Why it matters

Expanding into new states is an exciting sign of growth but it also means your tax footprint can expand just as quickly, often before you realize it. Many businesses run into compliance issues simply because they didn’t realize they had triggered filing obligations in another state. 

I’ve seen this firsthand in my work with businesses both big and small; dealing with unintended consequence of what was at the time; thought to be in your business’ best interest. In one case, a client began shipping products into several new states after a strong sales year. They didn’t open offices or hire employees there, so they assumed nothing had changed from a tax standpoint. But once we reviewed their sales activity, it became clear they had already crossed economic nexus thresholds in multiple states, triggering both sales and income tax obligations they did not expect.

That’s why understanding where you have established filing requirements is the first, and most important step.

First things first- Where do you have filing obligations?

If you have the required activity to generate a filing requirement; it is typically said your business has ‘nexus’ with a particular state. Traditionally, you create nexus if you have a physical presence in a state, such as an office, warehouse or employees working there. However, after the Wayfair decision issued in 2017 by the United States Supreme Court; almost every state now has economic nexus statutes in place which can trigger a filing requirement for a particular tax based on sales made to in-state customers alone. Therefore if your sales revenue in a state exceeds certain thresholds, you may be required to collect and remit sales tax there and file income or excise tax returns with the state;  even though the business does not have a physical presence there.  

You may have nexus if you:

• Have employees or independent contractors working in the state on a permanent or temporary basis
• Own or lease property located in the state
• Store inventory in a warehouse or fulfillment center
• Exceed the state's gross receipt threshold

How do multi-state operations impact your income taxes?

Once you determine that you are in fact operating in more than one state, you may also be required to file income tax returns in each of those states. States determine how much of your income is taxable within their borders using a percentage called apportionment. This is generally based on factors like where your property is located, where your employees work and where your sales are made. 

What about sales tax requirements?

As you expand your business, sales tax becomes more complex. Each state sets its own rules for rates, exemptions, registration requirements, and filing frequency. If you have nexus in a state, you’ll likely need to register for a sales tax permit, collect the correct taxes, and file returns on a regular basis.

What payroll and employment tax rules apply?

Hiring or relocating employees into new states adds another layer of complexity. You’ll need to ensure you’re withholding the correct state income taxes, registering for state payroll accounts, and paying into the appropriate unemployment insurance systems. Even one employee in a new state can trigger new filing obligations.

Other state and local taxes to monitor

Beyond income, sales, and payroll taxes, some states impose additional taxes and fees, including:

• Franchise or business privilege taxes
• Business and Occupation Taxes
• Commercial Activity Taxes
• Gross receipts taxes
• Local city or county business taxes (New York City Business Corporation Tax, Philadelphia Business Income and Receipts Tax, etc.)
• Annual registration or reporting fees 

These vary widely by state and can impact your overall cost of doing business.

Checklist: Preparing for multistate taxation

Before expanding into a new state, it helps to take a proactive approach:

• Identify where you may have created nexus
• Review potential income tax filing requirements
• Assess sales tax registration and collection obligations
• Confirm payroll and employment tax requirements
• Keep clear records of employees, revenue, and property by state