State Income & Franchise Tax

Service description

Determines which states can tax the business's income or franchise, divides its profits among those states using each state's apportionment formula, and prepares and files the returns. Federal law limits when a state may tax net income, for example when a seller's only in-state activity is soliciting orders for physical goods, so the review starts with where the business actually operates.

Common industries

Any business operating in more than one state, including those with remote employees or acquired subsidiaries.

ROI

Getting apportionment and nexus right prevents costly restatements and surprises in an audit or a future transaction's diligence.

Benefit

Determine and file your multistate income/franchise obligations, with apportionment done right — often triggered by growth, remote workers, or an acquisition.

Why get it

Each state writes its own rules for who owes income or franchise tax and how profits are divided, and a business that grows across state lines can trigger filing duties without noticing. Filing correctly avoids back tax and surprises in an audit or a sale.

When you benefit

Recurring: returns are filed every year in each state where the business has an obligation, and the review is refreshed when operations change.

What it costs

Flat fee per return.

When you pay

Commonly priced per state return, with the first year costing more than later years because of setup, and billed when the returns are delivered. Reviews of prior years or of several entities are often quoted separately.

Other costs

The tax itself and any state filing or registration fees are separate from the provider's fee.

Risks to know

Mistakes in nexus or apportionment can shift income to the wrong states, so the business overpays in one and underpays in another, and a state can assess back tax for periods it believes were filed wrongly. Some states have adopted aggressive nexus standards, which can make a business's position harder to defend.

When risks arise

Exposure builds each year a state return goes unfiled or is filed wrongly, and it typically surfaces when a state audits the business or when a buyer or lender reviews its filings in a transaction.

The process

The provider maps where the business has nexus, gathers property, payroll and sales data, and applies each state's apportionment formula to divide income. The business reviews the results and approves the returns, which the provider files and then monitors for state notices.

Your commitment

The business provides its financial statements, its prior-year federal and state returns, and property, payroll and sales figures for each state. It should flag remote employees, new locations, acquisitions and any state notices, since each can create a filing obligation.

Documents to gather

• Prior-year federal and state income and franchise tax returns
• Financial statements and trial balance
• Property, payroll and sales figures for each state
• Notices or audit correspondence from any state tax agency

Helpful reading

• A Very Short Primer on Tax Nexus, Apportionment, and Throwback Rule — Tax Foundation
• Monday Map: State Corporate Income Tax Apportionment Formulas — Tax Foundation

Further research

• 15 U.S. Code § 381 — Imposition of net income tax (limits on state taxation)
• 15 U.S. Code § 383 — “Net income tax” defined
• 26 U.S. Code § 164 — Taxes (federal deduction for state taxes)