You can owe tax in a state where you have no office, no storefront, and no intention of doing business. The concept that decides this is nexus: the connection between your business and a state that is strong enough for that state to require you to register, file, and pay. Get it right and multi-state is just paperwork. Ignore it and a routine notice can turn into years of back taxes, interest, and penalties.
Two kinds of nexus
It helps to separate two questions, because the rules are different:
- Income-tax nexus decides whether a state can tax your business income.
- Sales-tax nexus decides whether you must collect and remit sales tax on what you sell there.
You can have one without the other, and the thresholds rarely line up. A company can be collecting sales tax in a state long before it owes income tax there, or the reverse.
What actually creates nexus
The usual triggers:
- Physical presence — an office, a warehouse, equipment, or inventory stored in the state (including stock held in a marketplace fulfillment center on your behalf).
- Employees — and this is the one that surprises people. A single remote hire who works from another state can create payroll-withholding, income-tax, and sometimes sales-tax obligations there. The pandemic made this the most common new-nexus story we see.
- Economic activity — after the South Dakota v. Wayfair decision, states may impose sales-tax collection based purely on sales volume, with no physical presence at all, and nearly all of them now do. Thresholds vary by state (a common one is $100,000 in sales a year; some states also count transaction volume, though many have dropped that prong), and they change, so they have to be tracked per state.
The protection most owners have never heard of
A federal law, Public Law 86-272, says a state cannot impose a net income tax if your only activity there is soliciting orders for tangible personal property that are approved and shipped from outside the state. It is a real shield for product companies.
But note the limits: it does not cover services, it does not cover sales tax, and many states have narrowed how it applies to internet activity (following Multistate Tax Commission guidance). So it protects fewer businesses than it used to, and it should never be assumed without checking.
Apportionment: dividing the pie
Once you file income-tax returns in more than one state, you do not pay full tax on all your income in each one. Instead you apportion — divide your income among the states using a formula. States historically used a three-factor formula (sales, payroll, and property), but most have moved to a single-sales-factor approach that weights where your customers are. The goal is that, done correctly, your income is taxed once across the states rather than several times.
What to do about it
The practical sequence is the same every time: figure out where you have nexus, register before (not after) you start filing, file the right returns, and apportion defensibly. If a state sends a nexus questionnaire, do not ignore it — a thoughtful answer is far cheaper than a unilateral assessment built on the state’s assumptions.
If your business reaches across the U.S. border as well as across state lines, the same questions stack on top of federal and treaty issues, and they are best handled together rather than in separate silos.
The takeaway
Multi-state exposure usually grows quietly, one remote hire or one good sales quarter at a time. The fix is almost always cheaper before a notice than after. We map where your business actually owes, register and file where it should, and apportion in a way that holds up. Book a free consultation and we will look at your footprint.
