Year-end tax guide: State and local taxes

2015 Year-end tax guideAs if your federal income, employment and investment tax burdens aren’t bad enough, state and local governments impose an even more byzantine collection of tax regimes on businesses and individuals.

Because each state and locality can employ its own set of rules, most individuals and companies that do business in multiple states find their state and local compliance burdens more onerous than their federal requirements. In fact, surveys by Grant Thornton have consistently found that an overwhelming majority of financial executives consider their state and local tax compliance responsibilities equally or more demanding than their federal tax responsibilities.

Most states employ some combination of property taxes, sales and use taxes, individual income taxes, and corporate or business income taxes. See our table to find out which states give you a break on one or more of the taxes. Local governments are more likely to impose property and sales taxes, but some localities also use income taxes to raise revenue.

States that do not impose a state-level sales, individual or corporate income tax
(click to view chart)

Q: Does sales tax typically apply to rentals and leases?
Yes, nearly all sales and use taxes have provisions that apply the tax to rentals and leases of goods that would be taxed if bought.

Q: Are pass-through businesses ever subject to entity-level state and local income tax?
In contrast to the federal income tax regime, a few states and local jurisdictions subject the apportioned income from pass-through businesses to entity-level tax.

Q: When do I have to collect sales tax on a sale?
The rules are complex and may depend on whether your business has a physical presence in the state, and how sales to customers in the state are actually made. 

Sales taxes
As a consumer, you typically pay sales tax where you make a purchase, but most states also require you to pay a use tax for goods purchased out  of state and then used in-state, such as mail order or Internet purchases. The rules are complex and evolving, but generally states cannot impose a sales tax on a purchase over the phone or online unless the seller has a physical business presence in your state or an association with an in-state individual or business. That’s why some Internet vendors charge sales tax on your purchases, while others don’t.

Planning tip: Make sure you’re not overpaying on exempted purchases
Many states and localities offer exemptions from sales and use taxes for certain items, such as machinery and equipment or property bought for further manufacture or resale. If you or your business makes frequent or large purchases that result in significant sales and use tax, consider performing a sales and use tax “reverse audit.” (click for definition)

Income taxes
Income tax rates and rules on businesses and individuals vary greatly by state. Most states with income taxes will impose taxes on all of your income if you or your business is a resident, but offer a credit for taxes imposed by other states for business done. Most states will also impose corporate taxes on corporations doing business in their state and, in some cases, on pass-through entities. Many states impose individual income taxes for nonresidents working in the state, though some have reciprocity agreements with nearby states. States generally have apportionment rules for apportioning income among states.

How much you ultimately have to pay will depend largely on what kind of work you do, where it is performed, and where you and your business are domiciled. There are many important tax planning considerations, and you should talk to a tax professional if you do business in more than one state. You will want to explore your opportunities for filing methodologies, apportionment and the state of organization.

Property taxes
Property taxes can be a significant cost for both individuals and businesses, especially in states without an income or sales tax or in states with high property values. Property taxes on real estate are one of the biggest expenses for investors and businesses with a large physical footprint. Taxes can often be based on a valuation by a state or local assessor who performed only a cursory review of nearby or similarly sized sites, leaving room for a challenge. In addition to real property taxes, some states also impose personal property taxes.

Planning tip: Property tax assessment analysis
Many taxpayers don't understand that they have a right to challenge the valuation a state or local government places on their property in order to assess tax. An analysis can often reveal that the state or local government has vastly overestimated the value of a property by failing to understand its condition or construction, or how it compares to others in nearby locations. If you haven't had a recent property tax review, consider researching local market data and your jurisdiction’s assessment records. You may be able to develop an argument for a reduction in valuation if you can document why a lesser valuation is appropriate and present this argument in front of a property tax assessor.

Business perspective: Leveraging your way to credits and incentives
Federal, state and local governments want your business. They are often willing to provide subsidies to motivate you to invest capital, create jobs and, in certain cases, retain jobs in their jurisdictions. New credits and incentives are voted into law frequently, and keeping track of every tax law change is difficult for busy, multitasking tax department personnel. There may be little time to strategize or anticipate and take advantage of credits and incentives opportunities.

Don’t leave money on the table. There are a couple of different opportunities your business should consider for turning local credits and incentives into cash in hand:

  • Tax credit review — With the constantly changing rules and evolving state legislation, it’s hard to know if you’re taking advantage of every credit to which you’re entitled. In a tax credit review, a team of professionals thoroughly and meticulously reviews  your business activities and filings to identify any credits or incentives you missed the first time around. This can often turn up significant refunds.  
  • Negotiated incentive services — You don’t have to settle for what’s already on the books. Depending on the size of your businesses, states and local governments may actively compete to attract or retain your business with specific credit or incentive offers. It is important to have highly experienced negotiators work on your behalf to ensure the offers you receive are as strong as possible.

Jamie Yesnowitz
T +1 202 521 1504

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