The state and local tax (SALT) landscape is evolving rapidly, presenting both challenges and opportunities. With shifting nexus standards, increased audit activity, and the complexities of a digital economy, businesses must stay compliant while optimizing their tax positions. This overview highlights the key SALT issues businesses should monitor.
Economic Nexus: A Moving Target
Following the South Dakota v. Wayfair decision, states have expanded economic nexus thresholds and intensified audits. These thresholds continue to change, potentially triggering new compliance obligations.
Businesses should:
Monitor sales and transaction volumes by state
Track nexus exposure
Ensure accurate collection, remittance, and filing of applicable taxes
Public Law 86-272: Under Scrutiny
P.L. 86-272 protects out-of-state businesses from state income tax if their only activity is soliciting sales of tangible goods. However, this protection doesn’t apply to other taxes (e.g., gross receipts, sales/use, or net worth taxes), and states are increasingly challenging its scope.
Activities that may void protection include:
Post-sale support via website
Online credit card or job applications
Use of cookies for business analytics
Selling extended warranties
Storing inventory in-state via marketplace facilitators
Businesses should review their digital footprint and adjust accordingly.
Sales Tax Automation: Benefits and Risks
Automation tools can streamline compliance but may introduce errors if not properly configured.
Common issues include:
Misclassified products or services
Incorrect local tax rates
Inability to handle complex tax rules
Regular system reviews are essential to ensure accuracy.
Rising Audit Activity
States and localities are increasing audit enforcement. Triggers include:
Rapid growth
Inconsistent or missing filings
Unregistered multi-state operations
Filing payroll or sales tax returns without income tax returns
To prepare:
Maintain detailed records
File timely and accurately
Consider voluntary disclosure agreements (VDAs) where appropriate
Pass-Through Entity Taxes (PTETs): A Strategic Tool
To bypass the federal $10,000 SALT deduction cap, many states allow partnerships and S corporations to pay state taxes at the entity level. This workaround can preserve federal deductions for individual owners.
However, PTET rules vary by state and elections are often irrevocable. Careful evaluation is necessary to determine potential benefits.
Digital Goods and Services: Expanding Tax Base
States are increasingly taxing digital offerings such as:
Streaming services
Cloud computing
SaaS
Digital advertising
Taxability rules vary, so businesses must stay informed and adjust systems accordingly.
Remote Work: Payroll and Nexus Implications
States may tax income earned by remote employees working within their borders, even without a physical employer presence.
Businesses must:
Track employee locations
Withhold correct state/local taxes
Assess nexus implications of remote work
Failure to comply can result in penalties.
Local Taxes: The Hidden Burden
Local jurisdictions may impose additional taxes, including:
Local sales/use taxes
Gross receipts taxes
Business license fees
Property and delivery taxes
Businesses must ensure their systems can manage local compliance requirements.
Looking Ahead: Planning Amid Uncertainty
Ongoing legislative, regulatory, and judicial changes continue to reshape SALT obligations.
Strategic planning includes:
Potential federal tax reforms
State conformity or decoupling
Impacts on deferred tax assets/liabilities
Scenario modeling and flexibility are key to staying ahead.
Conclusion
The SALT environment is complex and constantly changing. Businesses must take a proactive, strategic approach—leveraging technology, staying informed, and seeking the guidance of SALT specialists.
By addressing the issues outlined above and implementing strong compliance frameworks, businesses can reduce risk, uncover savings, and improve operational efficiency. Partner with Herbein’s experts to simplify SALT compliance.
Article contributed by Lou Palladino, CPA, CFA, MBA.
