Missouri Tax Fishing
I've frequently discussed the issue of state taxes and income sourcing, as well as the requirement for non-residents to file tax returns for certain kinds of income earned in other states. This has been receiving a lot of publicity recently under the term "jock-tax" because of its application to professional athletes who earn their money in several different states, with the implication that it's a new development in taxation. It's not new and has been an issue to be concerned with for as long as I've been in the tax game.

Obviously the various states are always looking for ways to make sure they get their pieces of the tax pie. They use information documents (W-2s, 1099s, etc) to match up with non-residents. Withholding of taxes up front, such as on some real estate sales, is a powerful way for states to force nonresidents to file tax returns.

State tax agencies also receive tax return info from IRS and look for non-filers that way. Several years ago, I had to help unravel some Arkansas state tax problems that were caused by new clients who had filed tax returns for their Nevada based corporations using the owners' Arkansas addresses. IRS shared that info with the Arkansas DFA and then DFA sent notices requesting state corp returns. Now, we always use the Nevada corp address on the returns and we never hear a peep from any other state tax agency.

I mention this now because, in the past few weeks, I have had two clients who are full time Arkansas residents receive notices from the Missouri Dept. of Revenue requesting Missouri income tax returns for 2000, 2001 and 2002. Unlike when other states such as California do this kind of thing, there was no listing of any specific income items coming from Missouri sources. I asked the first client to call the number on the notices and ask for specifics. The DOR rep told him they had noticed that he had a Realtor license for Missouri, but they had no indication that he had earned any taxable income in Missouri. She told him they sent those notices out as a fishing expedition to possibly flush out some unreported income. She told my client to just write on the notices that he had no Missouri income and mail them back in and that would put an end to that issue. He did that and then the MO DOR sent back a notice accepting the fact that he had no Missouri taxable income.

When the second client called DOR, she was told a similar thing. Her name had come up as having a Missouri insurance license and the MO DOR was fishing for some taxable income. My client admitted that some of her clients did live in Missouri and wondered whether this meant she had to report that portion of their income to the State of Missouri. I explained how the issue of income sources works as follows, which I hope is informative for others around the country.

The key factor is not where your clients and customers live; but where you actually do your work. If you have an office in Missouri or you drive up to the homes of MO residents, that would be MO source income, which would need to be reported on a MO income tax return.

However, if all of your work is done through your Arkansas office, all income is Arkansas source and properly reported to and taxed by the State of Arkansas.

This is the exact same situation for us. We have clients all over the country. I am also licensed as a CPA in California. However, since we do all of our work from our office here in Arkansas, we don't have to file tax returns with any other states, including Calif.

If that is the case for your insurance business, you can write on the notices that all insurance income has been generated from inside Arkansas and none was earned in Missouri and that a MO income tax return is not required.

If you do conduct business with a physical presence inside MO, we will need to pro-rate your income accordingly and file MO and amended AR tax returns.

She assured me that all income was earned while physically inside Arkansas, so she is writing that fact on the MO DOR notices and we will not have to file any Missouri tax returns.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/08/2004 09:00:00 AM Send this post: