Navigating the complexities of state and local taxes (SALT) has become a pressing issue for businesses, especially as regulations evolve and states implement new laws to address fiscal needs. The landscape for SALT compliance is fraught with challenges, but understanding its key components and adopting best practices can help businesses avoid potential pitfalls. This article will explore what SALT encompasses, common challenges, recent changes, and strategies to ensure compliance.
What is SALT?
SALT refers to the taxes that states and localities impose on businesses and individuals. These taxes can take various forms, such as income, property, sales, and excise taxes. For businesses, SALT liabilities often vary based on where they operate, their nexus, or physical or economic presence in a state, and whether they sell goods or services across state lines. Understanding SALT is essential for navigating the tax obligations that come with operating in multiple jurisdictions.
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant changes to the SALT deduction, capping it at $10,000. This cap has become a contentious issue, particularly for high-income taxpayers in states with substantial tax burdens. The goal was to reduce federal subsidies for high-tax states, but the result has been increased scrutiny on how SALT is structured and enforced at the state level.
Key Components of SALT
Understanding SALT’s key components is critical for any business that operates across multiple states. Here are the primary components to consider:
- Income Tax: Most states impose a corporate income tax on businesses that have a physical or economic presence, or “nexus,” in the state. This can include direct sales, maintaining inventory, or even remote employees working from within state borders.
- Sales and Use Tax: States charge sales taxes on tangible goods, certain services, and sometimes digital products. Use taxes apply when goods are purchased out of state but used within the state. Businesses must monitor both sales tax collection and use tax obligations, which often vary widely by state.
- Property Tax: Property taxes can be levied on both real estate and personal property used for business purposes. These taxes are typically assessed at the local level, leading to disparities even within a single state.
- Excise Tax: Certain goods, like fuel and tobacco, are subject to excise taxes. These taxes are usually imposed to raise revenue or discourage specific behaviors and can add complexity for businesses dealing in taxable goods.
- Gross Receipts Tax: Rather than taxing income, some states impose a gross receipts tax on total revenue, regardless of profitability. This can create a unique burden on low-margin businesses that may still owe significant taxes despite minimal profits.
Common SALT Challenges Faced by Businesses
For businesses, managing SALT compliance can be particularly complex due to the diverse regulations, rates, and definitions that vary from state to state. Some of the common challenges include:
- Nexus Determination: Establishing nexus can be tricky, as states have different criteria for what constitutes a taxable presence. Following the 2018 South Dakota v. Wayfair Inc. decision, states can tax businesses based on economic presence alone, increasing the risk of compliance issues for online and remote sellers.
- Varying State Laws: Each state has its own tax laws and regulations, which can change frequently. Navigating these different rules requires significant resources and expertise. For example, many states have enacted workaround measures, like passthrough entity (PTE) elections, to help residents manage the $10,000 SALT deduction cap.
- Audit Exposure: The increased reliance on SALT revenue has led to more rigorous state audits, with auditors looking closely at nexus, sales tax collection, and income allocation. Businesses that operate in multiple states are often at greater risk for audits, increasing their need for meticulous record-keeping and tax planning.
- Digital and Remote Business Models: Digital services and remote work have changed the landscape of SALT compliance. For instance, Maryland recently introduced a tax on digital advertising, a move that could set a precedent for other states. Similarly, remote employees may trigger nexus in states where a business has not traditionally had a physical presence.
- SALT Deduction Limit: The $10,000 SALT deduction limit has been particularly challenging for high-income taxpayers and businesses in high-tax states, leading to increased pressure on businesses to find ways to minimize their SALT liabilities through strategic tax planning.
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Recent Changes and Trends in SALT
In recent years, SALT has been at the center of significant legislative changes. The following trends are shaping the current and future landscape of state and local taxation:
- SALT Deduction Cap Workarounds: As a result of the 2017 TCJA, several states have created workarounds for the SALT deduction cap. For example, some states allow passthrough entities to elect to be taxed at the entity level, enabling businesses to deduct state taxes at the federal level. While helpful, these workarounds can lead to additional compliance challenges.
- Increased Enforcement of Nexus Rules: States are actively enforcing nexus rules in light of the Wayfair decision, making it essential for businesses with remote operations to understand where they might owe state taxes. Economic nexus thresholds now apply to both sales tax and income tax in many states, expanding tax obligations for businesses with no physical presence in a state.
- Digital Advertising and Service Taxes: States are experimenting with taxes on digital services, particularly advertising. Maryland’s digital advertising tax was the first of its kind, sparking interest in other states considering similar measures. The rapid growth of digital commerce and remote work may lead to new SALT obligations in unexpected areas.
- Focus on Tax Conformity and Decoupling: Federal tax changes often ripple down to states, but states may choose to conform or decouple from federal provisions. For instance, while some states conform to the TCJA’s business expense deductions, others have opted to limit or restrict these deductions. This lack of uniformity complicates compliance for multistate businesses.
- Potential Sunset of the SALT Cap: The SALT cap is set to expire in 2025 unless Congress extends it. High-tax states have strongly advocated for repeal, while other legislators argue that the cap is necessary for maintaining a simplified tax system. Whether the cap remains or expires will significantly impact future SALT planning for businesses.
Best Practices for SALT Compliance
Given the challenges and evolving nature of SALT, businesses should adopt a strategic approach to ensure compliance and minimize tax liabilities. Here are some best practices for managing SALT obligations effectively:
- Conduct a SALT Nexus Review: Regularly assess your business’s activities across states to determine potential nexus triggers. This can help you avoid unexpected tax obligations in new states. With the proliferation of remote work, companies must be vigilant about nexus changes due to employees working in different states.
- Leverage PTE Elections Where Applicable: If your business is structured as a partnership or S-corporation, consider whether electing to be taxed at the entity level in certain states might provide a federal tax benefit. While beneficial, PTE elections must be carefully evaluated to avoid unintended state tax liabilities, particularly for nonresident partners.
- Stay Informed on State-Level Tax Changes: As states continue updating their tax codes, staying informed on new developments and SALT tax changes is essential. Engage with state-specific tax advisors or subscribe to updates from reliable tax authorities to ensure compliance with the latest regulations, including any new SALT tax law amendments.
- Use Technology for Compliance: Tax compliance software can automate the calculation and filing of state taxes, helping reduce errors and stay compliant with varying state regulations. Many software solutions also update automatically with new tax rates and laws, making it easier for businesses to manage their SALT obligations.
- Plan for Audit Readiness: Keep detailed records and documentation for all transactions, nexus activities, and tax filings. By maintaining an audit-ready approach, your business can minimize the disruption caused by state audits and ensure compliance across jurisdictions.
- Consult with SALT Experts: Given the complexities involved, businesses should work with experts who specialize in SALT issues. Tax advisors can help assess nexus, manage risks, and navigate compliance requirements tailored to your specific business operations.
Conclusion
As we look ahead, the landscape of state and local taxation (SALT) continues to evolve, shaped by both legislative developments and shifting economic trends. The future of SALT compliance will likely be marked by increased complexity, with states pursuing innovative ways to generate revenue while addressing budget gaps and economic changes. The $10,000 SALT deduction cap set by the Tax Cuts and Jobs Act of 2017 is set to expire in 2025, a looming deadline that will force federal and state policymakers to revisit SALT’s role in tax policy. As debates continue, high-tax states are exploring creative workarounds to help residents manage their tax burdens. Additionally, states are refining their definitions of “nexus” in light of the Wayfair decision, with some taxing businesses based on digital and remote sales, regardless of physical presence. The future of SALT will also be impacted by new areas like digital advertising and services taxes, as well as the ongoing expansion of sales and use tax obligations across state lines. Businesses operating in multiple jurisdictions will need to stay agile, proactive, and well-informed to manage these salt tax relief opportunities and navigate salt limits as they evolve.
Navigating SALT compliance in this complex and shifting environment requires specialized knowledge and an in-depth understanding of both state and federal tax laws. Bennett Thrasher’s team of SALT experts helps businesses achieve compliance while strategically identifying opportunities to reduce liabilities and avoid audit risks. From conducting comprehensive nexus reviews to implementing tailored tax strategies, our approach addresses the unique challenges faced by businesses of all sizes. As states increasingly adopt new rules, our team stays on top of evolving tax laws, helping clients adapt to change with a proactive, strategic approach. Whether navigating regulatory updates or exploring tax savings opportunities, Bennett Thrasher is dedicated to simplifying compliance and optimizing tax positions. Contact us today to learn how our expertise can support your tax strategy, building a robust foundation for sustained growth and financial resilience.
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