Have you accounted for state tax obligations in your growth strategy?

Real estate firms are diversifying, moving beyond traditional buy-and-flip models into operating businesses. While this evolution opens new revenue streams, it also introduces a hidden risk: state and local tax (SALT) requirements. Many business owners underestimate the breadth of tax obligations when expanding across state lines, which can lead to severe consequences. As operations grow and branch out into new revenue streams, maintaining compliance calls for a closer look at multiple tax types.

The Growing Complexity of SALT in Real Estate

Firms that have traditionally focused on buying, selling, and leasing properties may be in for a shock when developing operations into a business service model. Taxes that once seemed predictable now involve multiple layers. Suddenly, sales tax, income tax, payroll tax, and registration requirements all come into play.

Examples:

Retail Operations: Retail stores involve hundreds of daily transactions. Each sale can carry unique sales tax implications based on product type, location, and even promotional discounts. Beyond sales tax, businesses must account for income reporting on retail profits, business personal property tax on inventory, and payroll obligations for staff.

Nursing Homes: Services such as room and board, medical care, housekeeping, and fitness programs may have different sales tax treatments under state law. In addition to service-related taxes, firms must manage employment tax filings, business personal property tax, and income tax reporting for the business entity.

Enhanced Rentals: Amenities like cleaning, concierge, or furnished units can trigger unexpected tax obligations. These may include income tax on service revenue, payroll tax for staff providing services, and registration requirements in multiple jurisdictions.

The Hidden Risk: Penalties and Personal Liability

Failing to collect and remit sales, income, or employment tax can have serious ramifications, including felony charges in many states. Corporate officers can be held personally liable, facing financial penalties and potential jail time as enforcement efforts intensify and audits become more frequent. Penalties typically start at 25% of the tax due, with interest compounding at 10%. Left unresolved, these charges can escalate rapidly, turning a manageable issue into an expensive problem.

Be sure to account for:

Sales Tax: A transaction-level tax borne by the customer. If your company doesn’t collect it at the point of sale, the liability becomes yours.

Income Tax: Extends beyond corporate business filings. Failure to withhold and remit employee individual income tax is treated as a breach of trust, triggering personal liability for officers.

Employment Tax: Missing deposits or late filings can result in cascading penalties, liens, and even criminal charges. Enforcement agencies prioritize these cases because they involve employee benefits.

Local Obligations: Local tax laws, industry-specific levies, and other regulations add new layers. Non-compliance in one jurisdiction can lead to audits in others, compounding risk and cost.

Key Challenges When Entering New States

Expanding into new states can come with a maze of regulations. Every jurisdiction has its own rules, and what’s exempt in one may be taxable in another. For businesses operating across multiple locations, staying compliant becomes a moving target. Missing a single requirement can lead to penalties, audits, and operational delays.

Here’s what to keep in mind:

Start with Registration: Most states require businesses to register with the Secretary of State before commencing operations. In addition, some jurisdictions mandate supplemental filings or reports within 30–90 days of registration.

Setup Payroll: Before running your first payroll, every new business must register with the state tax agency. After registration, you’ll receive a tax account number to manage payroll tax withholding. In some cases, reciprocal tax agreements let employers withhold taxes only for the employee’s home state.

Handle Multiple Licenses: Sales tax registration, income tax registration, permits, and annual business license renewals are required at federal, state, county, and municipal levels. With nearly 40,000 licensing jurisdictions in the U.S., each with unique rules for business and professional licensing, navigating this fragmented system can be confusing.

Understand Sales Tax Rules: Operating businesses often sell services, goods, or even digital products, all of which may be taxable depending on state laws. Currently, only five states impose no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.

Real-World Case Study

A specialty real estate company expanded through acquisitions and development, adding multi-state operations and new revenue streams. This growth introduced significant tax challenges, including the need to monitor changes in state-specific laws, maintain accurate tax collection across locations, and avoid penalties while reducing internal compliance burdens.

To address these challenges, the Elliott Davis SALT team worked with the company’s Vice President of Accounting to conduct a comprehensive state-by-state tax analysis, identifying taxability requirements, exemptions, and rate structures for each jurisdiction. From this analysis, a customized taxability matrix was developed to standardize processes across all locations.

The Results: The company implemented a repeatable, scalable compliance tool, reduced reliance on expensive software, streamlined internal processes to lower administrative burden, and minimized risk exposure through proactive measures. With a structured long-term strategy in place, the company gained confidence in managing ongoing tax obligations efficiently and effectively.

Click here for the full case study.

We Can Help

State and local tax rules in real estate can be overwhelming, but with the right strategy, businesses can avoid unnecessary liabilities. The Elliott Davis SALT team specializes in simplifying tax compliance with a structured, phased approach tailored to each client’s needs.

Contact us today to reduce financial risk, improve audit-readiness, and streamline your tax compliance.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.