The winter of 2015-2016 has been particularly mild here in the Northeast. However, the winter winds often made it difficult to gauge how cold it really felt by simply looking at the thermometer. Despite mostly mild days, on several days the wind combined with the ambient temperature resulted in “wind chills” in the single digits and below zero.
Similarly, multistate taxpayers and their advisors should focus not only on statutory tax rates and political ads in reviewing a state’s “tax friendliness,” but on each state’s overall taxing patterns in gauging the state tax “wind-chill” effect.
Below we’ll identify several state tax patterns that increase a state tax “wind-chill” as well as identify those states that appear to have several characteristics that make their state tax environments quite chilly toward businesses.
State Tax Wind-Chill Components
In determining a state “wind-chill” effect, the following state tax patterns are the drivers:
- Factor based Nexus Provisions (presence of one or more objective factor amounts triggers nexus). It should be noted that a State’s ability to assert Factor Based Nexus is limited to the extent a taxpayer is protected by Public Law 86-272.
- Receipt Only Factor Apportionment Provisions
- Market Based Sourcing Provisions (Income sourced based on where the customer is located)
- Mandatory Combined Filing Provisions
The State Tax “Wind-Chill” Map
Numerous states have adopted two of these state tax wind-chill patterns. The presence of two or more of these patterns may make the state tax climate “chilly” toward multistate taxpayers. However, combination of three or more of them should trigger state tax “wind-chill” warnings to multistate taxpayers and their advisors.
Category Four States and Jurisdictions[i]
We’ll call the states that have all four of the aforementioned provisions Category Four State Tax Wind-Chill Effect States. Category Four states may result in significantly higher state effective tax costs despite having low state statutory rates and even politically induced “tax incentives.”
- New York State
- New York City
Category Three States and Jurisdictions [ii]
We’ll call the states that have any three of the four provisions Category Three State Tax Wind-Chill Effect States. Category Three states may result in significantly higher state effective tax costs despite having low state statutory rates and even politically induced “tax incentives.”
- District of Columbia
Tax Foundation’s 2016 State Tax Climate Index
The Tax Foundation prepares an excellent annual analysis of state tax climates, which we find to be an extremely valuable tool. Through its State Business Tax Climate Index, the Tax Foundation “enables business leaders, government policy makers, and taxpayers to gauge how their states’ tax systems compare.” The 2016 Index provides the following visual of the “10 Best Business Tax Climates” and the “10 Worst Business Tax Climates”.
As per the Tax Foundation’s State Business Tax Climate Index, the 10 best states in this year’s Index are:
- South Dakota
- New Hampshire
And the 10 lowest ranked states in this year’s Index are:
- Rhode Island
- New York
- New Jersey
How Prepared Is Your Business for State Tax “Wind-Chill” Effects?
Just as we should appropriately understand and prepare for “wind-chill” dangers during the winter months, multistate taxpayers and their advisors should regularly monitor and prepare, where possible, for the potential state costs arising from state tax “Wind-Chill” effects. As an increasing number of states adopt state tax patterns that incorporate several of the State Tax “Wind-Chill” components, multistate taxpayers and their advisors should heed the warnings and regularly monitor state tax legislation for these ramifications and prepare accordingly.
[i] To assist in our research, we have relied on CCH’s Smart Charts to facilitate identification of those states that have high “State Tax Wind-Chill Effects.”
[ii] To assist in our research, we have relied on CCH’s Smart Charts to facilitate identification of those states that have high “State Tax Wind-Chill Effects.”