The state tax authority in every state you have connections to may lay claim to your earnings and expect you to file state income taxes. Attorney Shenkman puts this into perspective for working RVers.
by Martin M. Shenkman, CPA, MBA, JD
"How do I love thee? Let me count the ways…." And, state tax departments, struggling to raise money, have many ways to show you their affection. First, why they might really like RV'ers.
Why You're the Target
Willie Sutton, the famous (or some might say infamous) bank robber was asked by a reporter why he robbed banks. He quipped, "Because that's where the money is." So you might ask, why would a state tax department go after you when there are fat cats with big bucks probably playing games, too? The answer is as obvious as the old Willie Sutton adage. Who better to tax than someone who is not a resident in their state? If you're a resident in say Texas, and California believes you owe back taxes, you cannot exactly vote in California. The easiest prey for any state tax authority might just be those who claim to reside anyplace else.
Understanding some of the key concepts and jargon will help you unlock some of the ways different states may seek to tax you. You can't sing tax karaoke without knowing the lyrics. Here's a few words to help you sing-a-long with the state tax auditor (hum the Beatles tune "Tax Man" as you read):
• Domicile – the place where you permanently reside and where you eventually intend to return. If you want to avoid tax in a particular state in which you lived, you'll need to break your "domicile" there. The toughest part of this for many RV'ers (which will be discussed in another article in this series) is to establish a new domicile. If you're traveling a lot that may be tough.
• Nexus – The magic glue that permits a state to tax you, or to impose tax return filing requirements on your or a business entity, such as a partnership. Nexus is just a fancy technical term for connection. What connections do you, or your business, have to a particular state? Once you reach a certain "weight" of connections, you have a tax issue. And, the GVWR for tax isn't very heavy!
Planning tip: Keep in mind, the fact that you don't owe tax doesn't mean you don't have to file.
• Residency – Where you live currently. This is not as strong a connection as domicile.
• Statutory Resident – You might not make a particular state your current home, but if you trip over the requirements that state law uses to define a "resident" of that particular state for income tax purposes, then you may be taxed as a resident under that law or statute as a "statutory resident." This may be as simple as being in that state too many days in any given year. Do some research on line and keep your diary. As mentioned in other articles, look up the instructions for filing tax returns for any state you work in or spend considerable time in. Note the relevant information in your calendar/log so you can avoid becoming a statutory resident (unless that state is really your home). More on this tricky concept in later articles in this series.
State Tax Authority Conclusion
There are a number of ways a state tax authority can find a connection or basis to tax you. To avoid tax entirely by a particular state, you need to understand and monitor each of these. In most cases if you spend a considerable portion of the year in a particular state, maintain a permanent home in that state, or work in a state you'll probably face state taxation. In future articles in this series we'll take a look at the gritty details as to how states can tax you and what you might need to do when more than one state is after your tax dollars. Just remember, planning and understanding the law, can save you tax dollars, audits, and aggravation (and perhaps worse).
Martin M. Shenkman, CPA, Esq. sponsors a free legal website LawEasy.com.
Martin is an RVer with a special cause. He is an avid fundraiser for the National Multiple Sclerosis Society and The Michael J. Fox Foundation For Parkinson's Research. See his RV4TheCure.com website for how you can help him fight MS. Besides RV business tax and legal information, he will share some of his RVing and fundraising experiences with us.
Caution: This article and other columns can never substitute for professional legal, tax, and accounting guidance. These columns can provide only broad general advice, which may not apply to your situation. The rules differ substantially from state to state. Tax, business, and other laws change rapidly over time so there can be no assurance that the information in this column is current. The best approach is to review the ideas in this article with your own CPA and attorney. The application of general tax and legal principles to some of the unique facts presented by RV working is particularly complex and there is little specific law providing guidance to rely upon.