We often see small businesses in the aerospace and defense industry run into problems with state taxes during buyer due diligence. State taxes are highly complex for small companies doing business across the nation, primarily because each state operates under its own unique laws regarding income, sales, and payroll taxes. In the middle market of the aerospace and defense industry, most companies do business across numerous states, including the key A&D clusters such Texas, California, Washington, Florida, Connecticut, Ohio, and Kansas. Doing business across state lines – through sales of products or services or remote employees, can create “nexus,” which can trigger quarterly filing and tax payment requirements.
Every state has its own unique laws regarding taxes, and these laws can (and do) frequently change. Many states have state tax laws based on “Economic Nexus”, meaning annual sales at or above that amount trigger nexus. California and New York, for example, at the moment have nexus thresholds of $500,000.
If you have employees in other states, you are probably aware that you are required to pay withholding and payroll tax obligations in those states. But you may not be aware that having employees in other states can trigger “Physical Nexus” and require your business to pay quarterly income taxes in those states. Even one remote employee can make your business liable for paying income taxes to that state each quarter.
If you are considering selling your middle market aerospace and defense business in the near future, you should retain state tax experts to help you navigate and clean up your state tax filing and payment requirements. With sufficient time, this clean-up can be done relatively easily, so that you are compliant with the laws and can breeze through buyer due diligence on this issue.
Have a great day everyone,
William Alderman
Founding Partner
