Taxes: one step over the (state) lines

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It is an Amazon world.  Buying cheaply from distant vendors and selling to customers far away is important even to the smallest businesses.  Unfortunately, tapping markets in other states can easily ensnare you in other state tax systems.

States can impose income taxes on out-of-state businesses with activities that go beyond sales activities to generate orders to be approved out-of-state.  That can be an easy bar to clear.  A Council Bluffs contractor who crosses the river to do a project in Nebraska not only crosses the state line, but also the line that subjects him to the Nebraska income tax.  A salesman who also maintains an inventory in a state to fill orders there brings his employer into that state's income tax.

For sales tax, the bar is even lower.  Having a non-employee salesman in a state can subject all of your sales in that state to sales tax there, even if the activity does not meet the level that triggers income taxes there.

Being subject to income taxes isn't the end of the world.  If an individual pays taxes in another state, it may reduce home state taxes dollar for dollar; all states imposing an individual income tax provide a credit for taxes paid in other states.  Corporate taxpayers subject to taxes in other states may be able to take advantage of favorable tax rules in the home state, like Iowa's "single-factor" apportionment rules. 

Still, taxes in another state are a hassle.  The states all have their own rules for computing taxes, their own deadlines, and, often, their own unhelpful tax bureaucracy.  It's much less of a hassle, though, when you plan for it than when some state assesses you for five years of back taxes.

If you are doing a project across state lines, let your tax pro know.  When you put together your information for your 2009 business tax returns, be sure to put list out your sales, property and payroll by state.  Let your preparer know if you are renting business property out of state.  If you aren't sure whether you've done enough in another state to trigger tax there, go over things with your tax advisor.