Tag Archives: non-resident

Taxation Without Representation is Alive and Well

Our forefathers launched the Revolutionary War with the claim “taxation without representation.” What few of us realize is that taxing the other guy who has no say in the matter is now a prevalent technique. Here are some examples.

  • Hotel taxes to fund sports stadiums – New professional sports stadiums across the country are using hotel taxes to fund their construction. This tax is added to every visitors’ bill without input on whether they agree to the tax or not. In perhaps the most brazen example, supporters of a potential new NFL stadium referendum in San Diego are promoting getting fans from competing football teams to pay for their new stadium through hotel taxes.
  • High property tax on vacation property – Own a cabin or other vacation property? The property tax you pay for this property is set by local officials. Temporary residents do not have a vote in electing these people. So out-of-town cabin owners end up footing the bill for local initiatives without a vote.
  • Small business taxes – While the legal system treats corporations as legal entities, they have no voting rights. In addition, millions of small businesses are taxed on individual tax returns as flow-through entities, but the owners have no voting authority to represent their business if they do not live in the same community as their business. This means things like property taxes and sales taxes are set without representation.
  • Out-of-state taxes despite no physical presence – Many states are taxing non-resident individuals and businesses with new legislation. For example, a consultant working for a California company may be subject to California income tax, even if residing and working in another state. Out-of-state businesses are challenged with newly defined “nexus” rules. As non-residents, these new taxpayers have no voice in the matter.

What’s the big deal?

Unfortunately, the pace of targeting taxes towards people and businesses with no voting rights is increasing. This is often due to legislatures taking the path of least resistance. Why not place the tax burden on someone who does not vote? Here are some suggestions on what you can do to manage this problem for you.

  • Manage your stay – Know which cities have hotel taxes to support construction projects. Vote with your wallet by selecting your location for business and vacation stays. Sometimes the tax only applies to select counties around a stadium. This is the case with the tax to fund the construction of the Minnesota Twins baseball stadium. So select a nearby county that does not collect the tax.
  • Shop wisely – When looking for a new vacation home or cottage, pay attention to the property tax. There are cases where two similarly valued properties on the same lake have different property taxes because the lake is in two different communities.
  • Squeak – While you have no vote, you can still try to apply influence. If a community is not business-friendly in their tax proposals, getting the word out is often your only approach. Visit city council meetings and voice your concerns. Support local candidates that understand your plight. Consider challenging property valuations to minimize the impact of tax increases.

Every state, county, and community is different. Know the tax climate before you buy, move, or work in a community that is not your primary residence. It is often your only defense when you are subject to taxation without representation.

Small Business Consultants Beware

Over the past few years, state revenue departments have been getting creative in making new tax laws to capture non-resident income taxes. If you are an individual operating as a sole-proprietor consultant or service provider to customers out of your own state, here is what you need to know.

This could be you

  • You could owe state income taxes to a state you never visited or worked in.
  • Non-resident employees doing the same work you do as a consultant may not have to pay state income taxes while you must.
  • Federal law protects non-residents from state revenue attacks, but only if you sell tangible property (like pencils, watches and other physical property). It generally does not protect those who provide services.
  • Every state can be different. Just because you know your state’s rules, do not assume other states follow the same guidelines. Nor should you assume other state laws are logical or reasonable.

What can you do?

If you are a consultant providing services to out-of-state customers, here are some tips.

  • Research the states rules – Research your customers’ state tax laws for non-resident service businesses. Also review that state’s non-resident employee wage rules. See if they treat them both the same way.
  • Become a temporary employee – If non-resident rules are different for consultants versus employees, consider becoming a part-time employee or temp employee. Adjust your bill rate to allow for the employer paying half of your Social Security and Medicare.
  • Physical presence – If you conduct your work in the out-of-state location, a non-resident tax return is usually due. But this is not always the case.
  • Service or product? – Remember, selling product across state lines is different than providing a service. Nexus laws and tax cases make physical presence required. But here too, there can be exceptions.
  • If in doubt, ask for help – The best advice is to ask for help. This area of tax code is rapidly evolving. There are no national guidelines and states like California and Michigan are very aggressive. Exceptions in state rules make mistakes easy to happen. This can lead to you owing taxes to another state based on your out-of state activities.

Small service businesses cannot readily defend themselves against large state revenue departments so they are becoming victims as one state tries to take another state’s income tax revenue. While you may receive a credit in your home state for taxes paid to another state, it is not always easy to do and penalties are often applied. Your best defense is knowledge.