More and more companies are shifting to remote workforces and sales, and when these activities cross state borders, they can create tax requirements. At Kruze Consulting, we understand that the need for startups to register for state and local taxes isn’t always obvious or easily understood. Not registering properly, however, could result in your startup:
- Paying fines, interest, and fees for any period that you should have been registered but were not.
- Being liable for any back taxes owed.
- Not being able to sue in a state where you are not properly registered.
Startups that work with a professional employer organization (PEO) may assume that the PEO has taken care of any state registrations that the startup needs. Typically, however, PEOs do not help startups register in tax jurisdictions. In addition, registration issues with remote employees can cause your payroll to be blocked, either for individual employees or your entire staff.
The primary question we see startups ask us about state and local taxes is:
Are we required to register with the state, or submit the Annual Filing if we only hire remote workers from that state?
The answer is probably YES. Startups that have remote employees in a state, with no other operations, generally have an ‘economic nexus’ in the locality and are required to register in the state. There may also be annual reporting requirements and the need to do state tax filings, depending on the jurisdiction. Even companies using PEOs will likely have these requirements.
Does your startup need to register for taxes? Check with our tax team.
At Kruze Consulting, we work with startups to determine “tax nexus.” The term tax nexus describes a situation in which an out-of-state business has a tax presence in a particular state or municipal taxing jurisdiction. Nexus applies to all taxes, including sales, income, and franchise taxes. Common situations include:
- A business with a physical presence in another tax jurisdiction always creates tax nexus.
- Having a single remote employee is sufficient to create tax nexus in some states.
- Meeting specific sales thresholds in tax jurisdictions may mean your startup has tax nexus. The Supreme Court declared, in the 2018 South Dakota v. Wayfair decision, that states have the authority to require remote businesses that have significant sales within a state to collect and remit sales tax to the state.
Specific nexus definitions vary by location. With 50 states in the US containing thousands of municipalities, there is a range of tax nexus definitions involving either a physical or economic presence in a tax jurisdiction. In general, your business will have tax nexus in a location where your company:
- Has real or personal property
- Holds a business license
- Has employees
- Has equipment or inventory
- Has significant sales (generally more than $100,000 and/or 200 transactions, but these amounts can vary by state), offers services, or bids for contracts
If tax nexus exists, then your company has a tax-filing obligation to that jurisdiction, and may owe state income, franchise, or sales taxes. Companies paying wages to remote employees must withhold any state and local income taxes, and pay unemployment taxes, for the employee’s location. Kruze Consulting can help your company determine locations where you have established tax nexus, and help you get properly registered.
Steps for registering to conduct business out-of-state: Foreign qualification
If your company has established tax nexus in another state, you need to register your business in those states, often called “foreign qualification.” This process can be complex, and include:
- Establishing a registered agent located in the state, which is required in every state where your company transacts business.The agent acts as a point of contact between your company and the state.
- Some states may require you to have a certificate of good standing from your company’s state of incorporation, so you need to be up-to-date on your state tax filings.
- Submitting an application (usually called an application for a Certificate of Authority or a Foreign Registration Statement) to each state’s Secretary of State.
- Paying an application fee. In most cases the total cost to register will be less than $300, but fees vary based on the state and your business.
- Registering with counties or cities. This may not be necessary, but local governments determine their requirements, so businesses need to check with local authorities.
Some states will allow your startup to register online, while others make you file physical documents in person or through the mail.
Kruze Consulting can work with you on your tax registrations
The process of determining tax nexus and registering in those jurisdictions is complicated and time-consuming. Ideally, your business should conduct a nexus study to understand its obligations in various tax jurisdictions. The tax team at Kruze Consulting can help you review your sales data, assess your employee locations, and determine in which states or municipalities you have a filing requirement. In addition, we can help you negotiate the complex process to register for state and local taxes. For more information, contact us.