A state can treat someone as a resident on a day count alone, and can require a business to collect its tax without the business ever setting foot there. This subject covers statutory residency and how days are counted, what a domicile audit examines, the convenience-of-employer rule that taxes work never done in the state, credits for tax paid elsewhere, and the economic nexus thresholds businesses cross without noticing.
A residency examination asks where a person actually was and where their life was centered, and it is resolved on documentary evidence. Auditors request day-by-day location records, travel bookings and boarding passes, credit and debit card transaction histories, toll and transit records, mobile phone location and call records, utility consumption at each property, building access logs, employment calendars, and medical and professional appointment records.
A part-year resident return is filed by someone who was a resident of a state for part of the tax year, and it reports all income earned during the period of residency plus any income sourced to that state during the rest of the year. A non-resident return is filed by someone who was never a resident but earned income sourced there. In a year when a person moves, two part-year returns are usually correct.
Domicile is a person's true, fixed and permanent home, and changing it requires both abandoning the previous domicile and establishing a new one with the intention of remaining. Because intention is not observable, auditors examine objective evidence: the relative size and use of homes, where time is actually spent, where business is centered, where the family lives, and where items of personal significance are kept.
Once a business has nexus in a state, it must register before collecting, determine the correct combined state and local rate for each transaction, decide taxability for its own products, obtain and retain exemption certificates for untaxed sales, and file returns on the schedule the state assigns. Filing is required for every period even where no sales occurred.
Since the Supreme Court permitted states to require collection from remote sellers without a physical presence, states have enacted economic nexus statutes triggering a sales tax obligation once a seller exceeds a threshold of receipts or transactions in the state. The thresholds differ, the measurement periods differ, and the treatment of marketplace sales differs. Separately, states apply nexus concepts to income and franchise taxes, sometimes on thresholds of their own.
Many states apply a second, mechanical residency test alongside domicile: a person who maintains a permanent place of abode in the state and spends more than a set number of days there during the year is taxed as a resident on all income, whatever their domicile. The day count is generally based on physical presence for any part of a day, so partial days count in full, and travel days count at both ends.
Ordinarily wages are sourced to the state where the work is physically performed. A small number of states apply a different rule for employees of in-state employers who work remotely: unless the remote location was a necessity of the employer rather than a convenience of the employee, the days are sourced to the employer's state.
Dual residency arises where one state treats a person as domiciled there while another treats them as a statutory resident on day count and abode, or where two states reach different domicile conclusions on the same facts. Each then taxes worldwide income. Resident credits were designed for income sourced elsewhere rather than for a second resident claim, and the coverage is incomplete — particularly for investment income, which has no source state the rules recognize.
Gain on the sale of a business is generally taxed by the state where the seller is resident at the time of the sale, on the basis that intangible assets follow the owner. States where the business operated may also tax a portion, particularly where the sale is structured as an asset sale rather than a stock sale, since gain on assets used in a business is frequently apportionable to the states where that business was conducted. Real property gain is taxed where the property sits.
A state taxing its residents on worldwide income generally allows a credit for income tax paid to another state on income sourced there. The credit is limited to the lesser of the tax actually paid and the amount the resident state would have charged on the same income, so a taxpayer effectively pays the higher of the two rates.
Reciprocal agreements are arrangements between neighboring states under which residents of one who work in the other are taxed on those wages only by their home state. The employee files a certificate with the employer, who then withholds for the home state, and no non-resident return is required. Reciprocity is limited to wage income: business income, rental income and gains are not covered, and neither is income from work performed by a non-resident who is not covered by an agreement.
