Multi State Tax Issues

Multi state tax issues don't just impact businesses. In fact they impact people probably a lot more than they impact businesses. The reason for that is people move around a lot more than businesses do. So think of it this way. You have a situation where you have a client who's in one state and they travel back and forth frequently between let's say California and Texas, California has a 13.3% individual income tax rate, Texas has a 0% individual income tax rate. So the amount of tax that the taxpayer pays based on their movements between different states is going to depend on the residency of the particular taxpayer. Now residency is closely tied with domicile, which is a legal term. The domicile is essentially somebody's home base so once you move into a home and take steps to establish your domicile in one state, that state becomes your tax home however until you establish a domicile in that state or until you more specifically move your domicile outside of a state, that's where you run into problems. So take for example California that's been super aggressive in dealing with some of these issues.

In order to survive a residency audit for California you're going to need to prove that you are a resident of that particular state that you took steps to establish the domicile. So there's a variety of factors that go into this. It can be factors such as where your wife and where your kids are, where do your children go to school, what's the location of your bank accounts, where do you go to church, where do you visit your doctors, where are you registered to vote, where your car is registered, etc. So there's a variety of different factors. There's about 19 in total and all of them have this interplay to determine whether or not you're resident. So obviously residency audits are something that are really complex because there's not one particular factor that is dispositive and you can have factors in certain situations that end up on both sides but the issue is (particularly for clients that view themselves as residents of one state and not the other) it's really important to deal with these issues. California in particular has been very aggressive in coming after out of state people who they claim are residents of California for one reason or another. Even the minimal act of holding property here, like a second home in your name or something else, can trigger a residency audit so it's very important to respond to these things. It's very important to respond forcefully because the tax consequences are significant and you want to make sure that you have a good plan in place and deal with the residency audit as early as possible before it becomes a full-blown examination.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law