Startup Legal Talks (4)

Teach you how to sort out the interstate taxation relationship in the United States. Can avoiding high-tax states reduce the tax amount of the company?

More dry stuff, less wordy, and welcome to startup law. In the last issue, we talked about the company's income tax payment, which has nothing to do with the state of the company's registered state. So which state should we pay taxes according to? Is it possible to reduce a company's tax bill by avoiding high-tax states? Today, I will take you all to calculate the account together and take a look at this problem.

I want to make a statement here, companies have many kinds of taxes to pay. We only discuss income tax today, otherwise it will be a sea, and there is no end to it.

1. Concept Analysis

The first big rule to understand is that corporations are taxed in all states with substantial nexus. Don't panic when you hear this, it doesn't mean that the same money you earn is taxed in multiple states, but the same money you transfer is in a different state where your company has a physical connection. There is an allocation between.

There are three main factors that determine the actual connection: sales, payroll, and property. In another way, we may have a more intuitive feeling, that is, customers, employees and offices.

Then we will calculate a percentage for each factor, that is to say, the company's sales in a state are divided by its total sales in the United States to obtain the proportion of the state's sales factors. The company's sales in a state Dividing employee wages by its total U.S. employee wages yields the state's share of the sales factor. The company's property value in a state is divided by its total property value across the United States to arrive at the state's property factor ratio.

Sales Factor = Sales within the State / Total Sales

Payroll Factor = Payroll within the State / Total Payroll

Property Factor = Property within the State / Total Property

After the proportion of these factors is calculated, each state will assign a weight to these factors. Multiply this weight to calculate the percentage of a company's tax payable in this week to the company's total tax payable.

Percentage of Taxable Income Reported in State = Sales Factor × Sales Weight + Payroll Factor × Payroll Weight + Property Factor × Property Weight

This may sound a bit messy. We will give an example to illustrate it. Before that, the last concept that needs to be explained is this weight. Each state values ​​different factors. Here is a table. For example, 3 factors are three The weights of the elements are equal. For example, if only sales are written, the other two elements are not viewed, but only sales are considered. If there is double weighted sales, all three elements are viewed, but the weight of the sales element is twice the weight of the other two. .

2. Examples

Well, with that out of the way, let's start with examples. Suppose a company has a total salary of $10,000,000 for its employees across the United States, a total property value of $20,000,000, and a total sales volume of $25,000,000. It operates in three states, Montana, New York, and Florida. , why choose these three states? Because they represent the three most typical weights, Montana (Montana) is the average of the three factors, New York (New York) only looks at the sales factor, Florida (Florida) is all three factors but the sales factor twice the weight.

So now we assign values to each element in each state and calculate the percentage of each element in each state.

Taking this together, you will find that the total ratio is only 0.9375, which is less than 1, which means that the taxable amount of $5,000,000 is only $4,687,5000. Do you feel that there are some loopholes to take advantage of?

Third, are there any gaps?

But in fact, there are no loopholes in the U.S. tax law that can be drilled. Why do you say that?

Let's summarize the weight table just mentioned. in:

There are 8 states with an average of the three factors, namely Alaska, Hawaii, Kansas, Louisiana, Missouri, Montana, and North Dakota. ), Oklahoma, doesn't it feel like none of these states exist? Yes, these states are basically the worst economic states in the United States, and there are few places where people go.

Looking at the states that sell a single factor, this category has the most states, including Washington, D.C., California, Colorado, Connecticut, Georgia, Illinois, Indiana (Indiana), Iowa (Iowa), Maine (Maine), Michigan (Michigan), Minnesota (Minnesota), Nebraska (Nebraska), New Jersey (New Jersey), New York (New York) York, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Wisconsin, this group Does it sound more familiar? Yes, these states, except for a few in the middle, are the most economically developed states in the United States.

Finally, there are 9 states that consider all three factors but give twice the weight to the sales factor, including Alabama (Alabama), Arkansas (Arkansas), Delaware (Delaware), Florida (Florida), Idaho ( Idaho), Kentucky (Kentucky), New Hampshire (New Hampshire), Vermont (Vermont), West Virginia (West Virginia), these states are relatively modest.

Then everyone should also see that the worst economy will consider the three factors equally, the most economically developed states only consider the sales factor, and the middle economic place will consider the three factors, but also consider the sales factor as two double-checked. It can be seen that the element of sales is a very important assessment method. And that's one of the hardest elements to control, because where sales originate is where your customers are. What company would not do business in a state because of its tax disadvantage? Probably not. And because these states that only consider the sales factor are the most economically developed and populous states, they are often the battlegrounds for every company to do business. When it comes to marketing, no one will give up the two big states, California and New York.

In addition, some people may think that the example I gave above is a bit too complicated. How can there be so many companies operating across so many states. But now in the Internet age, whether it is selling goods or services, customers are all over the country, and more and more people are working from home after the epidemic began. If your employees can't stand the high cost of living in New York, California, they moved to a A state with relatively low consumption adds another state with substantial connectivity.

Having said that, everyone should have discovered that it is basically impossible to avoid tax by avoiding some states. Tax payable is the product of taxable income and the tax rate. That is to say, it is basically difficult to manipulate the tax rate here. Then I want to tell you that what really needs to be reduced is taxable income. I'm just here to give some advice. Tax avoidance is a big question. Never try to avoid tax simply by registering a company in certain states or controlling some elements in certain states.

More dry stuff, less wordy, here’s what startup law says, let’s go down and see you.