When considering expanding a business into multiple states, there are a lot of outcomes to forecast and decisions to make. Tax reporting probably isn’t the first thing that comes to mind, but something that is important, nonetheless to be sure you are covering your costs for this growth.
Although tax laws differ by state, most states require three different types of tax reports in any state you are doing business in. Here we review the three types of reporting a multi-state business needs to file to keep everything running smoothly.
When initially starting to conduct business in a new state, registering the business gives you the authority to do business in the state and allows the state laws to cover you appropriately for liability and related issues, should they come up. Registration will initiate the company’s state tax number or numbers, which are typically required to file state annual reports, state income tax returns, and state sales tax returns. In the years following the initial registration, an annual report or a bi-annual report that updates your business’s status must be filed. Many states charge a fee based on the business capital noted in this report. If for any reason this report isn’t filed, the business can lose its ability to be protected by state laws. It’s best to always register in each state as the business expands so business can proceed without difficulty.
When a business is registered in a new state, sales tax must be filed. It’s a common misconception to think that if the business’s products or services aren’t taxable, then this sales tax reporting isn’t required. However, a sales tax report must be filed regardless, to ensure compliance.
For taxable products and services, tax must be collected from the customers at the point of the sale and then paid to the state the transaction took place in at the time of the sales tax return’s filing. If no sales tax is collected at the point of sale for a taxable product or service, the business is still required to pay the taxes it didn’t collect, which can put a large ding on the company’s income. In addition, the business may have to pay interest on that unpaid tax, which can add up quickly.
Last, if the business’s clients are other businesses, there’s a chance that the clients will also be penalized for not paying sales tax if they undergo an audit. So what seems like a harmless oversight sets a lot of tax challenges into motion. By managing sales tax and reporting properly in multiple states, the thought of being audited won’t be an area of concern.
Your business accounting and state sales tax reporting is always best left to a CPA experienced in multi-state tax who can point out sales tax issues to avoid problems in case of an audit.
There are currently only six states that do not have a state income tax. For the rest of the states, however, income tax reporting is a requirement. When setting income tax requirements, states generally start with the Federal net income and then adds adjustments based on its own formulas.
Unfortunately, that means that each state charges more or less taxes based on various factors. Since the rules are completely different for each state, it gets complicated to do taxes, because not only does each state have its own rules, but those rules change year by year. It’s always best to work with accountants for small to medium-sized businesses who are experienced in working with multiple states so you don’t have to worry about keeping track of each state’s rules and updates.
Proper tax reporting in each state helps a business avoid tax mistakes and costly tax woes, including penalties. It’s best to work with a small-business CPA who understands small business multi-state accounting. They’ll know about amnesty periods in each state and can advise you on the best course of action to handle any disputes.
There are a lot of moving parts when it comes to doing business in multiple states. Just like you are an expert at running your business and providing your clients and customers products or services to solve their problems, it’s advantageous to find a CPA who specializes in multi-state accounting to keep your business running smoothly.
Contact our Accounting Advisors at Tolbert CPA here to learn more about all your multi-state tax and accounting needs.