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In Which State does
your Corporation File
Withholdings for Officers and Employees?
Many Companies say you can have a
Nevada
Corporation and you do not have to Register
in another state? Is that True?
What is UDITPA (The Uniform Division
of
Income for Tax Purposes Act)?
Why is it Important?
The Uniform Division of Income for Tax Purposes Act
(UDITPA) defines the payroll-factor numerator for the taxing state as "the amount paid in this state during the tax period for compensation…"
The UDITPA provision, which is taken from the Model Unemployment Compensation
Act, established four tests for determining whether compensation is
"paid in the state". If an employee’s activity meets
any one of the following tests, his or her compensation is to be included
in the taxing state’s payroll-factor numerator.
- All the individual’s services are performed
in the taxing state, or only incidental services are performed outside
the taxing state;
- Some of the individual’s services are performed
in the taxing state, and the individual’s base of operations
is in the taxing state
- If there is no base of operations, some of the individual’s
activities are performed in the state, and the state is the place
from which his or her work is directed or controlled; or
- If there is no base of operations or place where
the work is directed and controlled, some of the individual’s
services are performed in the taxing state, and the individual is
a resident of the taxing state.
What does all this mean? First, when you examine the
payroll for a company, its overall payroll equals the denominator. For
example, if your company had a payroll overall of $100,000 for a pay
period, that would be the denominator. If 10% of that payroll was attributable
to California, then $10,000 would be the numerator. You would have $10,000/$100,000
of your payroll attributable to California. Obviously, the other $90,000
would be paid in other states. Why is this important? You have to register
as a foreign corporation in each state in which you pay employees!
If it is determined, based upon these four tests, that
you are based out of your home state, then you must register to do business
in your home state. You will realize after reading these tests that
it is very difficult to have a business based out of Nevada, as many
registered agents in Nevada would have you believe.
When you examine the four tests you will realize that
your being subject to payroll in a particular state refers to
consideration of the following:
- Are you a resident of the state?
- Are all or part of your services performed in the
state?
These are two clear-cut ways when you will have to
pay the numerator portion of the payroll tax. The other two tests
are:
- Base of operations in taxing state
- Place of direction or control
Let’s look at these four tests more specifically:
- Services performed in taxing state:
Under this test, compensation is to be included in
the taxing state’s payroll-factor numerator if the service
is performed entirely within the state or only incidental services
are performed outside the state. In an administrative ruling, California
applied the provision to employees working on offshore oil wells located
outside the state boundary on the Continental Shelf and said that
compensation to such employees is to be excluded from the California
payroll-factor numerator, even though included in the payroll-factor
denominator. However, to the extent the employees are California residents,
their payroll is subject to California reporting.
Compensation is also to be included in taxing state’s
payroll-factor numerator if the individual’s service is performed
both within and without the taxing state but out-of-state services
are incidental to the in-state services. "Incidental"
is defined as any service that is temporary or transitory in nature
or that is rendered in connection with an isolated transaction.
- Base of operations in taxing state
Under test two, compensation is to be included in
the taxing state’s payroll-factor numerator if some of the individual’s
service is performed in the taxing state and the base of operations
is in the taxing state. The related regulation defines, "base
of operations" as the place of a more-or-less permanent nature
from which the employee starts his or her work and to which he or
she customarily returns to receive instructions from the employer,
to receive communications from customers, to replenish stock or repair
equipment or to perform any other necessary functions.
- Place of direction or control
If there is no "base of operations" anywhere,
compensation is to be included in the taxing state’s payroll-factor
numerator if some service is performed in the taxing state and the
taxing state is the place from which the service is directed or controlled.
The term "place from which the service is
directed or controlled" is the place from which the power
to direct or control is exercised by the taxpayer.
The Massachusetts Department of Revenue applied the "place of direction or control" concept in ruling that salaries
and management fees paid to corporate officers who resided in Vermont
and Florida should be included in the Massachusetts payroll-factor
numerator. Although the officers’ services were performed out
of state, the officers made a few trips each year to the Massachusetts
business location (this is an unusually aggressive view by a state).
- Residency in taxing state
If there is no base of operations or place from which
the work is directed in any state in which services are performed by
the individual, the compensation is includible in the state’s payroll-factor
numerator if some services are performed in the taxing state and the individual resides in the taxing state.
Do you have to Register in another
State as a Foreign Corporation?
Many times you may hear that you can run you business
through a Nevada corporation. You will hear, since you can be based
from anywhere you can just consider that you are operating in Nevada.
The problem is most people are not operating their businesses in Nevada.
They operate in their home states and thereby have to register as foreign
corporations.
To understand this further, you must first understand
a couple of principles. The first term you must understand is nexus.
A business is subject to tax in a certain jurisdiction
only if the taxpayer has established nexus there. Nexus is a measure
of the extent of business contact that the taxpayer has established
in the state. Once the taxpayer has established sufficient nexus, it
is taxable in the state. States define "nexus" differently,
and nexus may be defined differently for various types of taxes.
Sufficient nexus for income tax purposes is normally
established when a corporation derives income from sources within the
state, owns or leases property in the state, employs personnel in the
state or has capital or property in the state. However, the amount of
activity or connection which is necessary to create nexus is defined
by state statute and, consequently, tends to vary from state to state.
Public Law 86-272 was enacted by Congress as a political
compromise on multistate corporate taxable income. Historically, the
passage of Public Law No. 86-272 marked the first time that Congress
enacted general legislation to limit a state’s right to impose
an income tax on interstate activities. Public Law 86-272 governs state
taxation of income tax only if sufficient nexus is established.
In effect, this law provides immunity from state taxation
if the business’s only connection with the state is soliciting
orders for the sales of tangible personal property that are sent outside
the state for approval or rejection and, if approved, are filled and
shipped by the business from a point outside the state.
This immunity from taxation applies for only solicitation
of the sale of tangible personal property. As a general rule, the immunity
of Public Law No. 86-272 applies when the sales representative’s
activities are all materially ancillary to the order-solicitation process.
Not covered by Public Law No. 86-272 are leases, rentals, transfers
of real property and the sale of services. Solicitation is not defined
by the statute; therefore, each state defines it differently. Examples
of minimal activities within a state that could establish nexus include:
- Listing the company in the telephone directory;
- Registering to do business;
- Conducting training seminars or classes for salespersons
or customers’ personnel;
- Handling of customer complaints by sales representatives;
- Repairing or maintaining the company’s products,
even if performed only occasionally and at no charge to the customer;
- Investigating credit worthiness;
- Collecting delinquent accounts;
- Installing of equipment or supervising installation;
- Picking up or replacing damaged or returned property;
- Hiring or supervising personnel;
- Approving or accepting orders;
- Providing engineering services;
- Maintaining a sample or display room in excess of
14 days;
- Providing shipping information and coordinating deliveries;
- Carrying samples for sale, exchange, or distribution
in any manner for consideration;
- Repossessing property;
- Owning, leasing, maintaining, or otherwise using
any of the following facilities or property in the state: repair shop;
parts department; employment office; purchasing office; warehouse;
meeting place for the board of directors, officers, or employees;
stock of goods; telephone answering service; or mobile stores, that
is trucks with driver-salespersons;
- Owning, leasing, maintaining, or otherwise using
real property or fixtures;
- Cosigning tangible personal property to any person,
including an independent contractor; and
- Maintaining an office for an employee, including
an office in the home.
Nexus is usually not created under Public Law
No. 86-272 by the following activities:
- Advertising campaigns or sales activities and incidental
and minor advertising;
- Carrying free samples only for display or distribution;
- Owning or furnishing automobiles to salespersons;
- Passing inquires or complaints to the home office;
- Maintaining a sample or display room for less than
14 days and;
- Soliciting sales by an in-state resident employee,
provided that the employee does not maintain a place of business in
the state, including an office in the home.
Only rarely does registration not follow a need to pay
taxes. Each decision should be approached on a case by case basis. You
will have to make the final decision. You can make a more intelligent
decision by dealing with a firm such as ours which will encourage you
to do the best thing for yourself by registering where you do business.
This is contrary to the advice of others who discourage registering
in favor of the more expensive package of having an office with them
in Nevada.
How to Keep Your Business in the Top 5%!