State Income Taxes
State income taxes may be owed in more cases than companies realize. A survey by Bloomberg BNA found that 26 of the 50 US states believe a company has a sufficient “nexus” — or link to the state — to subject it to income taxes if the company leases space on a computer server in the state. Thirty-six states believe there is a sufficient nexus to tax if the company has an employee who works from home in the state and telecommutes.
Once a company has a sufficient nexus to tax, then the tax is on the share on the company’s income that is considered to have been earned in the state. Such income has a “source” in the state. Most states use some variation of a three-factor formula to allocate the company’s total income partly to the state by weighing the share of the company’s total payroll, property and sales in the state. However, some states provide different weighting to the factors and some have moved to use of just one of the factors.
Foreign companies doing business in the US are most likely to run into problems. Most foreign companies are familiar with the federal tax system but less familiar with state taxes. They may run up significant liabilities before they realize they owe money. Foreign companies are usually not subject to regular income taxes at the federal level unless their activities are regular enough to create a “permanent establishment.” Most states do not use the same concept. They look for a “nexus,” which can be created with a much smaller level of activity.