Multi-state business taxation rules have changed in recent years, and if you operate a service business across state lines – a consultancy or marketing agency, for example – your presumed tax savings might be smaller than you think. Historically, states primarily taxed you based on the location of employees, offices and the business’ sales force. It was a question of where the work that created the income was performed. But now many states are enacting what are called “market-based sourcing tax laws.”
For example: New Jersey taxes your total income no matter where it comes from. But if your clients are based in New York, a market-based state that wants to tax you for the work received in New York, BOTH can now collect tax on your revenue.
According to Entrepreneur Magazine: (http://www.entrepreneur.com/article/254533)
For entrepreneurs operating a pass-through entity, such as an LLC or S corporation, the situation can be even more challenging. If you do business in 19 market-based states, it’s possible that you (and each of your partners) will need to file a personal tax return for each state – and that’s on top of your corporate tax returns. It’s an accounting and logistical nightmare that will likely require you to pay income tax, and often a franchise tax, to do business outside your home state.
Details around this new taxation method vary from state to state – and even by industry – so before you make a move, do your homework and consult your tax expert. And keep in mind that promises made by politicians, especially regarding taxes, are never as simple as they sound.