Where you owe, and why you may owe where you do not operate
Multi-state nexus is the connection that gives a state the right to tax your business, and you can owe in states where you have no office at all. Physical presence has always created nexus, but a state can also reach you through economic activity alone — enough sales into the state, or a remote employee living there. Nexus decides where you file and where you collect.
Verify annually — figures adjust
Economic-nexus thresholds and apportionment rules are set by individual states and adjust over time; confirm the current thresholds for each state directly rather than relying on prior figures.
The cost is registration and ongoing compliance in each state where nexus exists — sales-tax returns, income-tax returns, and payroll registrations — plus software or a service to track thresholds and file. The exposure grows quietly as sales and hiring spread, so the real cost is often the back taxes and penalties from states where obligations went unnoticed.
Key points
- Nexus is the connection that lets a state tax a business, and it can arise in states where the business has no office.
- After South Dakota v. Wayfair, a state may require an out-of-state seller to register and collect its sales tax based on sales volume alone.
- A remote employee working from another state can create both an income-tax filing obligation and payroll withholding duties for the employer there.
- Sales-tax nexus and income-tax nexus are separate tests, so a business can cross one state's threshold without owing the other tax.
- A seller whose activity stays below a state's economic-nexus threshold has no collection duty there, and a purely single-state business has none at all.
What is it?
Nexus is the link between a business and a state that lets the state impose its taxes. Traditionally nexus meant physical presence: an office, inventory, employees, or property in the state. Physical presence still creates nexus everywhere, and it is the clearest kind — if you have people or property in a state, you generally have obligations there.
The Supreme Court's decision in South Dakota v. Wayfair changed the landscape for sales tax by holding that a state may require an out-of-state seller to collect sales tax based on economic activity alone, without any physical presence. States responded by enacting economic-nexus rules keyed to a seller's volume of sales or transactions into the state. Cross a state's threshold and you must register and collect, even from a single home office in another state.
Income tax nexus follows its own rules and is not the same as sales-tax nexus. A business with income-tax nexus in several states must apportion its income among them, dividing the total according to each state's formula. A remote employee working from another state can create both a filing obligation and payroll exposure there, which surprises owners who assume their footprint matches where they sit.
Who does it apply to?
Businesses selling online to customers across many states, where sales volume can create economic nexus far from where the business operates.
Employers with remote workers living in states other than the company's home state, which can create income-tax and payroll obligations there.
Growing businesses that have expanded sales or hiring beyond their home state without reviewing where they now have filing duties.
Who does it not work for?
- A purely local, single-state business with no remote sales and no employees or property outside its home state.
- Owners who assume a home-state-only footprint while in fact selling online to customers nationwide, which can create nexus they have not registered for.
- Businesses that treat sales-tax nexus and income-tax nexus as the same test, when the two follow different rules and can arise in different states.
- Sellers whose activity in a given state stays below that state's economic-nexus threshold, so no collection duty has yet arisen there.
What does the IRS look at?
- Nexus is primarily a state matter, so the relevant examiners are state revenue departments rather than federal, each applying its own thresholds and rules.
- Whether a business crossed a state's economic-nexus threshold for sales tax and failed to register and collect.
- Whether a remote employee in a state created income-tax nexus and payroll withholding obligations the business did not meet.
- Whether a multi-state business apportioned its income correctly among the states where it has income-tax nexus.
- Whether inventory stored in a state, including through a fulfillment arrangement, created physical presence the business overlooked.
What does it cost to fund, and when does the window close?
The cost is registration and ongoing compliance in each state where nexus exists — sales-tax returns, income-tax returns, and payroll registrations — plus software or a service to track thresholds and file. The exposure grows quietly as sales and hiring spread, so the real cost is often the back taxes and penalties from states where obligations went unnoticed.
The professional work is a state-and-local tax specialist or CPA running a nexus study to map where you have obligations, then registering and setting up collection. Because thresholds and remote-employee rules change and are tested against each state's current law, review the footprint at least annually and whenever you enter a new market or hire in a new state.
A studio based in one state sells online nationwide. It crosses a neighboring state's economic-nexus threshold — say $100,000 of sales into that state in a year — and must register and collect that state's sales tax even though it has no office, staff, or inventory there.
Related strategies
- §1361–1379Choosing and changing your business entityNo outlay
- State PTET statutesThe state pass-through entity tax election and the SALT capNo outlay
- §1366Reasonable compensation for S-corporation ownersNo outlay
Common questions
- Can I really owe tax in a state where I have no office?
- Yes. After the Supreme Court's decision in South Dakota v. Wayfair, a state may require an out-of-state seller to register and collect its sales tax once the seller crosses that state's economic-nexus threshold, with no physical presence required. A remote employee working from home in another state can separately create income-tax nexus and payroll withholding obligations in that state. Physical presence — an office, inventory, employees, or property — still creates nexus, but it is no longer the only path to it.
- Is sales-tax nexus the same as income-tax nexus?
- No. They are separate tests governed by different rules, and a business can have one in a state without the other. Sales-tax nexus turns largely on economic activity into the state after South Dakota v. Wayfair, measured against that state's own sales or transaction threshold. Income-tax nexus follows its own state standards and, once it exists in more than one state, requires apportioning business income among those states under each state's formula. Treating the two as a single test is a common and costly mistake.
- How do I know where I have obligations?
- A nexus study reviews sales, employees, inventory, and property state by state against each state's current economic-nexus thresholds and income-tax standards. It is normally run by a state-and-local tax specialist or CPA, and it produces the registration and filing list the business then acts on. Because both the state rules and the business's own footprint change, repeat the review at least annually and whenever the business begins selling into or hiring in a new state.
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
If you want to know which of these apply to your business specifically, that is a conversation about your actual numbers — not a seminar example.
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