Bush Says National Sales Tax Worth Considering

Bush: Sales tax in, income tax out?

My recent piece on the need to file tax returns with non-resident states prompted this email from a reader.

Hi –

I was reading your blog entry about “Missouri Tax Fishing” and wondered about my situation. I am a sales manager for a company based in California. I live in CA and I have an office in CA. However, I travel to Colorado, Washington, Oregon, Idaho, Nevada, Utah, plus British Columbia & Alberta in Canada on business. The trips are to visit customers and work with local sales rep. I am out of state on these trips 30% – 40% of the time.

I am physically working in these other states. Does this mean I must file multiple state returns?

Thanks,

My Reply:

The proper way to handle this has a lot to do with whether you are a W-2 employee or self employed. From your description, it sounds as if you are a W-2 employee. Let me know if that is an incorrect assumption on my part.

With W-2 employees, your employer’s payroll department should be keeping track of the amount of time you spend physically working in each different state (USA & Canadian) and reporting your annual W-2 wages accordingly. I have had some clients where they had several W-2s from their employers with several different State Wages amounts in as many as a dozen different states, including occasionally Canadian states.

As a W-2 employee, you are generally safe if you file tax returns consistently with how your employer has reported your payroll in the State Wages box on your W-2. The state tax agencies will be matching those up with your state tax returns.

If your employer is not properly allocating your payroll between states where you physically work, your employer has some serious potential liability to those other states when they are caught. State tax agencies are always looking for this kind of thing; so the current reporting situation could change. In cases where the employer is nailed for not properly allocating wages between states, the related penalties are normally assessed against the employer and not the employees.

If you are self employed, the burden of keeping track of the amount of time you spend and money you earn inside each state is on you. You are required to file tax returns with each state accordingly.

Good luck. I hope this helps.

Kerry Kerstetter

I later received the following additional info:

Kerry:

Thanks very much for the response — it was enlightening. I am a W-2 employee, but my employer reports all of my annual wages in my home state of CA. I have been working under these circumstances for 20 years with time at two major companies, and this is how both have handled things. I also know plenty of colleagues in the same industry working for different companies, and I have never heard of anyone getting wages allocated among several states.

I will have a discussion with my company’s Accounting Dept. Thanks again for getting back to me.

I wrapped this up as follows:

It sounds as if you keep a low profile when working in the other states.

Odds are that if the situation were reversed, and you were based outside of Calif and doing a lot of work there, part of your wages would be required to be allocated to Calif. That is the most aggressive state for snagging as many taxpayers as possible.

Kerry Kerstetter

John Kerry’s Whopper Tax Hike? The senator has limited himself to only one (painful) way of saving Social Security.







Scrap the code

Skill trumps luck for Pick 3 player, friends – News to those of us who make fun of lottery players. It seems that under certain conditions, with special promotions, it is possible to make a guaranteed 20% profit on lottery tickets.

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.