Multi-state taxation

A Simple Guide for Small Business Owners and Individuals

Doing business or earning income in more than one state can create extra tax responsibilities. Here’s what you need to know to stay compliant and avoid surprises.

What is Nexus?

Nexus is a legal term that means you have a sufficient connection to a state that allows the state to tax you. Nexus can be created by having a physical presence (like an office, store, or employees), owning property, or even by reaching certain sales or transaction thresholds in a state. Some states use an “economic nexus” standard, meaning you can have nexus just by making enough sales in the state, even if you have no physical presence there.

State Income Tax

If you have nexus in a state, you may be required to file and pay state income tax there. Most states tax income based on how much business activity you have in the state. This is usually calculated using an apportionment formula that considers your sales, property, and payroll in the state compared to your total business activity. Some states use only sales to determine how much income is taxable.

Sales Tax

Sales tax is a tax on the sale of goods and some services. If you have nexus in a state, you may need to collect sales tax from your customers in that state and remit it to the state government. The rules for what is taxable and the tax rates vary by state. After the Supreme Court’s Wayfair decision, many states now require out-of-state sellers to collect sales tax if they exceed certain sales or transaction thresholds, even without a physical presence.

Compliance Best Practices

• Know Where You Have Nexus: Regularly review your business activities to determine where you have created nexus.
• Register When Required: Register with state tax authorities in any state where you have nexus.
• Track Sales and Transactions: Keep detailed records of your sales, property, and payroll by state.
• File Returns and Remit Taxes: File all required income and sales tax returns on time and pay any taxes due.
• Stay Informed: State tax laws change frequently. Monitor changes in the states where you do business.
• Consider Voluntary Disclosure: If you discover you should have been filing in a state but haven’t, many states offer voluntary disclosure programs that can reduce penalties.

Summary

Multi-state taxation can be complex, but understanding nexus, income tax, and sales tax rules is essential for compliance. Regularly review your business activities, keep good records, and stay up to date with state tax laws to avoid surprises and penalties.