Paying State Income Tax in Non-resident States

[Todd King]

A few months ago I got a letter from the California Franchise Tax Board demanding I file a state income tax return for income that an insurance carrier reported to them I had received there in 2013. I do not live there, am not licensed there, and never received any compensation from any carrier for policies issued there in 2013. It turns one carrier mistakenly reported that I had received commission for med sup policies issued there and after working with the carrier to resolve the error a couple of weeks ago I got a letter from the state notifying me that the issue has been resolved and no further action was required on my part.

Beginning in 2015 I now do have a non-resident license in California and a few other states and have downline agents in a couple of non-resident states. My accountant tells me that I must file income tax returns in every non-resident state I receive commission in, assuming they have a state income tax, which I will do. He describes California as more aggressive than most at going after non-residents who earn income in their state, but that every state with a state income tax will expect a tax return for any earnings in their states.

I know a lot of agents here on the forum do med sup telesales across state lines but I've never heard any discussion of how you handle state income tax for your non-resident income. Are you filing returns in each state that has a state income tax? Ignoring the requirement and hoping the state won't come collecting? Unaware of the requirement?

I really don't want to put your accountant down, but they are acting like an *** here. Everything they told you is just not true for us insurance agents or even agencies. Get another accountant!!

 

[WCMason]

I really don't want to put your accountant down, but they are acting like an *** here. Everything they told you is just not true for us insurance agents or even agencies. Get another accountant!!

My accountant may very well be acting like an *** and I would love to have some evidence that he is. After getting this information from him I did my own research and discovered that states do require that non-residents file an income tax return for income earned in their state, consistent with what he told me. It does not appear that you were disputing that in general, but that it does not apply to those in the insurance business. I have not seen any mention of an exception like this for insurance agents or agencies on any of the state tax board websites I have been researching in my non-resident states. Is there any website or publication that you can point me to that would support this good news?

 

[sshafran]

My accountant may very well be acting like an *** and I would love to have some evidence that he is. After getting this information from him I did my own research and discovered that states do require that non-residents file an income tax return for income earned in their state, consistent with what he told me. It does not appear that you were disputing that in general, but that it does not apply to those in the insurance business. I have not seen any mention of an exception like this for insurance agents or agencies on any of the state tax board websites I have been researching in my non-resident states. Is there any website or publication that you can point me to that would support this good news?

All I can add to this is that my cpa wanted to do the same.

He even suggested that I should pay the "city" taxes of the appropriate cities when I sold. I thought...no way man...

After talking to many agents I came to the conclusion that no one does it. Right or technically wrong...no one does it...and there seems to be ambiguity.

The argument is that money isn't typically being paid *directly* to us when we sell the policy...it is being paid to the carrier. And we have a contract based in our city and business address to collect the commission from the carrier regardless of where the app was signed.

I had a specific conversation with one non-resident state and they said, "if you were physically in our state when you sold, then we want the taxes. If you were on the phone in *your* state, then we don't want the taxes."

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All I can add to this is that my cpa wanted to do the same.

He even suggested that I should pay the "city" taxes of the appropriate cities when I sold. I thought...no way man...

After talking to many agents I came to the conclusion that no one does it. Right or technically wrong...no one does it...and there seems to be ambiguity.

The argument is that money isn't typically being paid *directly* to us when we sell the policy...it is being paid to the carrier. And we have a contract based in our city and business address to collect the commission from the carrier regardless of where the app was signed.

I had a specific conversation with one non-resident state and they said, "if you were physically in our state when you sold, then we want the taxes. If you were on the phone in *your* state, then we don't want the taxes."

To clarify, if I sold labor and performed labor in another state and charged the person directly and he/she paid me, then that state should get a cut.

But I am not (nor is my agency) collecting a dime from my Medicare client in Chicago, Pittsburgh, or Cleveland. They pay the carrier... then the carrier pays me in my little city...

 

[TwiLight]

Well I will weigh in here... If you produce in a State you are subject to that State's Rules.... Taxes included.

Now some States have Reciprocity Agreements on Income... Ex: Illinois, Indiana, Michigan, Ohio all have such agreements with each other and will waive filing in each State as long as the Resident State is filed.

Many States neighbor States that do not have Personal Income Taxes and are more aggressive on Compliance, California is one of them.

Missouri will tie your license to your filing of income tax in that State.

Some States require you to have an office in that State (Registered with the SOS) in order to sell in that State as a Corporation or LLC.... Ex: Virginia and Texas.

Point is, if you sell across the borders of your Resident State, know the rules and laws of the State you are selling in.

Skipper.

 

[sirherbie]

Skipper how will the state rev department know what you sold in each state? If the carriers don't give you a breakdown surely they provide no list to the different states. It's a zero sum game. Each state probably has around the same % of resident and non resident agents . So in reality what they gain in nonresident fees they'll lose on the other side. I can never see agents abiding by this.

 

[walthamny]

I sell 2 or 3 policies a year in CA, so I file a non resident CA return. The income I declare on my CA return is not taxed in my home State of MA. CA rate is higher then MA, so I ended up paying a little more. It gets more complicated when you get renewals, because insurance companies dont break down renewal income by state. Now if I did not do this and I ended up getting sued for the few policies I sell in CA, I could get into big trouble. A lawyer can depose my tax returns and if I am selling in CA, but never filing a state tax return, you can expect trouble. Don't expect E&O to cover you for non filing of state tax returns. This is why you should think hard before getting licensed for only 1 or 2 policies in a non resident state.

 

[TwiLight]

Skipper how will the state rev department know what you sold in each state? If the carriers don't give you a breakdown surely they provide no list to the different states. It's a zero sum game. Each state probably has around the same % of resident and non resident agents . So in reality what they gain in nonresident fees they'll lose on the other side. I can never see agents abiding by this.

States Audit Insurance Agents all the time along with the IRS. They will look at your federal return if you hold a non-resident license and ask for a revue from you.

That will get you on the record. CA is notorious for this and then you have to prove it. Last time I did so was show a list of clients residency.

CRM Reporting with Commission Tracking is very important. Especially for Health Agents as companies will screw you out of at least 15% of your renewals each year, so the cost of software is minor to keep track of your business and commissions.

Basically, the more you make the more you are a target. Not all State Revenue departments are up to speed on tech and will miss most of it. Many are not though and are actively looking for tax cheats.

 

[vic120]

States Audit Insurance Agents all the time along with the IRS. They will look at your federal return if you hold a non-resident license and ask for a revue from you.

That will get you on the record. CA is notorious for this and then you have to prove it. Last time I did so was show a list of clients residency.

CRM Reporting with Commission Tracking is very important. Especially for Health Agents as companies will screw you out of at least 15% of your renewals each year, so the cost of software is minor to keep track of your business and commissions.

Basically, the more you make the more you are a target. Not all State Revenue departments are up to speed on tech and will miss most of it. Many are not though and are actively looking for tax cheats.

Which CRM Reporting with Commission Tracking do you use or suggest?

 

[sirherbie]

All this info we've discussed is probably the letter of the law much like intangible tax owed in many states on bank and stock accounts. But few ever claimed intangible taxes and the irs never enforced . We have a situation were we are paying our taxes although a small amount could be to the wrong state. As i stated any state that wants to enforce will probably see the same % of reduced taxes from other states that enforce. So it's a wash really. I like 99.9% of agents who do business in multiple states won't lift a finger until co's segregate 1099's by state were income was made and it's reported to the it's .

 

[WCMason]

States Audit Insurance Agents all the time along with the IRS. They will look at your federal return if you hold a non-resident license and ask for a revue from you. That will get you on the record. CA is notorious for this and then you have to prove it. Last time I did so was show a list of clients residency. CRM Reporting with Commission Tracking is very important. Especially for Health Agents as companies will screw you out of at least 15% of your renewals each year, so the cost of software is minor to keep track of your business and commissions. Basically, the more you make the more you are a target. Not all State Revenue departments are up to speed on tech and will miss most of it. Many are not though and are actively looking for tax cheats.

I keep looking for an out for insurance agents but the more I read the less optimistic I am about finding one. The Interstate Commerce clause of the Constitution has a long history of litigation, much of it being the states fighting hard to preserve their right to tax those doing business in their states whether or not the business or individual has a physical presence there. There doesn't seem to be much of a challenge to a state's right to tax income of any non-resident who solicits business in their state, especially if there is a connection--they call it nexus--between the non-resident and the state. A non-resident license is a pretty firm nexus.