Opinion: Unincorporated Truckers Beware

By Kristie Roger

Associate

LarkinGibbs LLP

This Opinion piece appears in the Sept. 27 print edition of Transport Topics. Click here to subscribe today.

Many of those involved in trucking — particularly the over-the-road interstate variety — appear to believe an unincorporated trucking firm escapes multistate taxation.

They are wrong.

Trucking firms operating as proprietorships, partnerships, limited liability partnerships (LLPs) and limited liability companies (LLCs) are subject to taxation under requirements similar to those imposed on corporations.

However, a state cannot impose an income tax on any business entity, regardless of form, unless that company has a sufficient nexus — i.e., a connection — with the state.

A state’s nexus standard applies to all entities, without regard to legal form, and every state has its own nexus standard.

For transportation companies, a state’s nexus standard is generally based on a carrier’s miles and/or pickups and deliveries within the state’s borders, regardless of the carrier’s home base.

Discovering exactly where your company stands with the various states where you do business or simply travel through is particularly important in today’s economy. In 2008, American Trucking Associations explained this issue to a House of Representatives subcommittee studying business tax simplification:

“Periodically . . . and typically in bad economic times like the present, one or more states mount a general campaign to force smaller trucking companies located outside their borders but traveling on their roads to pay their business taxes,” ATA said. “Such a campaign typically starts with widespread mailing of a ‘nexus questionnaire’ to hundreds or thousands of motor carriers that have paid operating taxes [i.e., fuel taxes, weight distance taxes, property tax renditions] to the state.”

Carriers that don’t return the questionnaire, ATA said, “receive increasingly threatening communications from the state until they do.”

ATA also said in its statement: “Particularly for smaller motor carriers, this is a cruel absurdity. Typically, the state that seeks to force interstate motor carriers to pay its business taxes not only assesses for years of back taxes but also either imposes a minimum corporate tax or taxes gross rather than net receipts. Through the use of these gimmicks, a state will have magnified the claimed liability out of all proportion, either to the carrier’s travel in the state or to its net income.”

Outrages such as ATA described can be expected when taxation continues to increase operating costs with limited benefits to the company. However, the U.S. Constitution has reserved such right to tax interstate activities to each state.

When determining if your company has a nexus with a state, the nexus standard is considered at the entity level. That is, once a carrier has a nexus with a state, each owner or pass-through partner has a nexus with that state.

The owner of a proprietorship and each partner in a partnership or LLP is required to file income tax returns in each state where the entity has a nexus. At the time of its formation, an LLC can elect to be taxed either as a corporation or a partnership for federal tax purposes. If the LLC elects corporate tax status, it must file corporate tax returns in every state in which it is determined to have nexus. If an LLC elects to be taxed as a partnership, or is a single-member LLC, each partner or owner is required to file income tax returns in each state where the LLC has a nexus.

For truckers who are sole proprietorships, the total business income is reported on Schedule C of the owner’s personal federal income tax return. Most states then use an apportionment method based on miles to allocate net business income to report on Schedule C to each of the states in which the business has a nexus.

Exceptions to this method do exist. New York, for instance, does not allow residents to apportion their net income. Owners or partners residing in New York must file a personal tax return that reports 100% of their business net income as taxable in New York. New York then allows the resident to claim a credit against the New York tax for taxes paid to other states that are based on the same income. The credit New York residents can claim is subject to certain limitations and, therefore, the actual credit allowed on the New York return may be less than the total taxes paid to other states. This is similar to the creditable tax amount derived from international taxation.

The income-tax filing requirements for proprietors, partners and other unincorporated entities vary from state to state.

Michigan and Ohio, for example, require the unincorporated owner to report his apportioned business income on a business tax return, while New Jersey and New York require the owner to report the apportioned business income on a personal tax return. Pennsylvania requires the unincorporated owner to file a personal tax return and to complete the foreign franchise tax section on the business tax return.

The lesson to learn is that once a business determines it has met the nexus standard in a specific state, the filing requirements in that state need to be reviewed carefully to ensure that the proper returns are prepared and filed.

If a careful review of the company’s activities determines that a nexus has been established in certain states and the required tax returns never have been filed, the company may be able to participate in a voluntary disclosure program in those states, if offered. The benefits of participating in a voluntary disclosure program can include a limited look-back period for filing required returns and a reduction in interest and penalties assessed on the past due tax returns.

Time can be of the essence when filing for voluntary disclosure. In the past, New Jersey has stopped trucks and impounded vehicles and cargo until arrangements have been made to bring New Jersey tax filings up to date.

However, when a truck has been stopped or your company has been contacted by a state’s tax department, your company is considered “discovered.” Discovered companies are not eligible to participate in most voluntary disclosure programs and, therefore, will lose the benefits of the limited look-back period and reduced interest and penalties.

Many unincorporated entities are unaware of their state filing requirements. If you are an owner or a partner in an unincorporated entity, you need to review your activities or contact your accountant to determine if you meet the nexus requirements in any states.

LarkinGibbs LLP, Buffalo, N.Y., is a firm of certified public accountants with an international practice. The author is the lead team member of the firm’s multistate taxation activity.