I’ve frequently discussed the issue of state taxes and income sourcing, as well as the requirement for non-residents to file tax returns for certain kinds of income earned in other states. This has been receiving a lot of publicity recently under the term “jock-tax” because of its application to professional athletes who earn their money in several different states, with the implication that it’s a new development in taxation. It’s not new and has been an issue to be concerned with for as long as I’ve been in the tax game.

Obviously the various states are always looking for ways to make sure they get their pieces of the tax pie. They use information documents (W-2s, 1099s, etc) to match up with non-residents. Withholding of taxes up front, such as on some real estate sales, is a powerful way for states to force nonresidents to file tax returns.

State tax agencies also receive tax return info from IRS and look for non-filers that way. Several years ago, I had to help unravel some Arkansas state tax problems that were caused by new clients who had filed tax returns for their Nevada based corporations using the owners’ Arkansas addresses. IRS shared that info with the Arkansas DFA and then DFA sent notices requesting state corp returns. Now, we always use the Nevada corp address on the returns and we never hear a peep from any other state tax agency.

I mention this now because, in the past few weeks, I have had two clients who are full time Arkansas residents receive notices from the Missouri Dept. of Revenue requesting Missouri income tax returns for 2000, 2001 and 2002. Unlike when other states such as California do this kind of thing, there was no listing of any specific income items coming from Missouri sources. I asked the first client to call the number on the notices and ask for specifics. The DOR rep told him they had noticed that he had a Realtor license for Missouri, but they had no indication that he had earned any taxable income in Missouri. She told him they sent those notices out as a fishing expedition to possibly flush out some unreported income. She told my client to just write on the notices that he had no Missouri income and mail them back in and that would put an end to that issue. He did that and then the MO DOR sent back a notice accepting the fact that he had no Missouri taxable income.

When the second client called DOR, she was told a similar thing. Her name had come up as having a Missouri insurance license and the MO DOR was fishing for some taxable income. My client admitted that some of her clients did live in Missouri and wondered whether this meant she had to report that portion of their income to the State of Missouri. I explained how the issue of income sources works as follows, which I hope is informative for others around the country.

The key factor is not where your clients and customers live; but where you actually do your work. If you have an office in Missouri or you drive up to the homes of MO residents, that would be MO source income, which would need to be reported on a MO income tax return.

However, if all of your work is done through your Arkansas office, all income is Arkansas source and properly reported to and taxed by the State of Arkansas.

This is the exact same situation for us. We have clients all over the country. I am also licensed as a CPA in California. However, since we do all of our work from our office here in Arkansas, we don’t have to file tax returns with any other states, including Calif.

If that is the case for your insurance business, you can write on the notices that all insurance income has been generated from inside Arkansas and none was earned in Missouri and that a MO income tax return is not required.

If you do conduct business with a physical presence inside MO, we will need to pro-rate your income accordingly and file MO and amended AR tax returns.

She assured me that all income was earned while physically inside Arkansas, so she is writing that fact on the MO DOR notices and we will not have to file any Missouri tax returns.

Andrew Roth, over at the Club For Growth blog, has been doing an excellent job monitoring the political side of tax issues. He has quite a few great posts today.

He has also posted the Club’s new ad (in three downloadable video formats) about John Kerry’s tax attacks on the “evil rich” who, as I have frequently explained, include just about everyone in the country when defined by DemonRats. For those who think I am exaggerating, a reminder that evil rich Social Security recipients include anyone earning over $25,000 per year, as defined by the Clinton-Gore 1993 Tax Hike, which was supported by John Kerry.





Helped by Tax Cuts, Business Owners Producing Lion’s Share of Income Tax Revenue

Another Bush Term Might Well Include Tax-Overhaul Push – While this plan sounds great, it is disappointing that the Bush team is afraid to discuss this much during the campaign in order to not offend the fans of class warfare.

Another John Kerry Flip-Flop — Taxing the Rich

John Kerry Threatens Middle Class Taxpayers – He threatens the entire country in oh so many ways.





Let’s Put the “Litigation Tax” on Trial – Interesting way to look at the inflated cost of so many things in our society due to ambulance chasers like the Breck Girl, John Edwards.

Report: Tobacco Taxes Drive Obesity – I’m sure we’ve all known plenty of ex-smokers who have substituted food for cancer sticks to satisfy their oral fixations.

No Sale for Kerryedwards.com

Weapons of class warfare

One of the issues I often advise considering when deciding whether or not someone should charter a new corporation and in which state to do so is the minimum cost to keep the corp in good legal standing because it is often necessary to curtail corp activities without actually going through the steps of officially dissolving the entity, or it may take a few years before actually using the new corp.

For Federal purposes, there is no annual cost to keep a corp alive other than the need to file a corporate income tax return (Form 1120). If there is no taxable income, there is no tax due. However, as I’ve always said, an 1120 should always be filed to show IRS that there was no taxable income and to prevent them from using their wild imagination to assume that non-filing means there were millions of dollars in unreported taxable income.

Most states have a corporate income tax and an annual filing or franchise fee. Most of the states with an income tax base it purely on the net taxable income, just as IRS does. A few, most notably the PRC, have a minimum tax regardless of the net profit. For at least the past dozen years, this has been $800 per year for any corporation (C or S) operating in California. A corp showing no activity or a loss of thousands of dollars still has to pay the $800 minimum tax. The justification for this by the rulers in Sacramento is that “they can afford it.” This is a direct quote from one of the tax-writing legislators who spoke at a CPA meeting I attended several years ago. In addition to the $800 minimum income tax, the PRC has an annual filing fee, which is currently $25.

As I’ve mentioned several times in my discussions of corporations, a completely unexpected bonus of relocating to Arkansas was the fact that its corp income tax has no minimum and the annual franchise fee has been only $50 for as long as I’ve been here.

That is about to change, for the very same reason as given by the PRC Rulers. I just received several copies of the snail mail newsletter (dated as July 2004, it hasn’t been posted to the web yet) from the Arkansas Secretary of State, Charlie Daniels (not the country singer) with a mention that the 2005 annual franchise fee will be tripled, to $150 per year.

While this will still be cheap compared to the Left Coast, it does change the economics of holding onto inactive corporations. Several years ago, back when we expected to be doing farming full time, I had set up another Arkansas corporation that was intended to handle the ranch operations. Since I was drawn back into tax work full-time, that corp has been inactive and I have just been paying the $50 annual fee in order to keep it legal until I decide to use it more fully. Now that it will be costing $150 per year, I am seriously just considering dissolving it.

For 2005, the annual franchise fee will also be due a month earlier than the traditional deadline of June 1. Filing it by May 1 is no big deal, but it will catch many by surprise next year.