More than ever, businesses are finding clients or customers in multiple states or having employees who live in multiple states. What this means for taxes can be very confusing for a small business owner.
When you operate a business in multiple states you need to learn some information about operating in the new state to know what the tax impact may be to you and your business. You will need to do some research and it is recommended to consult with an attorney and a tax professional to learn the state laws and rules regarding:
- Registering your business
- Business taxes and fees
- Sales tax
- Income tax
No two states have identical rules. As soon as you begin operating or employing workers in more than one state, your business operations will potentially become more complex.
This topic can be overwhelming especially at first. This guide can help you know what questions to ask and begin to determine how operating in multiple states can impact your business. You may need to revisit these topics several times. Be assured that operating in multiple states is possible, many do it, and if you pace yourself you can accomplish this goal.
Doing business in another state usually means registering as a “foreign” (out of state) business entity, as opposed to a “domestic” (original state) entity. Or you may potentially create a new business entity in the new state if the operations are substantially different and stand on their own as a separate business.
You may not need to register the moment you get one new client or have a few transactions in another state, depending on that states rules, but if you are planning to operate, advertise, and conduct regular business in a state then registering may be required.
Where and how to register
Registering a business is typically done via completing forms on the Secretary of State website. If the forms are complicated, seek assistance from an attorney. LLC formation is typically straight forward, though some states make it complicated. It is a good idea to use an attorney to form your LLC Operating Agreement, even if there is one owner. Forming a Corporation almost always requires the assistance of an attorney because it involves creating legal documents. Be wary of online services that are not attorneys, they could be practicing law without a license, or that are national and may not know your state specific rules.
Form of business
States can have varying laws regarding what business structure or formation is permitted for different business types. For example, California does not permit licensed professionals to operate under an LLC, so an LLC from another state may not be able to operate in California. Certain licensed professionals in PA would operate a regular LLC, but in NY would need to open a PLLC. Before operating in a new state, ensure you understand that states rules about the types of businesses structures that are allowed.
Most small businesses do not pay income tax at the business level, as most are pass through business entities. Sole proprietors, LLCs and entities taxes as an S-Corp are all pass through entities, meaning the income of the business passes through to the owner and is taxed at the owners tax rate. However, there can be taxes and fees owed by the business itself for operating a business in a state.
Gross revenue tax
A gross revenue tax (GRT) is tax on business gross income, meaning before expenses are deducted. Washington State has a Business and Occupational Tax (B&O tax) which taxes a small percent (for most businesses between 0.5%-1.5%) of the gross income from the business. Ohio State has a Commercial Activity Tax (CAT) for the privilege of doing business in Ohio. Businesses with gross receipts of $150,000 per calendar year or more must register for the CAT and out of state businesses who meet certain criteria and have a “bright-line presence” in Ohio, may have to pay the tax as well. See FAQ #7 on this page for more details.
Business license fees
Whether your business needs to obtain a business license or pay business fees is typically determined by your physical business location. Business license requirements can be created by a state, county or local government. Wherever your business operates or has employees it is wise to check the state, county and city/town for any business license requirements. You can search online for the state, county and city/town and “business license” as well as contact the local government offices and consult with an attorney to ensure you have covered this potential requirement.
If you sell products, you very likely need to collect and pay sales tax for the state/local area of the purchasers address or to your own state. Most businesses that sell products need to register with the sales tax authority as a seller.
Each state defines for themselves what type of sales require collecting and remitting sales tax. Most often these definitions will include tangible products or certain types of products. For example, some states charge sales tax on all products but others may not tax certain types of clothing and food that are considered necessities. Some states subject certain services to sales tax as well.
Every state has their own definition of use tax, and it’s important to confirm for the states your business is operating in. Use tax may be charged where sales tax was not collected from the purchaser. Use tax can also apply to purchases made out of state or where a purchase would not have originally been taxable but is used in a way that makes it taxable.
If you produce or sell products internationally, you may be subject to other countries tax including value added tax. A value added tax is a consumption tax assessed on products as they go through the supply chain.
Sales tax is incredibly complicated. Always consult professionals if you suspect you owe sales tax or to confirm you do not.
Local sales tax
Most sales tax is collected at the state level. However, local governments can collect sales tax in some places. For example, in Colorado a county can set up its own sales and use tax and if you sell to someone in that county, you are required to collect and remit the appropriate tax.
States without sales tax
There are 5 states that do not collect sales tax. They can be remembered by the acronym NOMAD: New Hampshire, Oregon, Montana, Alaska, Delaware.
If you are selling online, consider using a service or platform that assist with computing, collecting and remitting sales tax such as:
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