Good morning. It's February. The weather can't decide if it's still winter or spring (at least in Tennessee). The seesaw begins. The roller coaster. The uncertainty of when winter will end and spring will begin. One certainty is that change is in the air. The same goes for state and local taxes (SALT) as state legislatures are in session or will be in session and Governor's have already proposed changes. Over the next few months we will learn what changes get passed and those that won't. Regardless of what may or may not happen, there are trends that middle market companies should be concerned about.
Economic nexus is still a big concern for sales tax purposes. However, it is becoming even more important for state income tax purposes. (Economic nexus is simply defined as having a taxable presence in a state even when you don't physically enter the state).
State conformity to the Internal Revenue Code and the One Big Beautiful Bill Act (OBBBA) will make state income tax returns more complicated this year. States will continue to slowly conform or not conform (decouple).
Sales sourcing is likely the most important factor that middle market companies should be focused on getting right. Where and how a company sources their sales not only determines economic nexus, it impacts how much income gets taxed by a state for income tax purposes and where or when sales tax collection obligations occur.
Speaking of sales sourcing, knowing when and when not to use "look-through" sourcing (i.e., sourcing your sales to your customer's customer location versus your customer's location or "ship-to" state) is a growing challenge and complexity.
Sales tax on additional services continues to expand state by state.
Sales tax on digital goods and services continues to expand state by state.
The question of whether you are selling software or a service continues to be litigated or challenged. States leaning to treat these types of transactions as the taxable sale of software or SaaS.
The great federal law of 1959 (P.L. 86-272) that protects certain companies from state income tax continues to be whiddled away and its protections challenged and litigated. Companies should take this protective stance thoughtfully and carefully and well documented. It should not be taken lightly with assumptions. States are aggressively auditing companies that take this position.
Residency audits are on the rise as individuals attempt to move from high tax states to no tax states while maintaining a residence in the high-tax state. Several states are proposing higher tax rates (or new taxes) on "wealthy" taxpayers.
Pass-through entity tax elections (PTET) remain a viable option for owners of partnerships, S corporations and other pass-through entities despite the increase in the SALT CAP (federal individual itemized tax deduction). Knowing when to make an election still requires careful analysis.
Those are my top 10 trends or concerns for middle market companies. Trust me - there are many more, but these are the big bucket items, depending on your situation.
If you have questions or concerns on any of the above or other state tax issues, feel free to reach out. Don't wait for problems to arise (i.e., notices, audit assessments, additional tax, interest and penalties).
Stay safe. Stay warm. Stay sharp.
Don't let the past dictate your future. Free your company so it can move forward with confidence.