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How New Rules for Interstate Business Can Negatively Impact Your Income

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This story appears in the February 2016 issue of Entrepreneur. Subscribe »

For years, Texas politicians have tried to lure business owners away from states such as New York and California, touting the Lone Star State’s lack of corporate or individual income tax. The idea of adding 9 to 13 percent to your personal income is hard to resist. But you may not want to pack up your office quite yet. Multistate business taxation rules have changed in recent years, and if you operate a service business across state lines -- if you’re a consultancy or marketing agency, for example -- your presumed tax savings might be smaller than you think.

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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, according to Shannon Ward, CPA and senior manager of Los Angeles-based Gursey Schneider, LLP. But now many states are enacting what are called “market-based sourcing tax laws.” For example: If you live in Texas and perform a service for an individual or company in California, then California requires your company to pay income taxes on the value of work received there. See how this can get tricky? And it gets worse: If you’re conducting businesses in any of the 19 states currently using market-based sourcing, you’re required to file and pay taxes in each of them. I spoke to one business owner who paid taxes in 17 states this year.

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