Research Paper: State Income Tax Issues

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¶ … Amstel's plans to venture into new states of operations and the state income tax implications and obligations that this will bring. The new obligations would fall into three major categories, those being state corporate income tax burdens, employee income tax burdens and state unemployment tax burdens. These three line items will be covered one at a time and in great detail. Nexus and apportionment as well as the potential for state tax incentives will also be discussed.

State Corporate Income Tax Burden

The obvious and most pressing state tax burden that would affect Amstel were it to venture into new states is the income tax burden. In some form or to some degree, all of the states in the United States impose some sort of income-based taxes for states that operate within their borders based on the business that actually takes place in the state in question. Generally speaking, money that is earned in a state is taxed for both sales tax and income taxes. The sales tax is collected by the retailer but the state income tax filings would require a separate filing for every state in which Amstel engages in beer sales. It would not be limited or relegated only to Michigan as many of the sales would no longer technically be happening in Michigan. It all comes down to where the money is going when it's collected. If it's all going to Michigan, then the income taxes paid will probably be limited to Michigan. However, if Amstel sets up administration/financial arms in these other states of operations, the corporate income tax proposition will get more complicated quite quickly and every state in which earnings are earned and retained will have to have income taxes filed for that state.

State Employee Income Tax Burden

Most states have income taxes that apply to employees. Of the ones that do not, none of them are Michgan, Indiana, Wisconsin or Illinois. Each state with an employee income tax either relies on the federal W-4 withholding form and/or a state-specific form that is filled out by the employee and Amstel would be required to withhold commensurate with the elections on that form just like they currently do for the state of Michigan. Also as with the state of Michigan, there are fairly severe employer penalties if the employee's state income tax elections are not honored. Finally, employees should be making their own elections on the W-4's or the state equivalent forms as individual tax advice is not something Amstel HR or any other personnel should be engaging in.

Another tax, although technically not a state tax but specific to states nonetheless, is something that Michigan itself does have and that is local taxes. Detroit, Pontiac, Flint and other cities in the Michigan envelope have local income taxes. Many states in the United States, a lot of them close or very close to Michigan, have local employer and/or employee taxes that are at least somewhat tied to income if not directly linked through a flat rate. Wisconsin and Illinois do not have local income taxes but Indiana does in some areas. For whatever states that Amstel operates in, it has to be borne in mind that one or more of these local taxes may be applicable and Amstel would often be legally obligated to withhold the taxes if any Amstel employees work or live in an area that is subject to taxing. Local taxes can be based on either worked location, lived location or a combination of the two so every employee has to be looked at individually. Worked in taxes only apply if the actual location Amstel employees work at is in a taxing area.

Much of the same worked in/lived in implications apply to state income taxes as well. For example, even employees that work in Michigan may have implications as far as local taxes and/or state income taxes if they work and live in different cities or even states. For example, an employee working in Flint and living in Detroit may have dual-taxation from both jurisdictions but they may only have one or the other and the taxes often to be withheld by Amstel as a matter of law. Again, every employee has to be looked at individually and this is true when they start as well as every single time they change home address or work location.

Because of the implications above, employees must be made to understand that they must come forward and let Amstel know when they move so that the proper income tax adjustments can be made. The actual date of move is important and it's always best to catch the move before or as it happens rather than after the fact and this is especially true near the end of a quarter or the end of a year due to possible tax amendments and such. Amstel can and should track (and change employees as needed) as work locations change.

Another item that should be mentioned is that some employees may openly and actively resist withholding of certain taxes. While this can be accommodated to some point, there are limits. For example, if a local income tax is withheld for the courtesy and/or at the election of the employee, then the employer is not legally required to have withheld but the employer can do so if the employee would like them to. However, many local taxes jurisdictions do not give employers such latitude and the employee's only real option to avoid mandated withholding is not live in the area in question. As much as the employee may not like it, Amstel needs to comply with all relevant withholding laws.

The amount of latitude is much less present with state taxes. Only if an employee's wages are too low for taxation and/or if the employee files "exempt" on their W-4 or equivalent state form is it OK for the employee to not have state income taxes withheld. This assumes, however, that the state does not mandate withholding through the state equivalent of a "lock-in letter" or a tax levy. A lock-in letter is when the IRS mandates that a certain amount of income taxes are withhold, usually in the form of a mandated marital status and exemptions level. Any mandated action by the state (or local or federal) government should be considered first before EVER honoring an employee tax withholding request. Also note that some states require notification if an employee claims a certain amount of exemptions or engages in certain actions. This is rare, but it can happen. For example, some states require that a copy of the state W-4 be sent to them if the employee claims more than a certain number of exemptions for income taxes.

State Unemployment Tax Burden

The final state tax implication that Amstel should bear in mind is state unemployment insurance, or SUI. Not unlike the state unemployment taxes that Amstel pays in Michigan, all other states have some form of unemployment tax. It is usually borne in full and only by the employer and indeed this is the case for the four states being discussed in this report. Also noteworthy, as Michigan, Indiana and a few other states have found out, is that the federal government sometimes tweaks the FUTA rate paid on employees in certain states due to the employees of those states disproportionately using the benefits from the federal government. The standard rate for most states that pay state unemployment taxes on time is 0.06% but that rate can be higher (or much higher) of certain states are operated in or if Amstel were to not pay its state unemployment taxes on time. As for the latter, there is about a six percent addition to the federal FUTA rate if Amstel does not pay any and all of its state unemployment taxes in full and on time.

A side note about state unemployment taxes, and something that is just as true about other states as it is about Michigan, is that wages for which SUI taxes are paid do not give credit for SUI tax paid in other states or for other employers. Any new state or any new employer (FEIN in general, actually) means the employee is taxed from zero. Only when a related SUI ID is paid on (acquisition, merger, etc.) is prior credit on another ID allowed…and that is exceedingly rare.

The final items up for discussion are nexus/apportionment and tax incentives. When it comes to Michigan, that would be a sticky subject. As far as tax incentives, this is when states give tax breaks to corporations so that they do not pay as much as they normally would given current tax laws for one or more years in the future. However, this is exceedingly unlikely for Michigan to offer Amstel because Michigan is already the base of operations for Amstel and Michigan is not in the best financial shape and much of the same can be said for the cities in… [END OF PREVIEW]

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State Income Tax Issues.  (2013, May 9).  Retrieved April 21, 2019, from https://www.essaytown.com/subjects/paper/state-income-tax-issues/6308314

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