Expanding into new states can bring exciting opportunities, but it also comes with added tax responsibilities. Many businesses unknowingly trigger tax obligations in multiple states, leading to unexpected filings, penalties, or compliance challenges. The concept of nexus determines when a business has a strong enough connection to a state to require tax registration and payments.
Each state sets its own rules for what establishes nexus, and those rules change frequently. Physical presence, sales activity, and even remote employees can all create tax responsibilities in another state. The complexity grows for businesses operating across multiple states, making it important to stay ahead of tax regulations.
Understanding what triggers nexus, how tax liabilities arise, and what steps to take for compliance helps businesses avoid risks. A well-structured approach to multi-state taxation supports growth while reducing potential financial and legal complications.
Understanding Nexus in Multi-State Taxation
Nexus defines the connection between a business and a state that leads to tax obligations. Historically, states required a physical presence, such as an office, warehouse, or employees, before imposing taxes. However, state laws have evolved, and today, economic nexus can trigger tax responsibilities based solely on sales volume or the number of transactions within a state.
The South Dakota v. Wayfair Supreme Court decision in 2018 significantly changed how states apply sales tax nexus. Before Wayfair, a physical presence was generally required to enforce sales tax collection. The ruling allowed states to require businesses to collect and remit sales tax based solely on economic activity in the state. It’s worth noting that economic nexus for income tax purposes had already been used in some states prior to Wayfair, so the decision primarily impacted sales tax enforcement.
Beyond sales volume, other business activities can establish nexus. Employing remote workers, storing inventory in third-party fulfillment centers, and making direct deliveries are all potential triggers. Since each state sets its own rules, keeping up with changing regulations is necessary to avoid penalties or unexpected tax obligations.
Key Nexus-Triggers for Businesses
States use various factors to determine when a business has nexus and is required to pay taxes. While the specifics vary, several common activities frequently create tax responsibilities across multiple states:
- Physical Presence – Having an office, warehouse, store, or other business property in a state automatically establishes nexus. Storing inventory, even in a third-party facility like an e-commerce fulfillment center, can also trigger tax obligations.
- Employees and Contractors – Hiring remote employees, sending sales representatives, or working with independent contractors in a state may result in tax liability, even if they are only there temporarily.
- Economic Nexus – Many states enforce sales-based thresholds that can trigger tax obligations. While most commonly associated with sales tax, economic nexus can also apply to income, franchise, or gross receipts taxes, depending on the state. These thresholds vary widely across states.
- Deliveries and Services – Using company-owned vehicles to deliver goods or performing on-site services, such as installations or repairs, can create nexus, even if the business does not have a permanent location in the state.
Because nexus laws change frequently, businesses operating in multiple states must monitor activities that could trigger tax responsibilities and develop a strategy for compliance.
Tax Obligations Arising from Nexus
Once a business establishes nexus in a state, it may be required to register, collect, and remit various taxes. The most common obligations include sales tax, income tax, and franchise tax, though requirements vary by state.
- Sales Tax – Businesses with nexus must collect sales tax on taxable goods and services sold in that state. This involves registering for a sales tax permit, charging the correct tax rate, and filing returns on time.
- Income Tax – Some states impose income tax obligations if a business earns revenue from customers within their borders. Economic nexus laws have expanded these requirements, even for businesses without a physical presence. However, certain businesses may qualify for Public Law 86-272, which limits a state’s ability to impose income tax in specific cases.
- Franchise and Gross Receipts Taxes – Certain states impose taxes on businesses based on revenue, regardless of profitability. These may apply even if income tax obligations do not.
Compliance Strategies for Multi-State Operations
Expanding into multiple states brings growth opportunities but also increases tax complexity. Businesses must stay ahead of changing regulations to avoid costly penalties and administrative headaches. A well-planned compliance approach starts with understanding where and how nexus has been established. Regularly reviewing business activities, such as sales volume, employee locations, and inventory storage, helps identify tax obligations before they become a problem.
Once a business has nexus in a state, timely registration is necessary to avoid fines. Delays in collecting and remitting taxes can lead to unexpected liabilities, making accurate record-keeping a priority. Many businesses turn to tax automation tools to simplify compliance, ensuring sales tax rates are applied correctly and filings are submitted on time.
Since tax laws evolve frequently, staying informed is key. Working closely with tax professionals allows businesses to adjust their compliance strategies and focus on long-term success.
Navigating Public Law 86-272 and Its Limitations
While many businesses must comply with income tax requirements once they establish nexus in a state, there is a key exception for companies that sell tangible personal property. Public Law 86-272, enacted in 1959, the law prevents states from imposing income tax on businesses whose only activity in that state is soliciting sales of tangible personal property. As long as a company’s representatives only engage in solicitation (and orders are approved and fulfilled from outside the state) income tax nexus is not created.
However, this protection does not apply to service-based businesses or companies engaged in activities beyond sales solicitation. Tasks such as collecting payments, performing installations, or storing inventory in a state can override the law’s protections and create an income tax obligation. Additionally, states have shifted toward alternative tax models, such as franchise and gross receipts taxes, which fall outside the law’s scope.
As states continue shifting toward alternative tax models, such as franchise and gross receipts taxes, businesses relying on Public Law 86-272 should regularly review their activities to avoid unexpected tax obligations.
Seeking Professional Guidance
Navigating multi-state tax laws can be overwhelming, especially as states continue refining their nexus rules and tax obligations. What triggers tax responsibilities in one state may not apply in another, and frequent legislative changes make compliance even more challenging. Businesses expanding across state lines must stay proactive to avoid penalties, unexpected liabilities, and administrative burdens. Without a well-structured approach, tax obligations can quickly become a costly distraction from core business operations.
Working with experienced tax professionals provides clarity and confidence. DHJJ’s State and Local Tax (SALT) Group helps businesses assess their nexus exposure, determine tax obligations, and develop strategies to manage compliance efficiently. Our team provides customized nexus studies, tax planning, and ongoing compliance support to keep your business ahead of changing regulations.
Whether you’re expanding into new states or reassessing current tax liabilities, partnering with DHJJ ensures informed decision-making and financial peace of mind. Contact DHJJ today to discuss how we can help you manage multi-state tax complexities and keep your business focused on growth.
