State and local taxes: Key considerations when doing business outside your home state.

Clark Nuber Business Insights
As your business grows and you begin selling your products or services outside the state of Washington, you need to consider the tax implications. Other state and local governments are, of course, excited to have you selling to their residents and businesses. Each sale means the potential of added revenue to government coffers in the form of numerous taxes, including business taxes, such as income or franchise taxes; transaction taxes, such as sales and use taxes; and taxes associated with a mobile workforce, such as payroll taxes and personal income tax withholding. 
A business becomes subject to tax in another state when it establishes what’s known as “nexus.” Nexus refers to the level of activity that must occur within a state in order for the state or local government to have the authority to impose taxes on out-of-state business. Nexus standards vary from state to state and may depend on the nature of your activities in the state and the type of tax involved. 
Companies often make a critical mistake in thinking that an in-state employee is required in order for taxes to be due. While having an in-state employee does trigger state and local tax obligations, many taxes have a much lower nexus threshold. For sales taxes, nexus requires that the seller have some form of a physical presence in the taxing state. This includes having employees or independent contractors visit existing or potential customers and can extend beyond the obvious. In most states, attending or exhibiting at trade shows can create nexus. 
Physical presence often includes various forms of collaborative marketing agreements with in-state marketing partners. Businesses that make sales of products and services to end users need to be sensitive not only to nexus considerations, but also to whether their products and services are subject to tax in the customer’s state. Here the rules vary widely. 
Perhaps the biggest misconception about taxability is in the area of digital goods and services, such as SaaS and other cloud-based services. Companies with nexus that sell taxable products and services are liable for sales taxes they fail to collect. The key is to understand the various state rules so you don’t face a large, unexpected tax liability.  

Generally, a physical presence giving rise to a sales tax collection obligation will also subject the business to income or other business privilege taxes. So-called “economic nexus” laws are becoming increasingly popular in states that impose business privilege taxes. These laws provide that companies with sales volume above a certain threshold are required to pay business privilege taxes, regardless of whether any physical activity takes place in the taxing state. 

The good news is that federal law generally prohibits states from imposing net income taxes on out-of-state businesses that sell tangible personal property where the only activity in the taxing state is soliciting orders for sales. This federal law does not apply to business privilege taxes measured by gross income, gross margin or invested capital.
Like Washington, other states impose taxes on the employment relationship. Companies with out-of-state employees should expect to pay unemployment and workers’ compensation insurance premiums as well as withhold personal income tax. Moreover, companies with a mobile workforce may be required to withhold and remit personal income tax in states where employees travel.  
Income earned by employees while working in states with a personal income tax is usually taxable and the employer is required to withhold and remit the tax. The employees are then required to file nonresident income tax returns in the states where they travel to perform work. This is an issue even if employees are only in the state for a few days a year. Companies with a mobile workforce are advised to seek advice on how best to balance the burden of technical compliance with the potential exposure to tax, penalties and interest for failing to comply.
Bob Heller is a Tax Shareholder with Clark Nuber PS and leads the firm’s State & Local Tax Practice. Reach him at 425-635-7424 or BHeller@clarknuber.com. Learn more about Clark Nuber at www.clarknuber.com.

On Reflection: Foreign Service

On Reflection: Foreign Service

An unlikely alliance is pointing out how immigration reform would aid the economy.

The United States has long been schizophrenic on the issue of immigration, says Washington Technology Industry Association (WTIA) CEO Michael Schutzler. As each new wave of arrivals played critical roles in the nation’s economic growth, their presence often generated fear and disdain.

Recent anger toward Muslims and Mexicans expressed at presidential candidate Donald Trump’s rallies are exceptional only in that the sentiments come at a time when immigration has actually been on the decline.

Partnership for a New American Economy, a bipartisan group that makes allies of such unlikely pairs as right-wing media magnate Rupert Murdoch and grass-roots activist group One America, has released an extensive report that highlights the benefits of immigration to each state and calls for reforms in the immigration system.

When it comes to Washington state, a key concern is the need for more talented tech workers. “We don’t have enough people to fill our needs,” says Maud Daudon, CEO of the Seattle Metropolitan Chamber of Commerce. In Seattle in 2014, seven tech vacancies existed for every unemployed tech worker.

While many have criticized H-1B visas granted to technology workers as taking away jobs that could go to native-born Americans, the report points out that only 8,000 of the 275,000 people working in Washington’s tech industry possess such visas. Meanwhile, the report argues that each foreign tech worker employed creates an additional two to three jobs for native-born Americans. 

Each graduate-level STEM worker employed creates an additional 2.6 jobs, yet “the United States turns away half of all foreign born Ph.D.’s coming out of U.S. institutions,” says Matt Oppenheimer, CEO of Remitly, a Seattle startup that offers a cheaper way for foreign workers to send money back to their families.

With each generation of immigrants leaving the agricultural workforce in search of year-round jobs that don’t require travel and outside work, Washington’s farmers also depend heavily on new immigrants, says Michael Gempler, executive director of the Washington Growers League, a Yakima organization that represents Washington farmers. A reduced workforce, he says, is causing more agricultural production to move offshore.

A 20 percent reduction in the number of new field and crop workers immigrating to the United State between 2002 and 2014 resulted in $3.1 billion less production of labor-intensive crops like fruits, vegetables and tree nuts, according to the Partnership for a New American Economy report. That production, the group says, would have led to an additional $2.8 billion in spending and created an additional 41,000 jobs.

Locally, says Gempler, lower agricultural production threatens to reduce not only the acreage of fields planted but also investment in factories to process that food. Particularly hurt, he says, are small farmers who don’t have the resources to navigate the complex and costly process for getting workers into the country legally.

Immigrants in Washington
929,505: State residents born abroad (13% of total population)

251,703: Undocumented immigrants in state (who earned $4.7 billion and paid $586 million in taxes and $417 million in Medicare and Social Security in 2014)

Immigrants in Washington Make Up
55% of farmworkers
34% of computer system designers
42% of maids and housecleaners
30% of personal care aides
25% of STEM workers

Immigrants in Washington Contribute
$249.9 billion: 2014 revenues of state-based Fortune 500 firms founded by immigrants or the children of immigrants

$30.9 billion: 2014 earnings of state’s immigrants

SOURCE: The Contributions of New Americans in Washington, by The Partnership for a New American Economy