one, if your state requires one. When a good is shipped across four states to end up on the shelves of a store near you, do you file four state tax returns and pay four state sales taxes? I dont know what the tax court will ultimately decide, if in fact this is even in tax court, but until otherwise instructed, use your common sense. And if your Accountant is telling you to file four states and charging you for it, change Accountants.
oh and the advice you get on message boards is worth what you pay for it.
KMP isn't making sales of tangible personal property in interstate commerce (which would be applicable to the four state situation you described). That doctrine applies to sales and use tax issues.
KMP operates interstate and intrastate pipelines in various states. The interstate lines are likely to apportion income to the states which the line traverses based on pipeline miles or Mcf miles. Each state would be allocated a share of the income or loss from the entire pipeline's operations based on the proportion of miles or Mcf miles in each state. The more miles in one state, the more income allocated to that state.
The intrastate lines would allocate all of their income or loss to the single state that they are located in.
I think many of us find the advice given on some of these MLP message boards (KPMs especially) to be invaluable.
I do not think you advice is accurate when applied to partnerships. MLPs are not corporations...they are partnerships.
If you are a partner in a small law firm, and that firm has an office in two states, each partner's annual K-1 will show how much of that partners amount of partnership income derived from each state. Both of those states will be most certainly expecting them to report and pay tax on the income they received from the partnership activities in that state.
Being a partner in a big partnership...an MLP...is really no different. The total partnership income you receive comes from each different state where the partnership produces income. The operations in some states may be wonderful (i.e., generating high income), while others may produce less or even lost money in a given year. But your K-1 will show the income you received from each state. The MLP isn't telling you the state specific information for fun; there is a potential tax liability for limited partners with reported income in each state.
My 2010 KMP K-1 showed activities in 31 states. However, like they always do, KMP reported I received zero or negative income in each state, so I had nothing to file.
My Buckeye Partners (BPL) investment is a very different story. I first invested in 1990, and have long since stopped having a big tax shield; half my 2010 distributions were taxable income. BPL reported I earned positive income (and/or portfolio income such as interest or qualified dividends) in 17 of the 19 states they have activities in. Whether I have to file an income tax return in each of those 17 states depends on that state's minimum tax reporting requirements, and whether the amount of income I received there exceeds their minimum filing requirement. For example, the New York minimum reporting level is $15,000 for non-residents who are married filing jointly. My BPL income from NY is way under that level, so I had no filing or tax requirements. Each state is different though: PA has a $1 minimum filing requirement. That is not saying you necessarily owe tax to PA (that depends on how your non-resident tax return works out), but if you invest in BPL then PA is expecting you to file if you have $1 of BPL income reported to come from PA.
KMP reported activity on their K-1s in the following states:
AL AR AZ CA CO FL GA IA IL IN KS KY LA MD MN MO MS NC ND NE NJ NM NY OK OR PA SC TN VA WI WV
That does NOT mean you have to file taxes in each of those 31 states. KMP is extremely tax efficient. I have owned KMP since 2003, and have not reinvested. However my K-1 had 0 or negative income in each of those 31 states.
I did have portfolio income (interest and/or qualified dividends) in 11 of those states. However at the total (all state) level my KMP portfolio income was 5.4% of my total distribution. After allocating my portfolio income to 31 states, I was considerably under the minimum reporting requirements in most states. I have never bothered to research what the minimum reporting requirements for each state is for portfolio income. I know one state (PA) has a zero minimum reporting requirement for income, but my KMP generated negative PA income and 0 portfolio income there.
The only state I would be concerned about is a state where you are already filing for other reasons (such as you live or work there). In that case you certainly want to include your KMP results (if any) on those returns.
I believe the greatest state tax exposure comes from the sale of the units rather than from the operating results.
One question I have is what recourse does a state, of which I am a non-resident, have to either force me to file or to force me to pay the tax? As a practical matter will a state chase after a partner for a few dollars of tax - say under $100.