The Multi-State Business

So a person decided to start a new business, and incorporated the business, of course to protect his personal assets, and perhaps decide to expand from his local city/town to other cities and/or towns, even start crossing state lines, and thus operate the incorporated business in different states.  Well, as mentioned here before, a state can constitutionally tax an individual and/or an entity so, long there is:

 

  • Substantial nexus – or in other words there is significant contact with a given state (e.g., incorporating and/or register a business in a given state);
  • The tax is fairly apportioned;
  • The tax does not discriminate against interstate commerce; and
  • There is a fair and/or reasonable relationship between the services provided by the state and the tax imposed.

 

In terms of how a state can fairly apportioned its income tax on a taxable entity (e.g. a corporation), there are some methods that a given state might look at, in order to fairly apportion its given income tax.  The first method is the traditional “3-factor method” of apportionment, which is to look at first where the corporation and/or receive its sales, basically where sales earned within or outside a given state.   The second factor in this “3-factor method” of apportionment” is where the corporation’s fixed assets and/or property, and we are not just referring to real estate but its furniture, machinery, equipment, leased/rented property, and/or any other depreciable asset.  The third and final factor in this “3-factor method” of apportionment is where the corporation’s employees (including its corporate officers) are located.  Once these factors are determined then what result is an “apportionment percentage”, and some states give more “weight” to the sales factor (i.e. a “double weight”) to this “apportionment percentage”, California had its “3-factor method” of apportionment “double-weighted” towards the sales factor.

This “3-factor method” of apportionment was used mainly, because most business on our past were mostly involved in manufacturing, rather than sales and/or services today, and since our nation’s economy is more sales/services oriented, many states (including California) are dropping this “3-factor method” of apportionment, and moving towards that their “apportionment formulae” to reflection only and exclusive a where a corporation’s sales are coming from, which is the “single-sales factor”  method.   For 2014, approximately 19 states (including California) use the “single-sales factor” method on its “apportioned formula”.

If you are setting up a new business and/or planning to expand your business, and you want to operate your business across state lines, please let us know at info@kayatax.com, and will check on the various states to see what their “apportionment formula” is and see how it benefit and/or burdens your business, on a tax perspective.