When you think about state and local taxes, sales and use tax as well as income tax are the types that most often come to mind. But some less familiar taxes can affect businesses just as significantly. Often, the organizations are unaware of their filing obligation until a nonfiling notice has been received.
Here are some key features of franchise and other non-income-based taxes that you don’t want to overlook.
Also known as business privilege tax or gross receipts tax, the franchise tax is the most common state tax type after sales tax and income tax. A franchise tax is an annual state tax levied on certain businesses for the right to exist as a legal entity and to do business within a particular jurisdiction.
The amount of franchise tax can differ significantly depending on the tax rules within each state, as their calculation methods vary for calculating franchise taxes. Some states calculate the amount of franchise tax owed based on an entity's assets or net worth, while other states look at the value of a company's capital stock or have a flat fee.
States that enforce this tax include:
- New York
- North Carolina
While franchise taxes are paid in addition to state sales and income taxes and are not calculated using the organization's profit, sales thresholds may still have to be met for your organization to be liable for this tax.
Net worth tax
Net worth tax is similar to franchise tax as it is a tax levied in exchange for the privilege of doing business or exercising a corporate franchise in a state. However, this tax is based on the net worth of a corporation. Net worth is also known as shareholder’s equity or total assets — total liabilities of a company. States with a net worth tax are:
- South Carolina
State-specific business taxes
Capital stock tax is also similar to franchise or net worth tax as it is a tax that is imposed on a business’s net worth (or accumulated wealth).
Capital stock taxes differ from corporate income taxes, which are levied on a business’s net income (or profit). Connecticut imposes this tax, but it is starting to be phased out over five years starting in 2021.
Limited liability excise tax (LLET) applies to every business that is protected from liability by the laws of the state. This includes corporations, LLCs, S corporations, limited partnerships and other types of businesses with limited liability. This tax is not levied on sole proprietorships or general partnerships. Kentucky is the only state with this specific tax and the amount of LLET is based on the amount of business a company does in Kentucky. This is measured by the company's Kentucky gross receipts or its Kentucky gross profits.
The Commerce Tax is an annual tax that was passed by the Nevada legislature during the 2015 legislative session. The tax is imposed on businesses with a Nevada gross revenue exceeding $4 million in the taxable year. To calculate the amount of Nevada Commerce Tax, you subtract $4 million from the Nevada source income of an entity for the taxable year and multiply that amount by the rate set forth in the act.
Ohio and Oregon
The commercial activity tax is an annual tax imposed on the privilege of doing business measured by gross receipts from business commercial activities. A business's commercial activity is the total amount a business realizes from transactions and activity in the normal course of business. This tax may apply to any person, business or unitary group of businesses doing business in the state. Ohio and Oregon are the only two states imposing this tax, which is similar to a gross receipts tax.
Washington state’s business and occupation (B&O) tax is a gross receipts tax. It is measured on the value of products, gross proceeds of sale or gross income of the business. Since the B&O tax is calculated on the gross income from activities, there are no deductions from the B&O tax for labor, materials, taxes or other costs of doing business. The B&O tax is reported and paid on the excise tax return or by electronic filing. Rates vary, depending on the company’s industry. For example, the wholesaling and manufacturing B&O tax rate is 0.484% of your gross receipts and the retailing B&O tax rate is 0.471%.
The nexus factor
When considering if your company may be liable for any of these taxes, it’s important to note whether you have nexus in the state.
There are two categories: economic nexus and physical presence nexus.
Economic nexus refers to a business presence in a state that makes an out-of-state seller liable to collect tax there once the threshold of sales transactions and/or sales revenue is met.
Physical presence nexus is triggered when a business has a physical connection with a state or taxing jurisdiction, such as having employees, inventory or real property in a state.
How Wipfli can help
Wipfli’s state and local team can provide a deeper understanding of each state’s nexus requirements. By preparing a nexus study for your organization, you’ll learn about any tax liabilities that you may be unaware of. The study will consider all possible factors, including taxability of services and sales where your company has nexus, and help with registration.
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This article was authored by Caroline McDonnell, senior accountant.