Beware of State Taxes When Doing Business in Multiple States

By Merrill Barter September 2, 2015

In the “old days,” most banks – other than the large regional and national banks – did business in a localized area. Their customers were often within striking distance of a branch, and lending was most often done with these customers.

Today many if not most banks do business, including lending, over a much broader geographic territory. The internet enables customers to open accounts, make loan applications, and take advantage of myriad other banking services without ever setting foot in a bank location. Many of their business and individual clients conduct activities or own property in multiple states, and these clients may want to maintain their banking/lending relationships with one institution.

In a growing number of states, having loans secured by real property or tangible personal property, such as a mortgage loan on a second home, a commercial real estate loan, or a loan secured by business equipment, results in the financial institution having enough of a presence – nexus – to create a filing requirement.

A few states that take this approach are Florida, Massachusetts, and Pennsylvania. In each of these states, a financial institution with loans secured by real or tangible personal property within the state could be subject to that state’s income tax (financial institution excise tax in Massachusetts). The interest attributable to the loans would be sourced to the state where the property is located. In Pennsylvania, a law that was signed in 2013 changed the law so for tax years beginning in 2014, doing business includes having $100,000 or more of gross receipts from Pennsylvania customers. Gross receipts specifically includes interest from loans secured by real or personal property in Pennsylvania.

In some states, such as Connecticut and New York, “economic nexus” rules apply – the states look to the level of a business’s economic activity within the state to determine if a filing requirement might exist. In Connecticut, businesses with greater than $500,000 of receipts from in-state sources are deemed to have nexus, and therefore a filing requirement. If a financial institution has loans to customers residing in Connecticut the interest from which is $500,000 or more, the state would assert that the institution must file there. In New York, effective for tax years beginning after 2014, the “bright-line” income threshold is $1 million of revenue from in-state sources.

Some other activities that can potentially create nexus (and therefore a filing requirement) are the presence within a state of employees or independent contractors acting on behalf of the institution soliciting clients, negotiating loan terms or attending loan closings. Investment in real estate partnerships that hold property in multiple states can also create nexus in some states. A business’s activities are not typically looked at in isolation – multiple factors may be considered by a state when making a nexus determination, and the application of these factors is not consistent.

The states’ laws and rules related to nexus are complex and vary from state-to-state. This article is meant to provide a high-level overview of some factors that may be considered by states when determining whether an entity should be filing, and therefore are worth monitoring. Each financial institution’s situation is different, and should be evaluated independently. There unfortunately is no “one size fits all” analysis for determining a financial institution’s state filing requirements.

If you have questions or would like to discuss this further, please contact Merrill Barter or your BNN professional at 800.244.7444