Filing State Taxes for Out-of-Staters
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As you may have noticed, the country is facing budget crunches on all sides. The feds are billions of dollars in the hole, while states are cutting jobs, holding up refunds, and struggling to stay solvent. No one wants to raise taxes, but the money must come from somewhere.
What’s the easiest way to generate money without raising taxes? Find more ways of collecting taxes. For states, that means cashing in on the earnings of out-of-staters who are filing taxes—those folks who only work in the state temporarily or those who have a shadow of a presence.
How are the states doing this? Three ways: one tax for individuals, one for businesses, and one for both individuals and businesses.
Three state taxes you may need to know:
1) The Jock Tax. States started taxing athletes, performers, and others who work in their states for a few days. After all, these individuals often earn as much in a day or two as you or I earn in a year.
States have graduated to taxing ordinary mortals for working there for a few months. New York even established a precedent by taxing individuals who don’t work in the state or are not filing taxes. Yup! Thomas Huckaby worked for a New York corporation from his home in Tennessee. New York assessed income taxes against him—and won.
Why did New York win, even on appeal? Because Huckaby was working from his home in Tennessee for his own convenience and not for his employer’s benefit. Even the IRS takes that into account when looking at the office in home deduction for employees. You cannot use that tax benefit unless you are working at home for your employer’s convenience.
Another problem that arises: people who are moved to another state by an employer. When those people get their W-2s, there’s no withholding for the new state. It’s the individual’s responsibility to alert his or her payroll department that the state withholding needs to be changed. Who else will?
2) The Use Tax. Odds are, you do some of your shopping online. Many Internet-based stores don’t charge sales taxes in your state. Your state knows that. States are either adding a use tax line to your income tax forms or are requiring that you file a use tax return to report major purchases. You have two ways to report your purchases—either keeping track of the big purchases (computers, appliances, and so on) or by using the tables your state provides.
When you track your untaxed purchases, keep tabs on the downloadables vs. the physical goods. Downloadables are usually not subject to sales taxes in most states.
3) Sales taxes. This issue mostly affects businesses, not individuals. The question of state taxes has always been a major one with mail order houses located in one state that sell and ship to another state. You had to be pretty big—think Amazon.com—to get the attention of a state government. Today, even home-based operators can ship hundreds of thousands of dollars of merchandise into a state—think eBay sellers.
Several states require you to collect and pay sales taxes if you have nexus in the state. Nexus means any kind of physical presence. Having affiliates or sales agents may be enough for you to have nexus in a state.
Consult with your tax pro to determine how to restructure your marketing model to protect yourself from complex multi-state taxation. After all, registering for sales taxes also means registering for income taxes in that state.
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Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.
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