Basic Tax Math – Part 7 – State Taxation, Domicile and Your License

The place most travelers and tax practitioners stumble when dealing with multistate taxation, is separating the concepts of permanent residence / domicile and a tax residence. The two are entirely different yet frequently referred to synonymously because they are often at the same place.

A permanent residence is a legal concept, often referred to as one’s domicile. If you want to know someone’s permanent residence, just ask to see their driver’s license, car registration and voter registration. Each of these connections tie an individual to a state, and more particularly, a community within the state. The permanent residence, domiciliary state has the right to tax an individual’s global income regardless of where they earn it and how many days they spend within the state.

This concept of permanent residence and domicile spills into  the understanding of “residency” as it is applied to professional practice licenses. If a registered nurse holds a compact license, their primary license which grants the right to practice in other compact states is based on their permanent residence and domicile.  In granting this license,  it is expected that the nurse will continue to reside  in the state.  This is the reason so many state tax agencies and professional practice boards  share information with one another.  The licensing agency  checks a tax return as a way to confirm a taxpayer’s continued  residence in the state and right to hold a residence license – the state tax agency will use the roster of professional practice licenses  as an hunting/discovery tool tool to ensure that those  benefiting from residency in the state  are paying their share of taxes.

The cross-referencing of professional practice licenses and state tax returns started many years ago with California leading the way. Gradually,  it spread to almost every state in the nation.  About six years ago we did a survey  of every  nursing board  and state tax agency in the nation, asking whether they actively cross referenced data the for their own purposes. The answer was unanimous – they can and will when necessary.

This is why it is imperative for a multistate traveling professional  to file their state returns with the proper residency status. Every tax return leaves a cookie trail. When it comes to the states , the last thing you want is a series of annual returns that have no domiciliary consistency. Otherwise, the cookie trail can meander into the state taxation abyss where eager trolls endowed with the power to assess tax delinquencies await to harvest tax dollars from those that wander.

The Abyss

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