We all like certain surprises in the holiday season, but a tax surprise is not one of them.
To avoid that, businesses going into 2015 should take note of several tax law changes in other states that could directly increase their tax liability.
For years, the standard in most states for taxing business income was "physical presence nexus" – you had to have property or payroll in the state before you had to file a tax return.
That's still the case in determining if you owe taxes in Tennessee. But California, Washington, Colorado, Connecticut, Michigan and Ohio – and next year, New York – have switched to "economic nexus." That means if you're a Tennessee-based business that has a certain level of sales in one of those states, you are subject to the state's business income taxes.
With the exception of Ohio, most of these laws have taken effect within the past three years.
Depending on how the state determines the amount of your profits subject to their tax, the liability could be significant.
Businesses that have a physical presence in multiple states have been paying multiple state taxes for years. But even they might be surprised to learn that some states have changed how they figure how much of your profits are subject to their taxes.
Traditionally, a state would look at the percent of your payroll, percent of your property and percent of your overall sales in their state, and divide by three to get the portion of your profits subject to its taxes. But many are no longer considering payroll and property, driving up how much is owed by businesses that have large sales, but a proportionately small or no physical presence there.
The third change that has begun to snag more businesses is the trend to tax professional services based on where the customer is located. Eighteen states have adopted such "market-based" sourcing of revenue.
It's a huge change because traditionally services were sourced where the costs were incurred. If your business was based in Tennessee, and you sold services such as information technology support in other states, you paid taxes on that service income in Tennessee based on Tennessee's tax law.
The unfortunate reality is that some states have made the change to "market-based sourcing" and others haven't. So in Tennessee, you would still be subject to taxes on certain professional service income here, and you may be taxed on the same income in the state where your customer is located.
The combination effect of all three trends is rising tax liability — and more complicated compliance — on companies who do business throughout the country.