State Taxes
State Individual Income Tax
The state individual income tax system is based on the federal individual income tax system. The states ride or “piggyback” on the federal tax system in order to determine your taxable income. The state governments use your federal taxable income and adjust them with certain additions and subtractions to a “state tax basis.”
Individual income taxes were once the foundation of state revenues. Although they are still important, states have realized that sales and use taxes are a greater source of yearly funding. Thus, state income taxes have become less pronounced in their importance over the past five years.
State Corporate Income/Franchise/Excise Tax
State corporate and franchise tax systems are generally based on the federal corporate tax system. Like the state individual income tax system, the state corporate and franchise tax systems are usually based on federal taxable income. From the federal starting point, the state would make adjustments to the federal taxable income that the state government feels benefit the state. An example of this adjustment is the “depreciation” of property. The federal corporate tax system allows a bonus depreciation for businesses while, the states generally disallow this deduction and increases the taxable income.
Other state tax systems such as Ohio’s CAT and Texas’ gross margin tax, use gross receipts to determine business taxable income. These states tax corporate businesses at the gross receipts level. Gross receipts is determined as the amount of goods or services provided before any deductions for cost of goods sold, expenses and etc. These states tax corporate businesses at a much lower tax rate because the gross receipts tax base is much greater than corporate taxable income.
Sales and Use Tax
State governments have come to rely on sales and use taxes to carry state budgets year to year. Sales and use tax is the fastest growing source of revenue for the states. Thus, the states have begun aggressively auditing business taxpayers to remit sales and use tax. New York City has recently increased the sales and use tax in order to make ends meet.
Sales and use tax requires either monthly or quarterly tax returns as well as payments depending on the amount of sales. Monthly sales tax returns are generally due the twentieth (20th) of every month. Quarterly tax returns are generally due March 20th, June 20th, September 20th, and December 20th.
Sales and use tax is theoretically simple, but because it a simple tax to understand, the government makes compliance with the tax system much more difficult. The sales and use tax system is a detail- and fact-driven. The method by which a retailer bills a client and handles the transaction could contribute to a lower tax liability.
Property Tax
Property tax was the original fundamental tax system upon which the United States relied. Property taxes are an “ad valorem” tax. Ad valorem taxes are taxes based on the value of an asset. These assets could be real estate, property and etc. Thus, the application of these taxes is simple.
The states appraise the value of your property and apply the applicable tax rate. A taxpayer’s only means to lower his or her tax liability is to contest the appraisal value of the property.
Commercial Rent Tax
The Commercial Rent Tax is unique to New York City. New York City is a special place; because it is such a special city, taxpayers that rent between the Midtown and Downtown Manhattan are required to pay a special tax. For the honor of renting space for the trade or conduct of business in Manhattan earns you the privilege to pay the commercial rent tax. Only in the NYC!
Unclaimed Property Tax
Unclaimed Property tax is the United States’ “lost and found” tax. The United States requires all businesses that find property in any form belonging to their consumers to turn over that property to the state. Thus, you were supposed to turn over every dollar you’ve found on the street to the state. This law basically states that businesses are not allowed to keep property that belongs to their customers regardless of the reason.
The most common property that unclaimed property tax deals with is gift cards. Everyone has experienced receiving a gift card that we leave in our drawers and become accidental moth balls. When we do not use the gift cards, the business is legally required to turn over the value of the gift card in dollars over to the state.
The state calls this process “escheat.” Escheat is the formal title for the state taking in the lost and found property on behalf of all consumers. The state then “holds” the property until some claims it through a long process involving extensive paperwork. Thus, this is essentially the state’s way of obtaining easy money. Therefore, unwary business owners can become accountable for a huge tax liability.
Employment Tax
Employment tax was established by the Federal Unemployment Tax Act (“FUTA”) as an insurance policy that the United States created on behalf of all employees. Whenever someone gets laid off for whatever reason, the state provides “unemployment benefits” through the taxes collected with FUTA.
This tax is a tax that only businesses pay. All employers must pay this tax in order for most of us to collect our unemployment benefits. Thus, most ordinary taxpayers aren’t familiar with this tax.
But, it is a federally mandated tax that the Internal Revenue Service and the Department of Labor take very seriously. Thus, you had better get your W2s and your 1099s in order before they come knocking on your door.