Multi-State Tax Considerations for Individuals and Business Owners
An overview of residency, nonresident filings, business nexus, rental properties, remote work, and other issues that can create tax obligations across multiple states.
Crossing a State Line Can Create More Than One Tax Obligation
Living in one state while earning income in another is increasingly common.
Remote work, rental properties, business expansion, pass-through investments, relocation, and employees working across state lines can all create multi-state tax questions.
There is no single nationwide state-income-tax rule. Each jurisdiction has its own residency, sourcing, nexus, withholding, and filing requirements.
Residency Matters for Individuals
States may distinguish among:
- Residents
- Part-year residents
- Nonresidents
- Domiciliary residents
- Statutory residents
For example, Virginia generally taxes residents on income from all sources and also imposes filing requirements on nonresidents with Virginia-source income. Virginia also recognizes both domiciliary residency and an actual-residency test involving maintaining a Virginia abode for more than 183 days during the year.
Other jurisdictions may use different standards.
Working in Another State
An individual may live in one state but earn income sourced to another.
That can potentially create:
Resident Return in Home State + Nonresident Return in Work/Source State
Depending on the jurisdictions involved, credits or reciprocal arrangements may reduce double taxation.
For example, Virginia provides a credit in certain circumstances when income included in Virginia taxable income is also taxed by another state.
The exact treatment depends on the states involved.
Rental Property in Another State
Real estate generally creates tax considerations in the state where the property is located.
An investor who lives in Virginia but owns rental property elsewhere may therefore have filing obligations outside Virginia in addition to the resident-state return.
The same issue can arise when the property is eventually sold.
Businesses Can Create Nexus
For businesses, the question becomes broader.
Activities in another state can potentially create nexus, meaning sufficient connection for that jurisdiction to impose certain tax or filing obligations. The Multistate Tax Commission maintains a National Nexus Program specifically addressing state tax compliance arising from interstate commerce.
Potential triggers can involve:
- Employees in another state
- Physical offices
- Property
- Inventory
- Remote workers
- Sales activity
- Services performed in another jurisdiction
- Other economic activity
The applicable rules depend on the specific tax and jurisdiction.
Pass-Through Businesses Add Another Layer
Owners of partnerships and S corporations may receive K-1 income sourced to multiple states.
Depending on the circumstances, this can involve:
- Nonresident returns
- Composite returns
- Pass-through entity taxes
- Owner-level estimated payments
- State withholding
- Credits for taxes paid to other states
For example, Virginia provides procedures for resident owners included in qualifying pass-through entity composite filings in other states when determining available credits.
Plan Before Expanding
The best time to address multi-state taxation is before hiring an employee, opening an office, purchasing property, relocating, or substantially expanding activity into another state.
At Akato & Associates, we help individuals and businesses evaluate multi-state filing obligations and coordinate federal and state tax planning as their activities expand across jurisdictions.
This material is provided for general information only and does not constitute accounting, tax or legal advice. It does not take account of your particular circumstances. Contact the firm before acting on anything you read here.