‘Tis the season…tax season, that is. You know that this festive season is upon us when the store aisles of Office Max, Best Buy, and yes, even your local Wal-Mart or Meijer are gaily bedecked with row upon row of glossy red-and-white boxes.

Multiple states, multiple taxes, multiple tax returns
So, this year’s first tax topic: road warriors. What do self-employed consultants with clients in multiple states, baseball players, and blues musicians have in common? They all personally earn taxable income in multiple jurisdictions, potentially subjecting them to STATE income taxes in addition to federal taxes, in each of the multiple states that they perform services. (Subcontractors to other companies are not generally subject to the same problem — even if they travel, they are providing services directly to their general contractor — not to the general contractor’s clients — and it is the general contractor who will be on the hook for the complex tax issues that can arise.)

50 potential questions, 50 potential answers
How does a service provider know where and when his or her business activities will result in state income tax liability? This is a very complex question: there are potentially 50-plus answers — one for each taxing authority which the service provider visits. For example: say a computer consultant located in Michigan (or any other state) provides programming services to support custom implementations of the ADAMS® engineering simulation software application. The consultant has multiple ADAMS® clients and frequently travels to multiple states to provide them with custom programming services on an as-needed basis. Does the programmer owe state income taxes in each state where services are provided? Typically, the answer is yes — but a qualified yes. The answer is likely to be different for each state: each of the 50 states has its own jurisdiction and its own income tax laws. Some states do not tax income at all; other states have exemptions up to a certain amount of income earned by non-residents. Still others have tax treaties with various states, allowing the individual earner to simply pay the tax earned in another state, on the income tax return for his or her home state. Many states give none of these breaks to service providers, and expect them to file an income tax return for any amount of income earned in their state. (Here’ an example: Colorado requires anyone earning money in the state to pay income tax and file a tax return, regardless of the amount.)

Cities may also tax self-employment income
The same complexity applies with respect to earning income in cities and other municipalities: large cities frequently have income taxes to pay for the city services which are consumed not only by residents, but also by the large number of workers who do not live in the city but commute into the city to earn income. For example, the city of Detroit imposes a local income tax on income earned within the city limits. Further, many cities have tax rates that discriminate between residents and non-residents, with non-residents paying a higher rate. (Typically this is achieved by taxing everyone at the same rate, but giving a tax refund to full-time city residents.)

Answering the local state and city income tax question can involve further issues on how the applicable state income tax or city income tax jurisdiction determines how its tax is applied. Many of these taxing agencies look to the ‘tax home,’ or ‘residency,’ of the individual. Some define “part-time resident” and “permanent resident.” (An example of a famous recent case: Derek Jeter of the New York Yankees was sued by the state of New York for state income taxes on his multi-million dollar income. Jeter said that his permanent residence was in Florida (no income tax) and New York said that from 2001 to 2003, his permanent residence was in Manhattan, subjecting him to income tax in the state. Jeter apparently recently settled the case with the state under terms of non-disclosure; see the New York Times article on Jeter and taxing athletes in every place they play a game(!)…here.)

Where can I find information on state income taxes for all 50 states?
Unfortunately, nobody has made this easy for you. While there are several subscription publications on the state income tax issue directed at lawyers, accountants, and other tax professionals, there is no widely accessible comprehensive web-based collection of state income tax statutes. For many small business owners, the answer is going to involve working closely with your accountant, and investigating each state’s website for income tax information.

States and cities are stepping up efforts to tax consultants, athletes and entertainers
The recent economic decline, coupled with tough cuts in payments from the federal government to the states, has forced states to become tough on income tax evasion. States increasingly are on the lookout for well-publicized income activity, scouring the Internet for information on taxable activities such as schedules of performances for touring musicians, and news releases and announcements by service providers from other states of new contracts or projects with high-profile clients. With the Internal Revenue Service’s new emphasis on auditing the self-employed, individual service providers are squarely in the cross-hairs of tax agents. Mistakes in this area are common and frequent, and circumstances are dire: the consultant, athlete or musician not only can be forced to pay the unpaid back taxes, but also penalties and interest, which often exceed 100% of the tax owed. The moral of this story: if you’re providing services outside of your home state, you really need backup from a good accountant.