Doing Business in a New State? Watch out for Trap Doors

Posted By Joseph Gaudio, CPA

Tax Traps - Delaware CPA FirmGenerally the CPA’s relationship with a new client begins due to a need for tax return preparation, financial statement preparation or both. Often, as business thrives and client needs expand, the CPA becomes involved with consulting and providing guidance on significant business decisions. This is the best part of our job, in my opinion. It’s gratifying to watch our clients grow and thrive. It’s especially rewarding when we see a recommendation improve an internal process or save some money. Often, when providing services, the following Q&A unfolds:

Joe, CPABill, revenue is up 10% this year. What factors are driving this increase?

Bill, Client CFOYes, we are having a great year. Sales are up mainly because of this new account that Jim, our sales manager, landed. They’re a little farther away from our headquarters in Wilmington. The new customer is in South Jersey.

Joe, CPA – (This sends the red flags flying in our minds). Congratulations on the new business, Bill, but we need to discuss that you now have nexus in New Jersey.

Bill, Client CFOWhat does this mean for my business?

Bill asks a great question. I wish I had a simple answer. Unfortunately, as is the case with many areas of tax law, the answer depends on a variety of factors. To even begin advising, we try to provide our clients first with some general information, and second, a starting list of questions that we need answered to identify problems, evaluate possible solutions, and provide recommendations.

General Information

Nexus simply means you have a presence and are conducting business in a state other than your home state and because of this, the new state wants to tax you. You are exposed to potential income, business, franchise, and sales/use taxes and may have new tax return filing requirements. The amount of your tax exposure generally increases based on the volume of revenue, payroll, and/or property in the new state. In addition, you may have to fill out some forms. Many states require Certificates of Authority to do business or other governing documents that need to be filed with the state.

Client Questions

  • What are your sales in the new state? Are goods shipped to the customer with your trucks or a common carrier? Each state has a different definition of “sales” sourced in its state.
  • Are your trucks crossing any other state lines? In our industry, we’ve heard a few horror stories of clients receiving Department of Revenue notices simply because one of their trucks spent some time on a freeway outside their home state.
  • Do you have an office or location where you conduct business in the new state? If so, how many people work there and what are their salaries?
  • Do you own or lease any other property that resides in the new state?
  • Do any of your employees actively solicit customers in the new state?

Bottom line, there are 50 states (even more townships and municipalities), and they all have different rules, but CPAs know how to find the answers.

If you are doing business outside of your home state, consult your tax advisor to verify you are complying with tax filing requirements in that jurisdiction.

Photo by, anyjazz65 (License)

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