You already know Uncle Sam wants his cut. Unfortunately, he’s not the only one with his hand out. Depending on where you operate, sell, and hire, your business could have state tax obligations – even if you’ve never actually been there.
One business, multiple tax bills
Federal income tax gets all the attention, but don’t let it overshadow the state taxes your business might have to deal with.
- Income taxes: A cut of your business income, depending on the state.
- Corporate income taxes: Same idea, but specifically for corporations and their profits
- Franchise taxes: No, you don’t have to own a McDonald’s. Some states charge regular businesses simply for the privilege of doing business there.
- Sales and use taxes: Sales tax is usually collected from your customers. If it isn’t charged on a taxable purchase, use tax may come knocking later.
- Payroll taxes: Having employees may mean you’re responsible for withholding state income tax and paying unemployment taxes.
- Local taxes: Cities and counties want their cut, too.
And just to keep you on your toes, there’s no universal state tax checklist. Different states play by different rules. What you’re required to pay varies widely based on state, activities, employees, and business structure.
If your business crossed state lines, your taxes may follow
You don’t have to pack up your business and move to another state to pick up a tax obligation. Sometimes, your sales do the traveling for you.
For years, the line in the sand was having a physical presence in the state. But then online shopping entered the picture and made things even more complicated. And one little word started causing a whole lot of headaches: nexus. Your business may have it in more places than you think.
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Nexus is essentially the connection between your business and a state that can give the state the right to impose certain taxes. These days, that connection doesn’t necessarily require you to physically be there.
In 2018, the Supreme Court’s South Dakota v. Wayfair decision changed the game. It opened the door for states to require certain out-of-state-sellers to collect sales tax based on their economic activity there, even without a physical presence.
Of course, every state likes to keep things interesting, so the rules and thresholds aren’t the same everywhere. And if you have a remote employee working in another state? Congrats, your business may have picked up another state obligation without opening a single new office.
Don’t get attached to sales tax
If you’re required to collect sales tax, don’t get too comfortable with it. You’re basically the middleman. You collect it from customers, hang onto it, and then send it where it belongs. And the states definitely want it back.
When and how often you have to hand it over depends on the state. And if parting with that money is hard, missing the deadline is worse – now you could be paying penalties and interest out of your own pocket. In some states and circumstances, whoever is responsible for collecting and remitting sales tax can even be held personally liable.
So, collect the money. Just don’t spend it.
State taxes play by their own rules
When it comes to consequences, each state gets to decide how painful falling behind is going to be. Penalties and interest vary, but states also have their own collection tools. Depending on where you do business, missing a critical deadline could mean liens, levies, garnishments, or problems with certain business licenses.
Take South Carolina, for example. The state can file tax liens and use levies to collect unpaid taxes. If that’s not enough motivation for you, the South Carolina Department of Revenue can revoke licenses it issues, including Retail Licenses and Alcohol Beverage Licenses. Forcing a business to stop operating is one way to get its attention.
And unfortunately, paying one tax collector doesn’t stop the other. State and federal tax obligations are separate, so you’ll have to make things right with both.
You don’t need to memorize state business tax requirements for all 50 states. You do need to know which ones apply to your business. Know where you operate, where your employees work, and where your customers are located, then check the rules in those states. And if you’re not sure what applies to you, call in a tax pro. With 50 states making their own rules, there’s plenty of room to make an expensive mistake.
