Year-End State and Local Tax Planning Perspective

In recent years there have been significant changes to the State and Local Tax Nexus rules. Historic physical presence nexus standards are long past. Today, almost all states employ economic nexus concepts, whereby merely having sales sourced to a state generally result in a filing requirement even without a physical presence. The Wayfair case validated economic nexus for sales tax purposes and amplified economic nexus for income tax purposes, signaling to all states that economic nexus is sound law.

Economic nexus presents risk and opportunity for service providers. States across the nation use different sourcing rules and methodologies to assign sales to a state. Although many businesses might be subject to nexus, with proper planning, income tax burdens can be alleviated or reduced with sales-sourcing analysis. As states continue to shift to using the sales factor as the sole measure of apportionment, and market-sourcing continues to be prevalent in sourcing sales, businesses are actively reconsidering their sales sourcing approaches to potentially reduce state taxes.

Your business should be considering a State and Local Income Tax Nexus and Sales-Sourcing Assessment if:

  • Service revenue streams are derived from multi-state customers/clients
  • Business’s receipts per state would vary based on possible different sourcing rules, such as:
    • Location where services benefit the customer.
    • Location of customer's billing address.
    • Location of customer’s headquarters.
    • Location of customer’s primary interaction/contacts with the business.
    • Location of customer’s order location.
    • Location of the customer’s customer (i.e., ultimate customer).
    • Other metrics (e.g., IP address analysis) that could result in a varied sourcing approach.
  • Sales would be subject to special industry sourcing rules, such as financial services, technology (e.g., SaaS), advertising, transportation.
  • It has significant tax in any respective out-of-state jurisdiction.

State and Local Tax Workarounds

One of the centerpiece provisions of the 2017 TCJA was the $10,000 limitation on state and local taxes (SALT) that individuals (including pass-through businesses) may claim as an itemized deduction on their federal returns. The SALT limitation profoundly impacted many business owners.

Several states responded by enacting pass-through entity taxes (PTETs) as a workaround to mitigate the impact of the SALT deduction limitation for the owners of pass-through entities. As of the end of 2022, over half the states have enacted PTETs, making the availability of PTETs more commonplace rather than the exception. While some state PTETs are mandatory, most are elective.

Prior to making a pass-through entity election, there are several key issues that businesses need to consider:

  • IRS Approval: The IRS indicated in Notice 2020-75 that it intends to allow PTETs. However, the IRS has not issued any further guidance on the issue.
  • Federal Tax Benefit Implications: It is possible that the PTET benefit may be limited if some taxpayers are subject to the federal tax benefit rule.
  • Resident Clients: Resident partners/shareholders participating in a PTET (elective or mandatory) may not receive a credit for taxes paid to another state on their resident state income tax return.
  • Dual Estimate Payment Requirements: In some states, a pass-through entity needs to make estimated payments against the PTET. This may not alleviate the owners' obligations to make estimated payments in their personal capacity. While the tax only gets paid once, this may cause cash-flow issues from having to make two estimated tax payments.
  • Refundability Issues: In most states, the PTET becomes a fully refundable credit on the owners' personal returns. However, in some states the credit is not fully refundable and/or excess credit is carried forward to future years where it may expire if not fully used.
  • Other Considerations: Business owners should keep in mind that the election to pay tax at the entity level is subject to each business’s facts and circumstances and may vary depending on specific state provisions.


As the economy continues to evolve, widespread telecommuting, the looming economic downturn, and state budget shortfalls has increased the focus on state taxes. Although telecommuting raises many concerns, some of these central issues put into focus are:

  • Income and sales tax nexus
  • Income tax apportionment
  • State payroll withholding

Nexus in respect to telecommuting is generally straightforward. An employee’s presence in a state creates nexus unless protected by P.L. 86-272. Virtually all state COVID-19 relief provisions have expired. For income tax apportionment, in some states, the consequence of an employee working from a different state could affect sales sourcing, payroll, and the property factor for state tax apportionment. For example, the New York City UBT (for non-corporate entities) uses cost-of-performance sourcing, which can lower taxes if employees leave New York to telework in nearby states. Such sourcing is generally determined based on the place where the services are performed.

Payroll withholding also presents challenges. Most states source employee wages to the state where the employee performs the services; however, with “Convenience of the Employer” rules, such as those in New York, there is added complexity. These rules, some of which preceded the pandemic, essentially require non-resident wages to be sourced to the state’s office where the employee is assigned.

This could result in double withholding requirements for the employer. Some of the key issues impacting payroll withholding decisions include:

  • Temporary versus permanent employee relocations
  • States that employ reciprocity agreements
  • States with convenience of the employer rules

Employee mobility and telecommuting are here to stay, and businesses must adapt and plan for the many tax issues that arise.

Considerations for Changing Residency

Now that you can work from home, are you considering a move to another state? Perhaps to a low-tax or no-tax state? If so, you are not alone, and here are some of the things you should be considering.

In order to change one’s domicile, an individual must physically move to a new jurisdiction with the concurrent intent to make the new jurisdiction their fixed and permanent home. Individuals domiciled in a state are subject to that state’s taxing authority on all their income.

Domicile is the place you regard as your permanent home — the place to which you intend to return after a period of absence (e.g., a vacation, a short-term business relocation, educational leave). As a practical matter, you can only have one domicile at any point in time, although you may have multiple residences. Once established, domicile continues until you affirmatively establish a new domicile. Individuals establish a new domicile by moving to a new location with the concurrent intent to establish a fixed and permanent home there. However, moving to a new location, even for a substantial period of time (e.g., a multi-year work assignment), does not change your domicile if you do not intend to remain in the new location permanently. Individuals who moved out of their primary homes during the pandemic with the ultimate intention of moving back generally remain domiciled in their original home states. Individuals who maintain a second residence in another state may also find that they are statutory residents of the states where they temporarily resided if they spent substantial time at the other residence.

Determining where an individual is domiciled requires a subjective analysis of several factors, including, but not limited to:

  • The individual’s home (considering the size, nature, and use of the residences) when an individual maintains more than one home
  • Active involvement in a trade or business
  • Where did the individual spend more time than anywhere else
  • Location of “near and dear” possessions
  • Family connections

Additional factors demonstrating your intent to permanently move include registering to vote, obtaining a driver’s license and vehicle registration in the new state. The burden of proof is upon the person asserting a change of domicile. The person must show an intention to abandon their previous domicile and establish a fixed and permanent home in a new one. Proper planning and understanding of their current home states’ residency rules are imperative if contemplating a domicile change.

Additional considerations when planning a change of domicile include:

  • Whether an individual will remain subject to tax on their wages in the state they left pursuant to an Office of Convenience rule.
  • Modeling potential tax savings by relocating to a low or no tax state. Individuals remain subject to tax as a nonresident on income derived from sources within a state. As such, business owners may remain subject to tax on virtually all their income after they move.
  • Implementation of proper domicile planning, considering the facts and circumstances, documentation requirements, and other rules when putting in place a plan to mitigate audit risks.
    • State Tax Authorities are aggressively examining taxpayers’ claims that they broke their domicile. Failing to prepare for a tax examination at the outset of a move jeopardizes the ability to ultimately prevail at the audit. Failing to plan = planning to fail.
2022 Year-End Tax Planning Resources

Withum’s Year-End Tax Planning Resource Center is a one-stop-shop for annual tax planning tips for individuals and businesses, legislative and regulatory changes, COVID impacts and other tax-saving opportunities.

Recent Nexus Developments

With economic nexus the law of the land, the concepts of state tax have been turned upside down. Now, businesses are first required to consider whether it has sales sourced to a state in order to determine if it has nexus. Best practices include examining a taxpayer’s sales tax nexus footprint at least annually. With sales tax, the issues of taxability review, the use of marketplace facilitators, and exemption certificate management have garnered more analysis in a post-Wayfair world.

In the aftermath of Wayfair, the Multistate Tax Commission (MTC) has targeted one of the remaining lifelines businesses have to shield them from income tax economic nexus; P.L. 86-272.

On August 4, 2021, the MTC voted to adopt a revision to its “Statement of Information” whereby a business could lose P.L. 86-272 protection solely by engaging with customers through the internet. In 2022, both New York and California issued guidance that they were adopting the MTC’s revised Statement of Information. It is expected many other states may adopt the MTC’s guidance implicitly through their MTC conformity provisions. The federal law known as P.L. 86-272 was passed over 60 years ago and it prohibits a state from imposing income tax on businesses that only sell tangible personal property (TPP) AND its activities in a respective state do not exceed the solicitation of orders. For many years, even preceding the Wayfair case, for income tax, it has been generally accepted that economic nexus has been the law of the land, unless a business was otherwise protected by satisfying P.L. 86-272.

MTC’s guidance provides examples of when the use of an interactive website will tarnish P.L. 86-272 protection, which activities include:

  • Providing post-sale customer assistance via an electronic chat or website email
  • A career or employment page that accepts applications for non-sales positions
  • The use of “cookies” on a customer’s device to gather information on shopping trends or to track inventory
  • Transmission of remote product patches, upgrades or updates via the internet
  • The offering of extended warranty plans
  • Use of marketplace facilitators, such as the fulfillment center which maintains inventory
  • Other interactive internet related activities

The MTC’s revised statement adoption could result in significant income tax liabilities for many remote businesses, as many of these businesses use a website or app to interact with its customers. Even if businesses have performed nexus or P.L. 86-272 review in the past, they should consider having such studies refreshed, considering many of the recent developments the last several years.

Item’s to consider:

  • Review existing and pre-Wayfair Nexus footprint including inventory held by marketplace facilitators
  • Assess post-Wayfair filing obligations
  • Evaluate income tax, sales and use tax, and other indirect tax nexus
  • Determine potential tax exposure for prior periods
  • Consider options to limit exposure (e.g., Voluntary Disclosure Agreements, amnesty, etc.)
  • Assist with communication to stakeholders in the organization
  • Review product and service mix
  • Analyze sales sourcing on a state basis for determining income tax nexus
  • Develop nexus and tax matrix
  • Review purchases to identify potential sales tax refund opportunities
  • Review and consider automation needs
  • Prepare and file registrations as necessary
  • Develop SALT processes to meet compliance requirements
  • Prepare for tax audits
  • Address changes in the organization (e.g., new lines of business, modified sales force activity, marketplace facilitator/provider inventory locations etc.)
  • Continue to monitor changes to economic nexus and tax laws

Sales and Use Tax Planning Considerations

Sales and use taxes can be a significant financial burden if proper procedures are not in place and appropriately maintained. Companies should periodically review their sales and use tax process and procedures, including, but not limited to:


  • Physical and economic nexus for sales tax purposes should be reviewed regularly to identify jurisdictions where additional collection (and self-assessment) responsibilities exist.
  • Missouri is the last state to adopt economic nexus and has set a threshold of $100,000 revenue into the state in the previous 12-month period effective January 2023.
  • Remote retailers, marketplace sellers and marketplace facilitators should review if they are compliant with state and local sales and use tax laws and marketplace facilitator rules.

Changing Tax Laws and Definitions

  • Most state sales tax codes were written decades ago, prior to the advent of the internet. These tax codes are no longer adequate to address the digital economy. States are addressing these inadequacies by updating regulations and statutes.
  • State definitions of taxable digital services and cloud-based products are constantly evolving – and digital goods and services that were previously exempt are becoming taxable in several states.
  • Any time a business launches a new product or service line, it should engage a taxability analysis.


  • Exemptions for certain purchase may provide opportunities for significant recoveries of sales and use taxes erroneously paid to vendors or accrued and remitted to a jurisdiction. An annual review of purchases should be conducted to identify potential refund opportunities.
  • Companies should review their people, process, and technology to identify how to comply with sales tax responsibilities in multiple states and localities.
  • It may be necessary to implement third party software to help maintain accurate sales tax rates.
  • The volume of state and local related forms and deadlines can require significant time for employees to properly manage the sales and use tax function. Errors could lead to significant penalties and interest or even liens on the responsible officer’s properties. As such, companies should consider outsourcing their sales and use tax compliance to reduce risks and concentrate on higher-value activities.

Please note sales tax could be a significant factor in the event of a merger, acquisition, or request for funding. If the sales tax function is not reviewed periodically, a due diligence review may uncover exposures. Therefore, companies should periodically perform a review of their sales and use tax procedures.

Contact Us

Reach out to a member of Withum’s State and Local Tax Services Team for guidance as year-end approaches.

Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.