The impact of state and local taxes on individuals
and pass-through entities
Introduction
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
In addition to federal income taxes, state and local governments levy a
variety of taxes that impact individuals and businesses operating within their
jurisdictions. While corporate entities conduct multi-state business under
complex nexus and apportionment rules, pass-through entities like sole
proprietorships, partnerships, S corporations and LLCs electing such
treatment generally allocate income and deductions at the owner level
requiring state filing obligations. This paper examines the main types of state
and local business taxes and how the pass-through structure affects owner-
level tax burdens across multiple taxing authorities.
Individual Income Taxes
Nearly every state imposes an individual income tax on resident and
nonresident personal service income earned within its borders. Rates vary
widely from nil in states like Texas, Florida and Nevada up to over 13% in
California. Residents report worldwide income while nonresidents report only
income sourced to that state.
Pass-through income from S corporations, partnerships and sole
proprietorships retains its tax character - ordinary, capital gain/loss - when
passing to the owners. Resident owners include their entire distributive share
of business income on their state return. Nonresident owners only include
income sourced to that state based on property, payroll and sales factors.
State returns may allow credits for taxes paid to other jurisdictions.
Business Entity Taxes
Beyond owner-level taxes, some states also impose business entity-level
taxes on pass-throughs in addition to or in lieu of corporate taxes:
- S Corporation Taxes - Certain states like New York tax S corporations and
their shareholders. Others exclude S corps but tax built-in gains upon
conversion.
- LLC Entity Taxes - Some states assess an annual fee or tax on LLCs similar
to corporate franchise or minimum taxes. Rates vary up to around $800 per
entity.
- Gross Receipts/Margin Taxes - Several states implement broad
turnover/minimum taxes on total revenue rather than net income to capture
pass-through activity. Rates average 0.1-1%.
- Pass-Through Withholding - New York, New Jersey, Connecticut and other
Northeastern states require pass-through businesses to withhold taxes on
behalf of nonresident owners.
State and local entity taxes are deductible for federal purposes if ordinary
and necessary. However, pass-through owners still bear the economic burden
of these taxes.
Payroll/Unemployment Taxes
Nearly every state mirrors the federal system of assessing unemployment
insurance (UI) taxes on the first $7,000-$10,000 of wages paid annually to
each employee. Rates vary based on the individual employer's experience
but average around 6-8% of wages.
Additionally, several states levy broader payroll taxes beyond UI. California
and Pennsylvania, for example, impose disability insurance taxes of 1% of
wages. So aggregate state payroll tax burdens easily exceed federal only.
Pass-throughs must budget and remit these taxes separately.
Property Taxes
Property taxes are the largest source of local government revenue across the
United States. Tax rates vary substantially by jurisdiction but typical
assessment is around 1-3% of a property's fair market value annually.
Pass-through owner-occupied commercial real estate (even a home office) is
fully subject to assessment at the location. Rental properties owned by pass-
throughs also face property taxes unless eligible for exemptions. These taxes
increase operating expenses.
Sales and Use Taxes
Nearly every state assesses a broad-based sales tax on retail sales of
tangible personal property and certain services. Average combined state and
local rates range from 5-9%. Products or services not subject to sales tax
may still incur state and local use taxes if purchased for business purposes.
Regardless of legal form, pass-through businesses must register, collect and
remit sales/use taxes on taxable transactions in any state where they
maintain a physical presence or economic nexus through online or remote
sales. Multistate compliance is complex but failure to comply can trigger
steep penalties and back taxes.
Other State and Local Business Taxes
A variety of additional miscellaneous state and local business taxes may
apply selectively depending on the nature of a pass-through's operations:
- Hotel/Motel Occupancy Taxes
- Car Rental Surcharges
- Lodging/Amusement Taxes
- Extractive Resource Taxes
- Environmental Fees/Surcharges
- Licenses and Permits Fees
- Personal Property/Equipment Taxes
Many of these lower-profile levies are charged at the local level.
Multijurisdictional compliance complicates tax planning and budgeting for
pass-throughs operating nationwide or with partners/members across
municipal boundaries.
State Tax Incentives
While imposing a wide array of business taxes, states also implement
targeted incentives to promote economic development in key industries
through tax credits, exemptions and other subsidies. Pass-throughs
qualifying based on activities or investment levels can realize worthwhile
benefits including:
- Job Creation/Retention Credits
- Research & Development Tax Credits
- Manufacturing/Industrial Investment Credits
- Entertainment/Media Tax Credits
- Renewable/Alternative Energy Incentives
- Brownfield Redevelopment Benefits
- Low-Income Housing Tax Credits
Maximizing eligible incentives requires dedicated planning and compliance to
offset the costs of conducting multi-jurisdiction operations.
Multi-State Considerations and Planning
The complexities intensify exponentially for pass-throughs operating across
multiple states due to nexus concerns, allocation and apportionment
formulas and the administrative burden of multistate compliance. Key
planning strategies include:
- Conduct multi-factor cost-benefit analysis of states when considering
expansion.
- Review physical presence, affiliate nexus and economic nexus standards
impacting tax obligations.
- Calculate income allocation percentages and source deductions properly
among taxing jurisdictions.
- Ensure thorough recordkeeping for property, payroll and sales in each
locale.
- Consider forming subsidiary single-member entities for each state taxing
authority.
- Incorporate necessary state and local filing obligations into yearly tax
calendar.
- Take advantage of any multi-state or combined reporting election options.
- Budget for tax professional services to manage complex multi-state
compliance.
Failure to properly address these factors increases tax liabilities and risk of
penalties for non-compliance facing multistate pass-through operations.
Foreign Countries/U.S. Possessions
While this discussion focuses on U.S. domestic state issues, similar income
sourcing and tax payment complexities exist when a pass-through structure
expands operations globally or into U.S. territories like Puerto Rico offering
tax incentives. Foreign tax credits help alleviate international double taxation
for federal purposes, but adequate planning remains critical given added
jurisdictional layers and cultural/linguistic differences.
Conclusion
State and local taxation presents an onerous overlay of compliance
obligations for multistate pass-through entities conducting business
nationwide. Balancing nexus concerns, income sourcing rules, substantial
payroll and property tax expenses, complex multijurisdictional filing duties
and maximizing credits demands a strategic, proactive approach. With
diligent tax planning and execution by qualified advisors, however, multi-
level tax impacts across pass-through operations can be effectively managed
through optimized structures, planning and ongoing compliance practices
calibrated for each particular business situation.
