What is a Tax Situs?

Tax situs is the location where a particular asset, income, or transaction is deemed situated for tax purposes. It determines which state or locality has the authority to levy taxes on that asset, income, or transaction.

Key Takeaways 

• Tax situs helps identify situations where double taxation might arise and allows taxpayers to take steps to mitigate it, such as claiming credits or exemptions.
• Tax situs is often the linchpin in establishing nexus -- the connection or link between a taxpayer and a taxing jurisdiction. In most cases, a state or local government cannot impose its taxes on a person or entity unless it has nexus.
• The situs of property or a transaction determines the type of tax that applies and how much tax is owed. For instance, property tax situs dictates which local government can levy property taxes, while sales tax situs determines which state's sales tax rate applies.

Tax Situs vs. Residency and Domicile

While related, tax situs and residency/domicile are distinct concepts in that whereas residency and domicile determine an individual's general tax obligation to a state or locality, the relevant tax situs specifically pinpoints the location where the taxable event or property exists. 

Application to Different Types of Property/Income

Real Property: The tax situs for real property (land and buildings) is the physical location of the property itself, and therefore, the property is subject to property taxes levied by the local government where it's situated.

Tangible Personal Property: The situs of tangible personal property (e.g., vehicles, inventory, and equipment) is usually where the property is physically located. Complications may arise if the property moves between states regularly.

Intangible Personal Property: Determining tax situs for intangible personal property (e.g., stocks, bonds, intellectual property) can be more complex. It often depends on factors like the owner's domicile, the issuer's location (for securities), where the property is used or managed, and the specific state's laws.

Wage and Salary Income: Wages and salaries are sourced to a specific tax situs based on where the work is performed. Key considerations include:

• Primary Work Location: The primary location where employees perform their duties will generally be the situs for taxing their wages.
• Multiple Work Locations: When employees work in more than one state, they are usually required to allocate their income based on the time or portion of work performed in each state.
• Remote Work: With the rise of remote work, determining the situs of wages can be complex, involving both the location of the employee and the employer's operational base.

It should be noted that when it comes to employment income, considerations regarding residency can also be implicated, further complicating matters. 

Investment Income: The situs for investment income (dividends, interest, and capital gains) is determined primarily by the residence of the taxpayer and the location of the investment vehicle. Considerations include:

• Taxpayer Residence: Generally, investment income is taxed by the state of the taxpayer's residence.
• Source of Investment: Some states consider the location of the financial institution or company generating the income.
• Capital Gains: Real estate capital gains are typically sourced to the state where the property is located, while other capital gains are generally attributed to the taxpayer's state of residence.

Example: Tax Situs vs. Residency and Domicile

Scenario: Harry is domiciled in State A, where he has lived for most of his life and intends to return. However, due to a temporary work assignment, Harry is currently residing in State B for eight months of the tax year (and will therefore likely be deemed a resident of State B as well). Harry also owns a vacation home in State C, which he rents out when he's not using it. Finally, during the tax year, Harry also earns income from stocks held in a brokerage account managed in State D.

Outcome: 

• Income from employment: The tax situs for Harry’s employment income is State B, where he performs the work.
• Rental income from vacation home: The tax situs for the rental income is State C, where the property is located.

Investment income: The tax situs for the stock dividends may depend on state laws, but is often considered to be the owner's state of domicile (State A) rather than the location of the brokerage (State D).