- The inherently mobile nature of shipping means that businesses engaged in these activities face a myriad of state and local tax issues.
- These businesses can face income tax, sales tax, and property tax challenges, among other things.
Background
Shipping businesses and other businesses that depend on boats traveling domestically or internationally face a whole host of state and local tax issues. This article will explore some of the issues these businesses can face. Addressing these issues proactively can save the businesses time and expense later.
Nexus
The concept of nexus is a significant one from a state tax perspective. Broadly, nexus means having sufficient presence in a jurisdiction such that the jurisdiction can subject the business to tax. Nexus considerations are of the utmost importance for income/franchise taxes, sales and use taxes, and gross receipts taxes. Nexus standards vary by state and tax type. In any state that a business has a physical presence that is beyond de minimis, it is important to consider whether it is subject to each tax that the state imposes. Further, states may have so-called economic nexus standards for certain taxes based on the amount of revenue earned in the state; maritime businesses deriving income from customers located in these states must also consider the impact of these standards.
Insight from Forvis Mazars: Nexus studies, which compare business activities in a state to a state’s nexus standards, should be performed periodically to help ameliorate the risk of missing filing in states where maritime businesses ought to be filing.
Apportionment for Multistate Businesses
Apportionment describes how multistate businesses divide their income among the states to which they owe certain taxes, typically income and gross receipts-based taxes. In general, a business’s income is separated into “business income” and “non-business income.” Non-business income is allocated to jurisdictions based upon rules governing the specific types of non-business income. The remainder is considered business income and is apportioned using a fraction. Historically, this fraction was calculated based upon an average of the percentage of the business’s property, payroll, and sales in the state, which was then multiplied by the state’s tax rate and then multiplied by taxable income to reflect the tax due. Most states have moved away from this three-factor formula to a single factor, based upon sales. Finally, special apportionment rules may apply to certain maritime-based businesses.
Insight from Forvis Mazars: An apportionment and sourcing analysis can help businesses understand the apportionment rules applicable to them and how to source gross receipts to states for these businesses. For states with economic nexus standards, a sourcing analysis can assist in determining filing requirements.
Property Taxes
Maritime-based businesses face significant property tax burdens. Property taxes can be especially complex because they are typically assessed by local jurisdictions, and the number of filings required can quickly pile up. However, some of these businesses may be centrally assessed by the state and the property tax due distributed to the local jurisdiction by the state authority administering the tax. Certain property may be exempt from property taxes in certain jurisdictions, so it is important to fully understand each jurisdiction’s laws as they apply to the property in question. Finally, mobile property, such as boats, creates unique challenges in property tax to ensure that tax is being paid to the appropriate jurisdiction.
Insight from Forvis Mazars: Periodic analysis of the laws in these jurisdictions is important to maintain the integrity of property tax filings.
Sales & Use Taxes
Sales and use taxes are indirect, transaction-based taxes based upon the sales (or, in the case of use tax, purchases) by the taxpayer. Common issues maritime organizations face include understanding whether a purchase is taxable or exempt and making sure that taxes are paid to the appropriate jurisdictions. A handful of maritime businesses that engage with the public at large (such as boat charter operations or tourism-based cruises) must also consider whether those fees are subject to sales or admissions and amusement taxes, as well as incidental sales associated with these activities (such as food and beverage on a boat charter or a cruise).
Insight from Forvis Mazars: Taxability matrices, periodically updated, may help these businesses understand their sales and use tax filing obligations.
Planning Opportunities
There may be discrete planning opportunities available to maritime businesses. Statutory credits and negotiated incentives may be available as a means of mitigating tax. Entity planning may help to ensure multistate tax efficiencies for income tax purposes. Tax automation and other technology solutions, e.g., GPS tracking, may also help facilitate compliance across the spectrum of federal, state, local, and international taxes.
How Forvis Mazars Can Help
We can help you navigate the complexities of state tax that impact your organization, helping you to understand the nature of your tax obligations and consider tax opportunities specific to your business. If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.