By Martin E. Prendergast
Gray, Gray & Gray, LLP
If you are an architectural or engineering firm that does work in states other than your own, you may be on the hook for payment of state and local taxes.
States and municipalities across the country are struggling to close budget gaps and fund obligations such as pension funds, rebuild crumbling infrastructure, and reinvest in local economies. As a result, they are becoming much more aggressive in broadening their tax base and generating revenues. One way is to crack down on companies conducting business in their jurisdiction who may have previously been not properly reporting revenue earned within their borders.
Some professions are used to this state-by-state taxation. A member of the Boston Red Sox who travels to Yankee Stadium in New York for a three-game series knows that he will have to pay income tax – prorated for those three days – to both the State of New York and New York City. But for architects and engineers, the increase in compliance enforcement might be new, uncomfortable, and expensive.
The trigger for owing state and local taxes is nexus, which is defined as a “means of connection.” Traditionally, nexus is created when a physical presence is established. Once nexus by an out-of-state business is recognized, the state or municipality has the right to tax on any income generated within its jurisdiction.
But each state defines the requirements for nexus differently, and the very definition of “physical presence” in our wireless world is changing. A recent U.S. Supreme Court ruling, South Dakota v. Wayfair, found that companies that sell merchandise online and deliver to another state must collect and remit state sales tax on those purchases, even if the business has no physical presence in the state. This ruling may encourage states to range even farther in search of every last tax dollar they can find.
Has your firm inadvertently established nexus in another state? If so, have you overlooked reporting income and paying taxes in that state? Unlike many other professions, it is all too easy for an architect or engineer to become obligated to pay state and local taxes. A&E firms working on a project in another state are frequently required to visit a client, appear at the jobsite, and interface with local project managers, contractors, and developers. Even a single visit can establish nexus and create a tax obligation.
It is also common practice for an A&E firm to apply for licenses specific to a given state before they can work there. Once a license is established it is yet another trigger for the state to classify an out-of-state business as having nexus and becoming subject to tax compliance and payment.
A&E firms must pay close attention to activities they conduct outside of their home state. Nobody wants to be surprised by a state tax bill – or tax bills from multiple states – that is unexpected and not within the current budget. Some of the burden may be mitigated in advance through risk management strategies and up-front compliance. It is always better to work closely with a tax advisor who has experience dealing with SALT (state and local tax) issues.
Martin Prendergast is a Manager in the Architecture, Engineering & Design practice group at Gray, Gray & Gray Certified Public Accountants and Advisors in Canton, Mass. He can be contacted at (781) 407-0300 or at mprendergast@gggcpas.com