Self Employment multi state

[hillsboro15269]

Client is self-employed (Sole Prop), consulting.

She spent a lot of time in other states, earning money in those states.

Does she need to file a state return for the states where she worked?

(If she were a partnership or corporation, I know the answer would be "yes." For Sole Props I'm not sure.)

[BobKamman]

It depends on which state, how long she worked there, how much she made.  

[Just-Lisa-Now-]

If she got any 1099s from California, Im sure they'll be expecting a tax return.

[Terry53029]

You need to check filing requirements for each state she had income in.

[Rick19744]

As noted, it depends on each particular state.

Not only do you need to look at the filing requirements, but you need to review each states nexus standards.

While Quill and National Bellas Hess were specific when dealing with economic nexus (limiting this to sales and use tax only), the Wayfair decision was more broad.  This decision did not expressly differentiate between state income tax or sales and use tax when it changed the physical presence rule.  As a result, states are more likely to be more aggressive on their economic nexus standards.

[qbteachmt]

It's just amazing what you get as Results from a google web search on:

consulting services taxable by state

Example:

https://www.avalara.com/us/en/learn/whitepapers/service-taxability-by-state.html

[Rick19744]

And the amazing result as stated in the "google search":

Remember that within each category of services, states can still have drastically different regulations.  For instance, both Florida and Iowa are marked as taxing “business services,” even though Iowa taxes a wide range of these services and Florida only taxes security and detective services.

For more details about the specific tax liability of your business in individual states, consult state Departments of Revenue for additional information.

Not sure I would want to sit in front of a taxing authority with a google search as my defense.

[ShoeBox Taxes]

That's sales tax, not income tax. Though it's fascinating.

[BobKamman]

@Rick19744  Not only do you need to look at the filing requirements, but you need to review each states nexus standards.

Nexus is not really an issue for someone (like here) who actually spent time in the state where the income was earned.  But maybe the Henry Miller trilogy is a possible read for those staying at home.  

[qbteachmt]

I'm sorry; you simply asked about "state return" and sales tax immediately comes to mind when it is Other States, as with the note regarding the Wayfair settlement.

Your client has a State of residence, for income tax purposes, so you have to examine how each State treats "worked and earned while physically present" for those locations.

[Rick19744]

Of course nexus could be an issue.

Some states have rules regarding the number of visits to the state.  So as noted ,each state is different and you need to look at how that particular state determines nexus.

[sjrcpa]

@Rick19744That quoted language seems to be for sales tax, not income tax.

[Rick19744]

@sjrcpa don't disagree.  The point is that as noted previously, each state is specific and needs to be reviewed individually.

[sjrcpa]

 I agree with that.

[hillsboro15269]

Wow. I have no idea who Quill, National Bellas Hess, or Wayfair are, or what "nexus" is, besides a term in physics and higher math (and I know what it means, just not how it would apply here).

She has two 1099s, both around $30k. One of those 1099s has an address in Ohio, and the other in Missouri. 

I don't know which of her jobs apply to which 1099, but I do know that she worked primarily from home (in Oregon, which will tax everything and ***may*** give her a refund for income taxed by other states), and also did the following work-related travel: 16 weeks in San Francisco; 4 weeks in New Orleans; 1 week in Ohio. It is possible the Ohio travel is related to a portion of the income reported on the 1099 from Ohio, but not 100% certain.

Let's take CA. I used to be a tax prep in that state, and I know they like to tax everything. If they find a way to tax poop they will. But there's no 1099 from CA. How would FTB know she earned money there? If she's required to pay, how much should she pay? Should it be based on the income she received from CA (which is technically $0, according to the 1099-MISC) or the amount of time spent in CA? 

[BobKamman]

Nexus is not an issue for someone with physical presence.  In the context of recent court decisions,  It's an on/off switch for those with "contacts" that are based on factors other than being there.  Some states have laws that exempt individuals with nexus from paying tax, if the amount of income or the length of stay is below certain standards.

If you formerly practiced in California, you know the FTB sometimes takes a while to get around to conducting an audit.  Let's say her 4 months in SF generated the Ohio 1099.   Let's say that company is in Cleveland, and Sacramento sends an auditor there only twice a year.  When they show up in September, the company's penalty for not filing the correct 1099 will be reduced if they get around to doing it right away.  Or maybe the Ohio company has an accountant that hasn't dealt with California filing requirements until this year, but attends a seminar next month and learns what should have been filed.  

California, like IRS, doesn't tax pieces of paper.  It taxes income.  Your mindset should not be "no piece of paper, no tax ."  It should be, "let's pay the right amount of tax to the right state."

[qbteachmt · Accepted solution]

Nexus = your activity is treated the same as if you are there, such as, I work from Montana to provide a consulting service using the internet to Texas or CT and they want me to pay Sales Tax on the service rendered, the same as a local provider would be doing.

Wayfair = the people that advertise on TV for online ordering and delivery of household goods, including headboards with bed bugs. They got sued by South Dakota for not collecting sales taxes on sales made to people in that State. Wayfair is the settlement that opened up the world wide web to Nexus for sales taxes "across State Lines" for purchases from online sellers.

"It is possible the Ohio travel is related to a portion of the income reported on the 1099 from Ohio, but not 100% certain."

Your Client knows. No one is just working blindly not knowing who hired them for what or why they just traveled to OH or not knowing who paid them. Sheesh; hold that client responsible. And it's not just 1099 details; it is All Revenue that needs to be part of tax reporting. You know this. Tell the client to give Details.

"Let's take CA. I used to be a tax prep in that state, and I know they like to tax everything."

Try this one: A CA lottery winner moved to MT and all their lottery income is taxed here.

"But there's no 1099 from CA. How would FTB know she earned money there?"

Because a company with a CA tax return that filed information returns (1099) with their own CA address has reported there are payments made to someone not having a CA address? I like to use the word "discoverable" as in, if there is any sort of paper trail, that is Discoverable, if someone starts looking.

"If she's required to pay, how much should she pay?"

On what she reports, for what qualifies.

"Should it be based on the income she received from CA (which is technically $0, according to the 1099-MISC) or the amount of time spent in CA?"

Well, this just got confusing. You stated there is no Income, even though she worked while in CA? But, no income means no work.

And remember, even if she makes $2,000,000 as long as no one party pays $600 or more, there is never any 1099-M (NEC) issued. So I would drop the presence of 1099 from the discussion of proper reporting and filing of taxes, since it doesn't apply to what you, a professional tax preparer, are supposed to be doing.

[Rick19744]

@BobKamman said:

Your mindset should not be "no piece of paper, no tax ."  It should be, "let's pay the right amount of tax to the right state."

This is the paradigm that all tax preparers should have.  Excellent reminder.  

[sjrcpa]

Quill, National Bellas Hess, and Wayfair are US Supreme Court cases (the law of the land) on state taxation.

Being a professional tax preparer you need to learn about nexus for state tax purposes.