What are the risk factors for doing business in multiple states? Well, when you operate in one state, your circumstances are pretty easy to control. The facts of just your business, you have control over how those change. You’re only worrying about your state’s law. And it’s a much smaller scale. The problem is with a growing number of businesses today, a growing number of businesses are reaching out and having contacts with multiple states. So there’s a number of different ways that this creates risk for businesses.
Number one is shifting facts. So as you widen your net, as you get broader and bigger, and as your level of contacts increases with different states, you can’t always control the facts of your situation. So for example, if you have an employee in your company and they move to a different state, well, now you’ve just created nexus in that state for circumstances that are really kind of beyond your control.
The same thing with vendors. If you’re using vendors in multiple states, then you have to be worried about their contacts and their practices to make sure that their activity is not creating nexus for you in a state that you didn’t intend.
The next part that’s really complicated and that creates a lot of risk is the changing laws. So
nexus laws and the laws around multi-state businesses, number one, they’re very actively changing at this moment because a lot of states are trying to broaden their tax base. They’re trying to create as many taxpayers as possible to fund the revenue coffers of their state.
So the laws are changing in these areas, but it’s not like you’re dealing with one set of laws either. You’re dealing with laws for all 50 states. And while a lot of states do things similarly, there are some very pronounced differences between the different states. There’s not only difference from the law side of things, but there’s also differences from the enforcement side of things.
So you take a state like California, California is very, very aggressive towards out-of-state businesses and very unforgiving when an out-of-state business claims ignorance to California’s laws.
So that’s kind of the overall landscape of why multi-state taxation creates risk for businesses that operate in multiple states. And the best thing that you can do is try and protect yourself from that risk by understanding it and taking actions to mitigate it.