost of certain qualified manufacturing and research and development equipment placed into service by qualifying taxpayers. Since that date, the exemption amount has been 4.1875%, but recently changed to 3.9375% as of 1/1/17. For those of you in other states and used to a full exemption, note that this is still just a partial exemption on the purchase of qualified machinery and equipment.
There are certainly many other issues facing multi-state taxpayers, but these are a few items we are watching in 2017. Feel free to visit our weekly blog to keep in touch.
Monika Miles is President of Miles Consulting Group, a firm specializing in multi-state tax consulting for middle market businesses. Clients include technology, manufacturing, software and SaaS based companies doing businesses across state lines. Miles Consulting Group assists them in determining the sales tax and income tax ramifications of creating a taxable presence in a state and how to address these issues with the various states. When she’s not assisting clients with multi-state tax issues, she passionately shares rainmaking strategies with other professional services firms. Click here to visit her webpage.