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Your Business May be Subject to Income Tax in Multiple States

A majority of states now tax revenue for services based on the market where the service is received rather than where the service is performed.

Therefore, many service businesses (i.e. consultants, attorneys, digital service providers, software designers) may face an income tax liability from a state where no work is performed. Even worse, for pass-through businesses such as partnerships, limited liability companies (LLC), or S-corporations, the state-sourced income will pass-through to the owners potentially requiring them to file nonresident tax returns in multiple states.

Many states are aggressively auditing out-of-state companies to comply with these rules as taxing out-of-state businesses is better politically than increasing taxes on companies located in state.

California is a market based state and has the right to impose income tax on businesses without a physical presence here.

For example: A taxpayer’s “market” for sales of service generally is in California, if and to the extent the service is delivered to a location inside California.

Montana, Oregon and Kentucky joined the market based club in 2018.

New Jersey and Colorado will join the club in 2019. Missouri will join in 2020.

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Richard Pon CPA, CFP