State Tax Compliance Checklist

State Tax Compliance Checklist

Chau Tran
Managing Director, SALT
Share on facebook
Share on twitter
Share on linkedin
Share on email

30 Second Summary

  • While we may have gotten an unexpected reprieve from additional changes that would impact the 2021 tax year, we must still be prepared to navigate uncharted territory – and that means staying on top of our SALT compliance processes and procedures.
  • In her latest article for GTM’s Tax Insights, Managing Director Chau Tran shares State Tax Compliance housekeeping items to keep in mind, including when you should perform each task.

Over the past four years, numerous Federal tax law changes have kept state tax professionals busy. The pace in which these changes are coming are unlikely to slow down in the near future. While we may have gotten an unexpected reprieve from additional changes that would impact the 2021 tax year, we must still be prepared to navigate uncharted territory – and that means staying on top of our SALT compliance processes and procedures, so we can absorb those changes when they inevitably arrive.

Here is our checklist of some key State Tax Compliance “housekeeping” items to keep on your radar.

Q1 State Tax Compliance Tasks

At this point in the year, you should have completed the following tasks. If you haven’t done so already, now is the time to do so:

  • Review your tax calendar
    • The first quarter of the tax year is always a good time to review the upcoming tax calendar, especially if you entered into new jurisdictions or anticipate an upcoming business acquisition that may require registering in certain states and obtaining state tax identification numbers. Furthermore, it is just as important to review your previous year’s filings to identify any jurisdictions which you exited last year or perhaps marked any returns as “final” for other reasons
  • Review the impact of new state law changes
    • It is critical to have a good understanding of any law changes which were recently enacted or perhaps ones which were previous enacted but now take effect in 2021. Some examples include:
      • State sourcing rules
      • Rate changes
      • Combined reporting requirements
      • Federal law changes
  •  Identify potential state nexus issues
    • The recently revised MTC statement has made it increasingly difficult for many online sellers to claim protection under P.L. 86-272.  The updated guidance is meant to address changes in how business is conducted, specifically where a company sells tangible personal property directly through its website or app offering and the sale is approved and shipped from outside the customer’s state with no other connection to the customer’s state.  As a result, taxpayers may find themselves more vulnerable to state income tax nexus than in previous years.  However, the revised MTC statement is not automatically adopted by states and must be officially adopted as law or administrative guidance in order for it to take effect. It is always recommended to take a fresh look at filing positions on an annual basis to make sure you remain in compliance with each state’s current laws
    • California is the first state to incorporate the guidance by the MTC.  Other states are likely to follow.  See The Internet, State Nexus, and Sales Tax: The Impact of P.L. 86-272 – Global Tax Management (gtmtax.com)
    • Remote workers – have you hired new employees to work remotely in new states?  Have you allowed workers to continue working remotely after COVID-19 restrictions lifted? As states have begun lifting COVID-related restrictions many taxpayers who continue to allow their employees to work remotely may find themselves with additional state filings in 2021 so it is critical to review where your employees are working to determine if you have additional filing requirements
  • Request apportionment data from business units
  • Set up EFT/ACH debit payment process to avoid the rush of last-minute check-cutting
  • Calculate quarterly estimates for the current tax year
  • Submit Q1 estimates
    • These are generally due on the 15th day of the fourth month).  However, there are a handful of states that have Q1 estimated payments which are actually due in the first quarter
  • Consider an often-missed election – Montana Water’s Edge
    • This election is due within 90 days of the beginning of the first year in which it is intended to become effective and is binding for a period of three years.  The Water’s election must be made every three years, or the filing method will default back to a worldwide combined return for members of a unitary business

Q2 State Tax Compliance Tasks

By the end of Q2, you should complete the following tasks:

  • Review the apportionment data received
    • If collecting raw data that requires manual manipulation, consider a technology solution, such as Alteryx, to automate the data and streamline your process
  • Begin preparation of state modification workpapers 
  • If using a tax software, such as ONESOURCE® Income Tax Compliance, map state adjustments to their respective lines on each state’s tax return
  • Consider elective filing options such as nexus consolidation/combination
    • Entities filing separate company returns in the same jurisdiction may be able to reduce their liabilities by utilizing losses from affiliates to reduce consolidated taxable income or simply by “watering down” the apportionment percentage
  • Gather data for state tax credits
    • This is also a good time to identify potential opportunities for new credits as well as expanding on existing credit positions
  • Calculate and file state income tax extensions
  • Submit Q1 and Q2 estimates
    • Q1 estimates are generally due on the 15th day of the fourth month
    • Q2 estimates are generally due on the 15th day of the sixth month
  • Prepare and file state extensions
    • Most state extensions are due on the 15th day of the fourth month following the close of the taxable year

Q3 State Tax Compliance Tasks

Be sure to address these activities in Q3:

  • Submit Q3 estimates    
    • Q3 estimates are generally due on the 15th day of the ninth month
  • Tie-out state apportionment for sales, property, and payroll to the federal return or trial balance, and upload it to your tax compliance software
  • Continue to prepare state workpapers for adjustments and/or modifications to the federal taxable income
  • Update payments/overpayments and tax attributes (i.e., NOLs and tax credits) resulting from adjustments made by a state through a notice letter or recently closed audit

Q4 State Tax Compliance Tasks

In Q4, complete the following tasks:

  • Submit Q4 estimates
    • Q4 estimates are generally due on the 15th day of the twelfth month
  • Prepare and file state returns
  • Incorporate provision to return adjustments during or immediately after state filings to avoid errors/large discrepancies
  • Review workpaper documentation to make sure it is complete, ties to the filed tax returns, and is adequate to be considered “audit-ready”

GTM can help you navigate this process. To learn more about GTM’s State & Local Tax services or to speak with someone who can guide you, contact us.

About The Author(s)

Chau Tran
Managing Director, SALT
Learn More
Chau is a Managing Director in Global Tax Management’s State and Local Tax (SALT) Practice, focusing on direct (income and franchise) tax. She specializes in leading and coordinating...