Startups are increasingly shifting towards a remote workforce, yielding numerous benefits but also exposing them to a cluster of tax matters that demand immediate attention. Among pressing concerns are gross receipts taxes, unclaimed property, and the unfamiliar tax term nexus, which entails vast business implications.
Startups need to understand that they have income tax withholding obligations for their remote employees in states that impose a personal income tax, irrespective of whether the company has a permanent office in the state. A lesser-known fact is that startups could find themselves in the middle of entity-level income tax filing obligations due to the remote employees that they employ. This is due to a rule in the US Constitution that allows a state to impose a tax on a company if it has a substantial nexus with that state.
Hence, startups must meticulously assess the states where their remote employees are or will be based, to determine potential income-tax filing obligations on a state-by-state basis.
Similarly, a common mistake among startups is assuming that their state income tax filing demands cease at entity-level state income taxes in the absence of federal taxable income. However, that’s not the case. Several states, including Ohio, Nevada, Texas, and Washington, impose a company’s taxes based on its gross receipts rather than net income. This can potentially include startups with heavy revenue but no federal taxable income.
On top of being imposed state-wide, gross receipts taxes are also levied at a local level. For example, San Francisco imposes a tax on all taxable business activities attributable to the city. But startups should be aware that the deadline for gross receipts tax filings often deviates from the usual filing deadlines that apply to income-based taxes. So, it’s essential that startups are aware of their obligations and deadlines related to these taxes.
Lastly, startups must also be alert to the danger of unclaimed property. It, though technically not a tax, is a significant revenue source for states. Hence, failure to report such property could lead to berating enforcement of unclaimed property laws by the states which could escalate to taxing disputes.
To avoid such tangling scenarios, startups must decide whether they are holding any property that might be considered liable to be handed over to states under specific conditions. This would include employee wages, refunds, customer credits, and accounts payable and receivable among others.
By adapting to an understanding of these laws and endorsing an unclaimed property compliance process, startups can significantly curb future exposure to unclaimed property, shielding themselves against state audits and examinations.
Note: The views and opinions expressed in this article do not necessarily correspond to those of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
About the Authors
Michael Giovannini is a partner in Alston & Bird's global tax services group, focusing on multistate tax and unclaimed property planning.
Josh Labat is a senior associate in the same practice, specializing in complex tax controversy matters.