Multistate Tax for Architecture Firms: Nexus, Apportionment, and Licensing Across State Lines

Architecture firms do not stay in one state. A firm based in New York may design a hospital in New Jersey, a school in Connecticut, and a mixed-use project in Pennsylvania, all in the same year. Each of those states has its own rules about when the firm has “nexus” (a sufficient connection to trigger state tax obligations), how the firm’s income is apportioned to that state, and what registration and licensing requirements apply. Ignoring these obligations does not make them go away; it just adds penalties and interest when the state eventually notices.

Why doesn’t PL 86-272 protect architecture firms?

Public Law 86-272 prohibits states from imposing income tax on out-of-state businesses whose only in-state activity is soliciting orders for tangible personal property. Architecture firms sell services, not tangible personal property. PL 86-272 does not apply.

This means that any activity beyond trivial contact in another state can create nexus. Visiting a project site, meeting with a client, presenting at a zoning hearing, performing a site survey, and attending a construction meeting all create nexus in many states. Some states have adopted economic nexus thresholds for income tax (similar to the sales tax thresholds after Wayfair), but many states still use a physical presence standard for income tax, under which a single day of in-state activity by a firm employee can trigger nexus.

How is income apportioned across states?

Once nexus is established, the firm must apportion its income to each state using that state’s formula. The three main approaches are:

Single-factor receipts (market-based sourcing): The firm apportions income based on where the benefit of the service is received (typically where the project is located). A firm with $2,000,000 in total revenue and $500,000 from a New Jersey project apportions 25% of its income to New Jersey. This is the most common method and the simplest to apply.

Cost-of-performance sourcing: The firm apportions income to the state where the majority of the income-producing activity is performed. If 80% of the design work for a New Jersey project is performed in the firm’s New York office, the income is sourced to New York (where the work was done), not New Jersey (where the project is). This method is becoming less common but still applies in some states.

Three-factor formula (property, payroll, receipts): Some states use a weighted formula based on the firm’s property, payroll, and receipts in the state relative to its total property, payroll, and receipts. The receipts factor is typically double-weighted.

What are the payroll tax obligations?

When the firm sends employees to work in another state (site visits, construction administration, client meetings), payroll tax obligations arise in that state. Most states require withholding of state income tax on wages earned in the state from the first day of work. Some states have reciprocity agreements (for example, Illinois and Wisconsin have reciprocity, so an Illinois resident working in Wisconsin only withholds to Illinois), but many do not.

The firm must register as an employer in each state where employees work, withhold state income tax, file state payroll tax returns, and pay state unemployment tax (if required). The administrative burden scales with the number of states. A firm with projects in 8 states may need to register and file in all 8.

For project-based employees (an architect assigned to a 6-month construction administration phase in another state), the firm must withhold in the project state from the first day. The employee files a nonresident return in the project state and claims a credit on their home-state return for taxes paid to the project state.

What about state licensing requirements?

Architecture licensing is state-specific. Each state has its own board of architecture that regulates the practice of architecture within its borders. To design a project in another state, the firm and the individual architects must typically:

• Register the firm with the state board (most states require a certificate of authorization or firm registration)
• Ensure the architect of record is licensed in that state (reciprocal licensing through NCARB simplifies this, but the architect must still apply and pay fees in each state)
• Comply with continuing education requirements in each state where licensed

The licensing fees and continuing education costs are deductible business expenses. The time and administrative cost of maintaining multiple state licenses is not trivial for firms that work in many states.

What about withholding on nonresident partners?

Some states require the firm to withhold state income tax on the distributive share of income (K-1 allocations) apportioned to nonresident partners. For a partnership or LLC with partners residing in different states, this creates a withholding obligation in each state where income is apportioned. The withholding rate is typically the state’s highest individual rate.

Some states allow composite filing as an alternative: the firm files a single composite return on behalf of all nonresident partners and pays the tax at the entity level. This simplifies compliance for the partners but reduces their ability to take advantage of individual deductions and credits.

The multistate compliance burden is one of several factors that interact with the firm’s entity structure. The choice between an LLC, S-Corp, and partnership affects how income is allocated to partners and how withholding obligations are handled in each state. For a broader look at entity selection for architecture firms, see the entity structure guide. The licensing fees, registration costs, and travel expenses associated with multistate practice are all deductible, and the architecture firm tax deductions guide covers the full list of industry-specific expenses.

Related guides:

• Architecture Firm Entity Structure Llc Scorp
• Architecture Firm Professional Liability Insurance Tax
• Architecture Firm Project Accounting Revenue Recognition
• Architecture Firm Retirement Plans Partner
• Architecture Firm Succession Ownership Transition

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.