Welcome to our state, stranger!

Al Franken has been waiting out the last remaining 2008 U.S. Senate vote count for four months now.  If he hadn't run into multi-state income tax troubles, he might be comfortably settled into Walter Mondale's old seat.  Mr. Franken's tax troubles show how tricky state taxes can be for a small business.

His problems arose as he traveled around the country for appearances and speeches.  All it took was a single money-earning visit to, say, Boise to drag him into the Idaho income tax system.  A comedy club here, a college there and soon you have to file in a bunch of states.  When it came up during his campaign, Mr. Franken had to pay $70,000 in back taxes in 17 states.

How this happens

State tax compliance is a bane of small business life. It can take surprisingly little activity in a state to trigger "nexus," making you subject to that state's income taxes.

Mr. Franken's problem is common. Undoubtedly, many little businesses hop in and out of states without bothering to file.  That can be a dangerous habit. If you never file in a state, the statute of limitations never stops running, and you can theoretically be assessed taxes there forever.

States can tax the income of visiting businesses if they do anything more in the state then promote sales to be filled from out of state.  Maintaining inventory, doing consulting or construction projects, or almost anything else can subject you to income taxes in a state, even if you only do it for a day or two. 

Some states, like Texas, Michigan and Ohio, have enacted "gross receipts" or "franchise" taxes that have even a lower "nexus" threshold.  If you even sneeze in the general direction of Texas, you probably have to file there.

States are getting more sophisticated at identifying taxpayers who do business in a state, and this is becoming an issue to more taxpayers as interstate business becomes more common even for small businesses in the information age. Of course, states love to tax out-of-state taxpayers because they can't vote. Perhaps personal experience will make Mr. Franken sympathetic to legislation that would prevent states from taxing businesses that only are in a state a few days in a tax year.

If you have customers in multiple states, it might be time to sit down with your tax adviser. If you have potential problems for old years, your tax adviser might contact the state and work out a deal to limit exposure to, say, three years back taxes without penalties to encourage you to come forward voluntarily. But, as the mutual funds say, your results may differ