Brotman Law Presents

The Ultimate Guide to Multistate Taxation in California

Welcome to our Guide

Welcome to our firm’s guide on multistate taxes! We hope that you find this guide helpful as you navigate any multistate taxation issues you or your business may face.

We understand tax issues are hard, but we stand ready and able to assist you when you need it.

In this guide, you will find user-friendly articles on various multistate tax issues, particularly those involving California.

As many are aware, California taxing authorities have become increasingly aggressive with its tax collection efforts. To you and your business, this means you may have to devote more time to ensuring you are in compliance or not availing yourself to any tax liability you do not anticipate.

Our firm provides a variety of services but our primary focus is on California tax examinations and collections work. In particular, we help companies with compliance issues specifically. We have found an increasingly larger percentage of our practice working with multistate companies that are trying to stay out of trouble.

We often see a very large influx of businesses outside of California who tend to step into California tax issues.

This guide will provide information from the primary context of dealing with California tax issues, however, some information may be applicable to a variety of states.

California is one of the more aggressive states in pursuing businesses that are located outside of its borders for tax revenue. California has frequently utilized its ability to go after businesses and individuals that may have contact with the state of California, even if they do not reside or have voting power in the state.

California has even increased its base of operations by now having offices in New York, Texas and Illinois, which serve as regional locations for observing out-of-state tax compliance.

California’s increasing presence in other states is significant and demonstrates the way that the law is trending. Establishing out-of-state operations is the way states are growing revenue and increasing their tax base.

With the advent of the internet, businesses are able to gain contacts with states in even more ways, and it is creating novel legal issues. Administrative law, judicial decision, or legislative functions are not catching up to technology as fast as it is improving.

One of the challenges for multistate businesses is dealing with managing and mitigating risks when the laws are unclear, or when operations reach multiple states with different laws across jurisdictions.

Another challenge that businesses face is determining how to stay in compliance as well as avoiding issues without creating a huge cost burden or regulatory burden on the organization.

This guide will delve more into these issues so that you may be better equipped to tackle them and help avoid future liabilities.

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Introduction to the Issues

Since eCommerce makes it so easy to do business in multiple states, many small business owners think, “Hey, this is great!” and look to incorporate it into their business model. Like many entrepreneurs, they see it as an opportunity to increase revenue and to expand their brand. 

You would be surprised how little thought many small business owners give to sales tax issues, however, with no bad intentions on their end. It simply does not occur to them, especially if they are in charge of their own financial reporting and bookkeeping.

Unfortunately, failure to file and pay sales and use tax in all states in which you do business can have serious repercussions. The last thing you want is to have state authorities knocking at your door wanting to examine your records and punish you for any outstanding sales and use tax. 

Your company could end up being prohibited from doing business in that state, or your tax debt could even go into collections just to name a couple of the potential negative consequences for failure to pay taxes. Many small businesses cannot survive such events and would have to close up shop for good. Do not let this happen to you.

Our firm, Brotman Law, specializes in helping small business owners manage their multistate taxes. We can assist you to plan tax strategies that can keep you out of trouble as well as defend you in case you get audited.

Multistate taxes present very complex issues, and you need an expert to help you sort through them. That’s why we’re here for you.

The Most Common Problem of Multistate Businesses

The most common problem we see with multistate businesses is a failure to understand and identify the problem. Depending on your level of sophistication, you may rely on a CPA for tax advice. You may even enjoy the benefit of having an internal CFO, an internal controller or somebody else who guides you through the financial world. 

The frequent problem with most companies is when they think about taxes, they think about federal and possibly state income tax. When they think about state income tax, they normally only think about the state in which they are physically located.

The problem with multistate taxation is that laws of different jurisdictions are implicated. Thus, such laws may fall outside the expertise of the people that you trust for your tax reporting and advice.

Take a CPA, for example. Most CPAs firms do not specialize in multistate taxation. Chances are, your CPA probably specializes in preparing federal and state corporate income tax returns as well as individual returns. 

Multistate taxation is a different beast. In preparing your federal and state income tax returns, many accountants may not realize that the activity that you or your business is conducting is creating what we call “nexus” with a different state, thereby subjecting you to tax liability in that state. 

Think about it. When was the last time you talked to your CPA about multistate tax consequences? When was the last time your CFO thought about the jurisdictional tax requirements for the various states in which your business is expanding? Multistate taxation is not an issue that many companies think about. 

That is why we created this free guidebook, “The Ultimate Guide to Multistate Taxation in California.” This book is a must-read if you participate in any type of interstate commerce, especially if you conduct business online.

We will talk about unique problems of businesses that do transactions outside their traditional home state. We will also discuss the tricky topic of what constitutes “nexus,” including the definitions of what constitutes physical, economic and affiliate nexuses. We also will discuss issues specific to California.

Furthermore, we will provide strategies for compliance and tips to avoid audits. Lastly, we will discuss the tax implications of multistate residency.

Here is a preview of the chapters in our guide:

Chapters

01

Situations That Trigger Multistate Tax Problems

This chapter will give you an outline of what circumstances lead to multistate tax issues. This chapter is designed to orient you to how your business practices might trigger one of these issues. This brief chapter is here to increase your awareness.

02

What is "Nexus?"

This chapter breaks down the various types of nexuses with an emphasis on affiliate nexuses, and their impacts on remote sellers. We will discuss sales volume and amount of sales, two key elements in determining whether or not a business has nexus in a state. Lastly, we offer some tips on how to get into compliance, remain in compliance, and steps you can take to avoid tax audits.

03

History of Nexus Rules and Case Law

Here we will provide a brief history of the nexus rules and case law to help you understand how the law has evolved to become what it is today.

04

Risks Associated with Multistate Commerce

In the fourth chapter, we will look into the risk factors of multistate commerce, how to avoid tax liability and what to do if you are audited. We will also discuss how Brotman Law can defend you in the event of an audit, what to expect of the audit process and how much it may cost to defend you against an audit.

05

Getting Ahead With Proper Planning

This chapter discusses how our firm can assist you with planning for these multistate tax issues. We go over our firm philosophies, strategies, and rates as well as how we can assist you in audits and other interactions with the taxing authorities.

06

FAQs

This chapter addresses all of the questions small business owners may have about multistate taxation. Topics include amnesty, suspension of corporations, eCommerce, drop shipping and more. We designed this section to answer your most likely questions.

07

Multistate Tax Issues and Residency

The final chapter discusses the tax implications if you have residences in more than one state. We will sort out what constitutes a domicile vs. residency and how to avoid a residency audit.

Thank you in advance for reading “The Ultimate Guide to Multistate Taxation in California.” It was a labor of love for us, and our law firm welcomes all questions, comments, concerns, and feedback that you may have about this free resource.

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Chapters