Growing your business is exciting, but expansion often brings state tax obligations many business owners never see coming. Hiring a remote employee, opening a new sales territory, selling products online, storing inventory in another state, or acquiring another company may seem like operational decisions, not tax decisions.
However, each of these actions can create state tax filing requirements that, if overlooked, could lead to audits, penalties, and unexpected costs.
In the latest episode of Ask a DHJJ CPA, host Emma Yurchik sits down with Alexander Rivas, Senior Tax Manager in DHJJ’s State and Local Tax (SALT) practice, to discuss how businesses create state tax exposure and what they can do to stay ahead of compliance issues before they become expensive problems.
What This Episode Answers
This episode answers common questions business owners ask as they grow, including:
- What is state tax nexus?
- Can hiring one remote employee create state tax obligations?
- Does selling online mean I owe taxes in another state?
- Does Amazon collecting sales tax eliminate my responsibilities?
- Can storing inventory in another state create tax exposure?
- How do mergers and acquisitions impact state tax liabilities?
- When should businesses perform a nexus review?
- How often should companies review their state tax footprint?
Episode Summary
State tax issues rarely begin with tax planning; they often begin with everyday business decisions. As companies expand into new markets, hire employees across state lines, increase online sales, or pursue acquisitions, they may unknowingly establish the connection, or “nexus,” that allows a state to impose tax obligations.
Alexander explains that nexus is no longer limited to having an office or warehouse in a state. Today, businesses can create tax obligations through economic activity alone, such as exceeding certain sales thresholds, or through physical presence created by employees, contractors, inventory, or even temporary business activities.
Throughout the conversation, Emma and Alexander discuss the most common scenarios that create unexpected state tax exposure, how businesses can proactively monitor their risk, and why involving a SALT advisor early can help avoid audits, penalties, and complications during future transactions.
Main Takeaways
1. State Tax Issues Often Begin With Business Growth
Many business owners assume state tax only applies where their headquarters are located. In reality, expansion often creates new filing obligations before companies realize it.
Opening new markets, increasing online sales, hiring employees in other states, or acquiring another company can all create new state tax responsibilities.
The earlier these risks are identified, the easier and less expensive they are to address.
2. Nexus Is More Than Physical Presence
One of the biggest misconceptions surrounding state tax is that businesses only owe taxes where they have an office or facility.
Alexander explains there are two primary ways businesses create nexus:
- Physical nexus, such as employees, offices, warehouses, inventory, contractors, or equipment located in a state.
- Economic nexus, which is based on the amount of business conducted within a state, even if the company has no physical presence there.
Because every state establishes its own rules and thresholds, businesses operating across multiple states should regularly evaluate where they may have created nexus.
3. Remote Employees Can Trigger Tax Obligations
Hiring remote employees has become common, but many employers don’t realize that a single employee working from another state may establish physical presence.
That employee may create filing obligations for income tax, payroll tax, or other state taxes, even if the company has no office or customers located there.
Before hiring in a new state, businesses should evaluate the potential tax impact alongside their hiring decisions.
4. Online Businesses Aren’t Immune From State Taxes
E-commerce has made it easier than ever to sell nationwide, but it has also increased state tax complexity.
Many states now enforce economic nexus rules based on revenue or transaction thresholds.
Businesses selling through platforms like Shopify or Amazon should regularly monitor:
- Revenue by state
- Economic nexus thresholds
- Inventory locations
- Marketplace facilitator responsibilities
Even if a marketplace collects and remits sales tax, other filing obligations, such as income tax or franchise taxes, may still exist.
5. Third-Party Warehouses Can Create Physical Presence
Many businesses assume inventory stored by Amazon or another fulfillment provider isn’t their responsibility.
However, inventory stored in another state may establish physical nexus, depending on that state’s laws.
Companies should periodically review where their inventory is located and understand how those locations affect their filing requirements.
6. State Tax Due Diligence Matters During Acquisitions
State tax issues often become visible during mergers and acquisitions.
If a buyer discovers unpaid state tax obligations during due diligence, those liabilities, including penalties and interest, can affect the purchase price or even transfer to the acquiring company under successor liability rules.
Alexander discusses strategies such as voluntary disclosure agreements (VDAs) that may help businesses resolve historical exposure before a transaction occurs.
7. Temporary Activities Can Still Create Tax Exposure
State tax obligations aren’t limited to permanent expansion.
Businesses should also monitor activities like:
- Trade shows
- Temporary employees
- Independent contractors
- Traveling sales representatives
- Equipment rentals
- Board meetings held in other states
Even short-term physical presence can create filing requirements depending on the state’s rules.
8. Proactive Planning Is Less Expensive Than Reactive Cleanup
Perhaps the biggest takeaway from the episode is that state tax planning should happen before expansion, not after receiving an audit notice.
Alexander recommends reviewing a company’s state tax footprint at least annually, and more frequently during periods of rapid growth.
Understanding where your business operates, where employees are located, where inventory is stored, and where revenue is growing can help identify issues before they become costly problems.
Frequently Asked Questions
What is state tax nexus?
State tax nexus is the connection between a business and a state that allows the state to impose tax obligations. Nexus may be created through physical presence, employees, inventory, contractors, or economic activity.
Can one remote employee create state tax obligations?
Yes. In many states, a single employee working remotely can establish physical presence and create filing requirements for the employer.
What is economic nexus?
Economic nexus is created when a business exceeds a state’s sales or revenue thresholds, even if it has no physical location there.
Does Amazon collecting sales tax eliminate my tax responsibilities?
Not necessarily. While Amazon may collect and remit sales tax in many situations, businesses may still have income tax, franchise tax, or other filing obligations depending on their activities.
Can inventory stored in another state create nexus?
Yes. Inventory stored in warehouses, including third-party fulfillment centers, may establish physical presence under certain state laws.
How often should businesses review their state tax footprint?
Alexander recommends reviewing your state tax footprint at least once each year. Companies experiencing rapid growth or expansion into new states may benefit from more frequent reviews.
Why is state tax due diligence important during an acquisition?
Undiscovered state tax liabilities can reduce a company’s value, delay transactions, or transfer financial responsibility to the buyer. Addressing these issues before a sale helps reduce risk for both parties.
When should I involve a SALT advisor?
The best time is before making expansion decisions, not after. Consulting a SALT advisor before hiring in a new state, expanding operations, increasing online sales, or pursuing an acquisition can help identify potential obligations early and avoid costly surprises.
Final Thoughts
Business growth creates opportunity, but it can also create state tax obligations that aren’t always obvious. Understanding how hiring decisions, e-commerce, inventory management, expansion, and acquisitions affect your state tax footprint allows you to make informed decisions before problems arise.
If your business is growing across state lines, a proactive nexus review can help you identify potential risks, stay compliant, and focus on growth with confidence.
Transcript
Emma
Welcome back to Ask a DHJJ CPA, the podcast where real CPAs answer real questions from business owners.
I’m your host, Emma Yurchik.
Today, we’re talking about how everyday business decisions like hiring remote employees, expanding into new states, or selling online can create unexpected state tax obligations.
Joining me today is Alexander Rivas, senior tax manager in the DHJJ’s state and local tax practice.
Alexander specializes in helping businesses navigate complex multi-state tax issues, working with companies that operate across state lines, and helping them stay ahead of changing tax requirements as they grow.
Before we jump into today’s topic, could you tell our listeners a little bit about your background and what drew you to specialize in state and local tax?
Alexander
Yeah, absolutely. And thank you for the introduction. So, I started about 7 or 8 years ago in taxation.
I jumped into this field of state and local taxation specifically because I liked how much variety there was.
So, when you’re dealing with the United States of America, and you’re dealing with so many different states, you’re going to have so many rules.
And there’s something that I enjoy about finding different rules and putting them together, and it’s something I was very good at.
And I very much enjoyed the experience.
Emma
Absolutely. Well, again, thank you so much for joining us, and I’m excited to jump into this topic.
So, one of the things that surprised me while I was preparing for this episode is that many state tax issues don’t begin with a tax decision at all. They begin with the everyday business decisions.
Why does growth often create state tax complexity?
Alexander
That’s true. And probably the most common reason I get called in is because someone gets identified by a state for an issue. A lot of people, when they’re expanding, just going back to earlier, there are so many different rules, you really don’t know which ones you’re going to touch.
Part of the reason why growing your business can expand to state issues is because a state can reach you so long as they have what they call nexus, which is the minimum connection that a state needs for them to tax you.
And there are so many different ways that you can meet nexus. A lot of people aren’t familiar with those ways, so what often happens is that as you expand into another state, you are likely to trigger one of these, the state notices, and now you have state tax issues.
Emma
So, when you mention nexus and state tax issues, I imagine this goes beyond just where a business owner is located. I feel like that’s potentially a common misconception: it’s the connection with the state- that is more than just their headquarters.
Alexander
Yeah, absolutely. It’s a lot more than just where you’re located. That refers to physical presence, which is the previous way in which a state would determine that you had nexus.
So, do you have people in the state? Do you have a warehouse in the state?
But a far more common and more scrutinized way to determine nexus is what’s called economic nexus. And it works differently depending on what type of tax you’re talking about.
So, if you’re talking about sales tax or you’re talking about income tax, there might be some different features.
But in the high-level way to look at it, if you have a sufficient amount of economic activity- let’s say $100,000 of sales in a state- a state can now say, even if you have no people, if you have no warehouses, that you can technically meet the requirements to be taxed.
And a lot of people might not know that, so it can trip them up if they’re just used to only looking at the states where they have physical presence.
Emma
Got it. That makes sense. You know, as we jump into this topic, I want to start with maybe one of the most common situations, which is remote employees. So, if a company hires someone who lives in another state, what tax issues could that create?
Alexander
I see it all the time. Remote employees are very common nowadays. It’s a very effective way to get skilled labor into your workforce.
But a lot of people don’t realize that one of the elements of physical presence is where your employees are located. That also includes independent contractors working on behalf of your company and employees who travel.
So, let’s say you have a remote employee, and let’s say they do travel for the work; well, they’re still considered an employee of that state at that time, and they’re representing your company.
So, if a state were to find out that you have a remote employee, or let’s say you’re about to go hire in a state where you have activity, well, now you’ve created that physical presence that the state can use to argue that you have taxable presence.
Emma
So, what should employers do before hiring someone in a new state?
Alexander
I always recommend that you review your risk profile, right? If it’s a state in which there is a significant tax rate and the only thing keeping you out of that state is the fact that you don’t have physical presence- let’s say your economic nexus isn’t quite there yet, but it would be a burden for you to file in that state doing a risk review is always a good idea.
It’s often called a nexus review, which is when you look through all your states and determine what the risk profile is, what the chances are that you are at risk for being audited or for being required to file taxes, and then how significant it would be. That’ll help you make a better decision on whether you want to create a bigger presence in that state with physical presence, such as hiring an employee.
Emma
Okay. Does it matter if it’s just one employee?
Alexander
No, it doesn’t. In fact, it doesn’t even matter if you’re not doing business in the state in terms of activity. As long as you have an employee at some point throughout the year with a temporary job, it would count as physical presence.
Emma
Employees are just one piece of this puzzle. Another common growth milestone is expanding into new markets. So, let’s say a business decides to start serving customers in another state. Maybe they open a sales territory or begin doing more work there. What should they be thinking about before expanding into that state?
Alexander
There are a couple of important things to think about. One is, depending on what type of business you’re doing.
So, there’s something called Public Law 86-272. It’s commonly referred to as just a commerce law, and what it effectively does is it protects your business from the imposition of income tax, and it’s very specific in that it’s only income tax from another state so long as the only business you’re doing in that state is the solicitation of tangible personal property.
So now why that matters is, let’s say you’re a business that sells parts, or you sell some type of property, and the only thing you do is ship into the state. You have no employees, and you don’t enter the state at all. That’s going to inform your decision on whether you want to do anything else in the state. Because the moment you hire somebody, the moment you start offering services in that state, that protection gets eliminated.
And now for income tax, you may have been protected previously, but you’re not protected now, and a lot of people aren’t familiar with that. So it’s a really important decision to make if you’re not in the service field.
But another one, going back to the physical presence, is how much physical presence do you actually have in that state? Are you flying into that state? Are you physically setting foot in that state?
These decisions will matter if the state ever does find out.
Emma
Okay. I feel like that leads a little bit into another piece of growing quickly or expanding at all. You know, people don’t always think about that physical presence that you’re mentioning, so it could be opening an office, it could be a remote employee, but also maybe leasing warehouse space or storing inventory. How does that create state tax obligations?
Alexander
Yeah, so if you are renting, leasing, whether temporarily or permanently, at some point in the year, your footprint exists in that state. At some point, your company has existed physically in that state. One that gets a lot of people is independent contractors.
A lot of people think that if I hire an independent contractor, they’re not a direct employee, so the risk of physical presence is low. That’s not true. If you were ever to receive a questionnaire from the state and they ask for independent contractors and whether you have any, that would be technically considered physical presence. So that’s something that you definitely want to be careful about, as you’re setting foot into the state.
Emma
Okay. So, what about businesses using third-party logistics providers?
Alexander
There is a risk. It tends to vary. So, in some states, I believe California is one of them. Let’s say you use Amazon or you use some third-party fulfillment service where they store your inventory in a warehouse in the state. Although it’s not always heavily litigated, it is technically, for some states, considered physical presence.
So, if you have inventory in a state and it’s because it’s stored at an Amazon warehouse, it’s very important for you to review that state’s law to determine whether that technically creates physical presence. Because if it were your own warehouse, it would certainly be physical presence, but it can vary state by state on whether they would consider the third party to be physical presence as well.
Emma
Wow, that’s definitely a piece that I would not think of immediately. Can businesses have inventory in states and not even realize it?
Alexander
It can happen, absolutely. If you’re like a lot of folks that I know, get set up on Shopify, they get set up on eBay, they get set up on Amazon, and with so many things that you have to deal with as a business owner, you can lose track as to where your inventory might be at, and that’s one of the reasons it’s so important to.
You can request reports that will explain to you where this inventory is being stored, and that can help you gauge whether you have a risk in that state.
Emma
Okay. That’s extremely helpful. So why is inventory often, sounds like, one of the biggest surprises during a state tax review?
Alexander
I think it’s because a lot of people feel that it’s no longer in their hands, and so once something’s no longer in your hands, it doesn’t feel as easy to make that connection, right?
If you’re working through Amazon, you might feel like everything is being satisfied on their end, and so your risk is eliminated. But the reality is that the state taxes, while there are some parts in state taxation where the third party would be required to assist you in state taxes, a lot of the time it’s still going to fall on your responsibility, and that might be just an area, especially with startups, where they’re not quite sure where things are going.
Emma
Got it. Like you’re mentioning, e-commerce is a wonderful thing, and it’s made a lot of things easier than ever to sell nationwide, but it comes with some complications. So how has online selling changed that state tax landscape?
Alexander
So, one of the biggest ways that it’s changed goes back to what I was talking about earlier with how physical presence is no longer the only determining factor. Once e-commerce became more significant method for selling, states started to look at how much business you’re doing in a state.
So, a common one, for example, in sales tax is $100,000 of gross sales. It can also be $100,000 of net sales. Previously, you may not have had to worry about anything as long as you were just selling into the state. But now, one thing that you need to consider is once you cross the, let’s just say $100,000 mark, you might now be subject to sales tax in that state, and you may have previously not had to worry about that.
Emma
Okay. Now, I know we’ve talked about Amazon a couple of times here, but always a great example, right? So, if Amazon collects sales tax, does that mean the seller has nothing else to worry about?
Alexander
Generally speaking, that’s going to be something that you want to review carefully with Amazon.
So usually if a third party is capturing the sales tax and they’re remitting the sales tax, that generally means your obligation is satisfied, but that’s going to be dependent on where your obligations lie.
They might be collecting sales tax in the states that you’re shipping to, but let’s go back to that scenario where, let’s say you have inventory in a state and you now have an income tax, right? Because the income tax would be different than the sales tax. That’s something that Amazon would be very unlikely to satisfy for you, um, and would still be an exposure point for you.
Which is why that Nexus review is so helpful, because it really paints the whole picture for you.
Emma
Okay. Are there any other filing or reporting requirements that might still exist with that online e-commerce?
Alexander
Yeah, absolutely. One of the ones that commonly exists that also gets a lot of people is what they call the franchise taxes. So, when I referred to Public Law 86-272, and I mentioned how there’s income tax protection, there’s another type of tax called a franchise tax, and the best way to think about this is, like, think about it almost as if the license to do business in the state.
So, for example, if you’re operating within California, and I’m talking about merely operating in the state, whether you do business or not, you have to pay what’s called a franchise tax, which is a yearly fee, but it’s assessed on a base. And it’s generally $800 minimum but can get much higher, just depending on where you fall in that tax.
So, for each state that you work in, there’s a chance that you might have a franchise tax, and you want to keep that in mind also as you work in those states.
Emma
So, what should growing online businesses monitor as sales increase?
Alexander
You definitely want to monitor which states you’re operating in when there’s a significant change in revenue. You want to monitor where you have physical presence. Normally, you want to just file in those states, but let’s say it’s you hired an employee in the state, and now you’re doing more business in the state because of that new employee.
Now that’s a very big risk because you have the physical presence and you’re doing business in the state.
And it would also be helpful in general to monitor whether they have franchise taxes. Because if there’s a franchise tax and you haven’t fulfilled the requirements of a franchise tax, you are not technically allowed to operate within that state. It is the license, so a state that finds out can revoke your ability to do business in the state until you fulfill that obligation.
Emma
Okay. Got it. Now I do want to switch gears a little bit, and I want to talk about a topic that I know is a big one, but I’m hoping that you can touch on it just a little bit. I want to talk about acquisitions.
Acquisitions are another very exciting milestone, but I imagine they come with a lot of tax risks. So, what should businesses know before acquiring another company?
Alexander
When acquiring a new business, there are a lot of state tax risks that are associated. In fact, that’s one of the areas that people often don’t realize until it’s time for due diligence.
This could be difficult on the seller side too because if the buyer is doing their review and they find out that you have all these risks that you haven’t satisfied, they could be on the hook for what’s called successor liability, which in short just means the liability that transfers over to the acquirer so long as the obligations aren’t met or that you don’t have it in agreement that you will have some type of arrangement to satisfy that liability. So, for example, let’s say you come to find out that there was an employee in this state for a significant amount of time.
In addition to that, they had a significant amount of taxable liability in that state. You go to acquire that business. Not only is there a potential that the state can then question you and audit you, but there are potential penalties and interest associated with that, and that can grow over time, and that’s a risk that people might not think about when they’re acquiring a business, but those penalties and interest can add up significantly.
Emma
It’s surprising for me to hear that the buyer can essentially inherit the state tax liabilities. What role does state tax due diligence play during an acquisition?
Alexander
So, there are a few ways to reduce risk that will help in the process of buying and selling. So, from this, I’m mostly talking about the perspective of the seller, but obviously this is something that could be arranged as a buyer.
One of the questions is: how do you mitigate that risk? There are a few ways to do it. There are tax amnesty programs that occur within specific months in which you can reduce the amount of tax that you owe, and you’re generally more penalty-free, or there’s interest reduction in those periods.
Another and more significant way to reduce penalties is what’s called a voluntary disclosure agreement. It’s also referred to as a VDA. The way that a VDA works is a company will anonymously fill out a form to a state, effectively letting the state know that they are aware of prior exposure.
So, at this point, your identity as an entity has not been revealed to the state. The benefits are that if the state agrees, and only at that time in the agreement do you reveal the identity, there’s generally a limited look-back period. So, let’s say you had a risk going back 10 years; the risk might only be limited to 3 years, and that could save a lot of stress.
In addition to that, they usually waive penalties, so there could be a significant amount of savings that way, and that’s a strategy that a lot of businesses that are selling use to reduce those risks.
So going back to the previous example, let’s say you did have that state tax risk. One thing that you might work in that agreement is to satisfy the requirements of a voluntary disclosure agreement. And as part of that, that’ll help us reduce how much we want to escrow for that specific risk.
Emma
Got it. I feel like you’ve already highlighted some very important reasons to involve your tax advisor before the transaction closes. But are there any other, you know, important reasons to involve your SALT expert before?
Alexander
I would say the biggest reason is that it’s just growing to be a more and more difficult part of business operations. States are fully aware of the fact that more businesses are having access to do business out of state, and because of that, especially with the availability of information today, they’re able to find businesses and tax them.
And there are also occasions in which you can save taxes if you know what strategies you should use to mitigate your risk and which states make sense to do business in and which states might be better for maybe it might be a better idea to hire an employee in this state than this state just because of the potential risks that are exposed to.
Emma
Okay. Well, it sounds like some of the situations that we’ve been talking about throughout this episode have been kind of permanent expansion examples. But sometimes it’s temporary projects, contractors, or even attending events like trade shows in other states. So, can these activities create tax obligations?
Alexander
Yes, absolutely they can. And it’s unfortunate because I’ve seen a few situations where someone ceases to do business in a state, but there are so many different ways that an auditor can find out. Sometimes it’s by doing an audit on another company; they find a relationship, and then they start to look into another company.
So, trade shows can be a risk. Now, in a lot of states they have what they call de minimis, which just basically, at a high level, means a minimum amount of activity or time within a state before it really becomes an exposure point for Nexus. But most states could argue that as long as you’re operating in the state, even if you’re no longer doing it, but at that point in time you were, at that point in time you have physical presence, and so they expect an income tax return or potentially a sales tax filing. And so even if you’re no longer operating in that state, it’s still a good idea to gauge your prior risk. I like to do at a minimum 4 years of review on all states just to make sure that we cover our bases fully.
Emma
Okay. So, what kinds of activities should businesses be keeping track of?
Alexander
So, the most important ones are, again, going to be physical presence. I think that that’s important. So, whether you are renting equipment, whether you are leasing equipment in a state, if you have a warehouse, if you’re renting property, if you have an employee, whether it’s an independent contractor, whether it was temporary, even if you just hired an employee for a month, or they travel to another state.
Let’s say you’re having a board meeting and you’re traveling to a state. Anywhere where you’re physically present, that’s a very big flag for states, and if they are aware of the fact that you have physical presence, they have a right to tax you in most circumstances.
The other thing you want to do is, again, pay attention to that economic threshold. If you start to have a significant amount of activity in a state or you anticipate having activity in that state, it’s important to review their laws to see, even if you don’t have physical presence, is this a potential risk now because we’re selling $500,000 into the state? Maybe now you do have a risk there that you might not have had to deal with previously.
And then the last piece that I would say just for most businesses is always review what is actually subject to sales tax, because many businesses believe that if they’re in the service industry, for example, they’re never going to be subject to a sales tax. That’s not always the case. There are some states, such as New Mexico, that do have a tax on services. There are states like Washington that have what’s called the Business and Occupation Tax, which does tax not only services, but it also taxes wholesaling, which is usually exempt from sales tax. So, you can never go into a state just assuming facts. It’s one of the peculiar things about state taxation.
You have to approach each one in its own way, because there might be some rule that could really be unique to that state that you may not be ready for.
Emma
Wow. There’s a lot to keep track of. Do you have any recommendations for businesses to stay organized when keeping track of all of this?
Alexander
Absolutely. I mean, the biggest one I would say is finding yourself a solid CPA that you could send information to. The truth is, with so many states and so many laws, and each one updating every year, it’s very difficult. And I’m not going to sugarcoat that it’s difficult to keep track of this information. But just focusing on the highlights is going to be very helpful.
Again, knowing where you’re physically present, knowing the states that you operate in a significant way. So just looking at footprints will always help you. And I always prefer to take a conservative approach. It’s better to know the answer, and at best you don’t have to deal with anything, than not have any information and then get caught off guard with an audit or some kind of notice that you’re not expecting.
Emma
Absolutely. In listening to all of these examples, it seems like there’s a lot of situations where a business could unintentionally create state tax obligations without even realizing it. So, when is the right time to bring in a CPA or a SALT advisor?
Alexander
I’d say the best time is going to depend on your goals, but usually if you’re looking to expand and you’re go- you know that you’re going to be operating in different states, or you expect your business to grow significantly, it’s a good idea to catch it early, because the earlier you catch state tax issues, the better you can handle them.
It’s usually that the problems that exist usually exist because they were missed, and then you’re having to come and clean it up and try to save costs. But it’s much better to catch it early.
Emma
Absolutely. What information should businesses share before making those expansion decisions?
Alexander
I think it’s a good idea to share where your business operations are expected to grow significantly. So, if you’re planning on opening up a warehouse or an operation within a new state, especially if you plan on putting that on the website and you start to advertise that, those are all different massive exposure points, and it’s a good idea to get in touch with a CPA to ensure that you’re not potentially putting yourself out there more than you really should be.
Emma
How often should growing companies review their state tax footprint?
Alexander
I generally recommend reviewing it every year. The best time, I think it would be if you want to be extra conservative: you could do biannual, or you could do a midyear period as well as an end-of-year period. But at the least, every year, just because nexus laws generally are determined on a calendar year basis.
So usually if you meet nexus in one year, it covers the whole year. It can sometimes change to fiscal when there’s some variation, but that’s usually how it goes. So if you can anticipate that at our rate we’re going to be hitting that economic nexus in this state, you can then be more prepared for any state filings or obligations you have to deal with later on.
Emma
Got it. So what’s the long-term value of being proactive instead of reactive with state tax?
Alexander
The biggest one is going to be just not having to deal with audits and the expenses that come with an audit. There are audits that can span many periods, and this could be an unexpected li- a, a huge expense that’s unexpected. And for businesses that don’t have the liquidity to handle it, it can be very challenging to have a 40,000, 50,000, or even higher expense that comes out of nowhere, um, might not be something that a business is ready for.
The other issue is that, going back to the acquisition, if you’re planning on selling a business, let’s say you have a goal to sell the business within 3 years, and you haven’t held any state tax reviews, you haven’t checked what your risks are. If the buyer does conduct a review with their own CPA and they find these risks, then that can actually factor into your deal negatively, and it could make it a lot more challenging to sell when you’re trying to sell.
And then just the last point, if you are dealing with a pass-through, such as a partnership or an S corp, that income can directly flow at the individual level, which means that at the individual level, you might have obligations in states that you weren’t prepared for. So it’s not just going to be an entity problem now; it could be a problem for any of the members or shareholders that you might have.
Emma
Wow. This has been very helpful, and I think that the insights and tips have been super valuable.
Before we wrap up, I always like to leave our listeners with one practical takeaway.
So, if there’s one message you’d want business owners to remember from today’s conversation, what would it be?
Alexander
When in doubt, always double-check. It’s the best rule for state and local tax. I always say that a conservative approach is probably the best approach, because you just never know what’s going on with the state.
Emma
Definitely.
Well, Alexander, thank you so much for joining me today, sharing your expertise, and helping us better understand how everyday business decisions can create unexpected state tax obligations.
If your company is hiring employees in new states, expanding operations, buying another company, or simply growing faster than ever, it’s worth taking a step back to understand whether those decisions could create new state tax responsibilities.
If you have any questions about your company’s state tax exposure, the SALT team at DHJJ is here to help.
Thank you for listening to Ask a DHJJ CPA, the podcast where real CPAs answer real questions from business owners.
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