States Hungry for More Revenue
If part of your income derives from speaking engagements around the country, listen up! Those states in which you physically appear and which have a state income tax want to hear from you. Yes, they really do! And, if they don’t, they are more likely than ever to contact you. Most states’ revenue statutes require anyone who earns income in their state to file a state income tax return with them. This includes residents, part-year residents and nonresidents.
When you live (or reside) in one state and perform services in another state, you are a nonresident in that state subject to the requirements of their revenue act. Some states have a minimum income filing threshold; others do not. For instance, Colorado (randomly selected) states on their Division of Taxation website: “There is no minimum income threshold for filing a Colorado income tax return.” It also states: “You must file a Colorado income tax return if during the year you were: A nonresident of Colorado with Colorado source income and you were required to file a federal income tax return, or you have a Colorado income tax liability for the year.” Colorado source income includes “payments received for work performed in Colorado either as an independent contractor or as an employee.”
The Colorado requirements are similar to most other states in the country, which is to say, “if you earned income in our state, you need to file a return and pay any tax due.” Many states have done a poor job of enforcement in this area, but with a lagging economy and shrinking state revenues, I think that is about to change.
No Statute of Limitations
The states are not too worried. Once they identify you, they will generally ask you to file returns for all years you earned income in their state (unless they have an amnesty “special” going on). You see, there is no statute of limitations on returns that have not been filed yet! The statute cannot run until a return is received. Once you are compelled to file late returns, you will owe the tax plus late-filing penalty and interest. You may get a break if they are currently offering an “amnesty period” or have a voluntary disclosure program but these programs just reduce penalty and interest, not the tax.
Income Allocation at State Level Only
Your federal return is not affected by where you work because your federal return covers all sources of income from whatever source (and location) derived. The allocation of income and related expenses takes place at the state return level. If you live in a state with a state income tax, you would file your resident state income tax return with that state. However, if you have earned income in other (nonresident) states, you must file a nonresident tax return in each of those states where you meet the filing requirements. In order to prevent double-taxation on the same earnings at the state level, you prepare and file your nonresident state returns first and then reduce your resident state return by those amounts. Your resident state will often require you to show an allocation of your resident and nonresident income in order to compute your tax only on your resident income or they may allow you a tax credit for the amounts paid to the nonresident states.
IRS-State Information Sharing
Each state has an information sharing agreement with the IRS. They look at each other’s information to check for tax compliance. At some point, if it’s not happening already, each state will ask the IRS for a magnetic tape for all Form 1099-MISC’s issued by all businesses within their borders. The 1099-MISC has the payee’s name, address and Social Security Number (SSN) on it. They will then cross-reference (match) this with the returns filed in their state and “pop out” those that have not filed a nonresident return in their state. The states may start with 2008 (or earlier) and come forward since they have no statute restriction. From a state revenue compliance standpoint, this is “easy” money (like catching fish in a barrel). You will be sent a letter and asked to file and pay. If you don’t respond, the state revenue division will prepare a return for you and bill you. Ignore the bill and the next step is to garnish your wages or levy your bank account.
My Personal Experience
When I worked for the Michigan Department of Treasury, in the Discovery (aptly named) Division, as an auditor, I developed a project to enforce the Michigan Revenue Act targeted at all “entertainers” that came into Michigan for shows around the state and then promptly left without paying any taxes whatsoever. I started developing a database of entertainers and their managers and subscribing to Cash Box, Entertainment Weekly, Billboard, etc. to monitor the “stars” forthcoming appearances. Next, I would, in advance, contact the artists management agency or business manager and appraise them of the Michigan tax requirements. I remember calling a big-time Nashville business manager and telling him who I was and what I wanted to talk about. He said, “What? We’ve been coming to Michigan for 20 years and never paid taxes!” I replied, somberly: “Exactly.” Needless to say, entertainers soon got the word that they needed to be in compliance in Michigan and revenues to the state shot up from this group.
You may go to most state revenue sites by typing in the 2-letter state abbreviation followed by .gov and clicking on the taxes section to review their nonresident filing requirements for income earned in their state. Remember, you still have the opportunity to file prior year’s nonresident returns and amend your resident return to get in compliance. This post has focused on professional services rendered out-of-state and how that affects your state income tax obligations. A future post will address sales of product (books, DVDs) over the Internet and in-person within resident/nonresident states and your sales tax obligation for those sales.