Multi-State Tax Obligations: When Your Business Creates Nexus in Another State

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·8 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

State income tax nexus (the connection that gives a state the right to tax your business income) has expanded dramatically since 2018. Historically, nexus required physical presence: an office, warehouse, or employee in the state. Now, many states impose income tax nexus based on economic activity alone, similar to the Wayfair decision for sales tax. If your business has revenue exceeding a state’s threshold (often $500,000 or a factor presence threshold like 25% of sales), you may owe income tax in that state even without physical presence. Remote employees are another common trigger: hiring one remote worker in another state almost always creates nexus for both income tax and payroll tax purposes. For pass-through entities (S-Corps, partnerships, LLCs), nexus in a new state means the owners may need to file personal returns in that state as well.

✓Key takeaway

Multi-state income tax basics:

What creates nexus for state income tax:

Physical presence: office, warehouse, store, or property in the state
Employees or contractors performing services in the state
Remote employees working from another state (almost always creates nexus)
Economic nexus: exceeding a revenue or factor presence threshold
Solicitation: traveling to a state to solicit sales (with exceptions, see P.L. 86-272 below)

P.L. 86-272 protection (limited):

Federal law prohibits states from taxing income if the only activity in the state is solicitation of tangible personal property orders
Protection applies ONLY to tangible personal property (not services, not digital goods)
Orders must be approved and shipped from outside the state
Many states have narrowed this protection for businesses with a website or cookies in the state
If you sell services: P.L. 86-272 does NOT protect you

Apportionment (how states split income):

When you have nexus in multiple states, each state taxes a portion of your total income
Most states use a single-factor (sales) apportionment formula
Some states still use a three-factor formula (sales, payroll, property)
The sales factor is: (sales sourced to the state) / (total sales everywhere)
If 30% of your sales are in State X: State X taxes approximately 30% of your total business income

The remote employee trigger:

Hiring a remote worker in another state creates nexus in that state for:
- State income tax (the business must file and pay in that state)
- State payroll tax (withholding for the employee)
- Unemployment insurance (register with the new state)
- Workers’ compensation (required in the new state)
One remote employee = filing obligations in a new state

Pass-through impact:

If an S-Corp or LLC has nexus in a new state:
- The entity files a state return in that state
- Each owner/shareholder may need to file a personal return in that state
- Some states have a composite filing option (the entity pays on behalf of all nonresident owners)
- Some states have a Pass-Through Entity Tax (PTET) election that simplifies this

States with no income tax (simplify multi-state):

Alaska (no individual, corporate exists), Florida, Nevada, New Hampshire (interest/dividends only), South Dakota, Tennessee, Texas (franchise/margin tax exists), Washington (B&O tax exists), Wyoming
Doing business in these states creates NO income tax filing obligation (but may create sales tax, franchise tax, or gross receipts tax obligations)

What happens when a business expands into another state?

Hypothetical example

Round numbers. An S-Corp based in Florida (no state income tax) with one owner. The business hires a remote employee in Georgia.

Before hiring in Georgia:

Revenue: $400,000 (all from Florida clients)
Net profit: $120,000
State income tax: $0 (Florida has no income tax)
Filing obligation: federal only (plus Florida annual report)

After hiring a remote employee in Georgia:

Immediate obligations:

Register the business with the Georgia Secretary of State (foreign qualification)
Register for Georgia withholding tax
Register for Georgia unemployment insurance
Obtain Georgia workers’ compensation coverage
File Georgia Form 600S (S-Corp return) annually
The owner files a Georgia nonresident personal return (Form 500)

Income tax calculation: The owner/operator pays Georgia income tax on the portion of business income apportioned to Georgia.

Georgia uses a single-factor (sales) apportionment with market-based sourcing.

If the business earns:

$350,000 from Florida clients (services performed for FL customers)
$50,000 from Georgia clients

Georgia sales factor: $50,000 / $400,000 = 12.5% Georgia taxable income: $120,000 x 12.5% = $15,000 Georgia tax: $15,000 x 5.49% = $824

Note: the employee’s presence in Georgia created nexus, but the apportionment is based on WHERE THE SALES ARE, not where the employee works. If all $400,000 in sales are to Florida clients, the Georgia apportioned income may be minimal (some states would apportion $0 if all customers are in Florida).

However, Georgia also considers payroll factor and property factor for certain entity types. If the employee’s $60,000 salary is the only payroll:

Georgia payroll: $60,000 (100% of total payroll)
If Georgia uses a three-factor formula: (12.5% + 100% + 0%) / 3 = 37.5%
Georgia taxable income: $120,000 x 37.5% = $45,000
Georgia tax: $45,000 x 5.49% = $2,471

The formula matters enormously. The difference between single-factor sales (12.5% = $824) and three-factor (37.5% = $2,471) is 3x.

Cost of the Georgia filing obligation:

Item	Annual Cost
Georgia S-Corp return filing	$500-$1,500 (CPA fees)
Owner’s GA nonresident return	$300-$500
GA unemployment insurance	$200-$400
GA workers’ comp	$500-$2,000 (depends on classification)
Georgia income tax	$824-$2,471
Total	$2,324-$6,871

Important: the owner likely gets a credit on their Florida return for taxes paid to Georgia. But Florida has no income tax, so there’s nothing to credit against. If the business were based in a state WITH income tax (say New York), the owner would claim a credit on the New York return for taxes paid to Georgia, avoiding true double taxation.

Pass-Through Entity Tax (PTET) option: Georgia allows the S-Corp to elect to pay PTET at the entity level. This converts the state tax from a non-deductible personal tax to a deductible business tax (bypassing the $40,000 SALT cap). At 5.49% x $15,000 = $824, the PTET election saves approximately $824 x (federal rate - 0) = $200 in federal tax. Small at this income level, but significant at higher apportionment.

When multi-state expansion is worth the complexity:

The employee generates revenue that exceeds the compliance cost
The new state has low or no income tax (hiring in Florida, Texas, Wyoming)
The sales apportionment to the new state is minimal (services to out-of-state clients)

When it’s NOT worth the complexity:

A single remote employee earning $40,000-$50,000 in a high-tax state
The compliance cost ($2,000-$5,000) is a meaningful percentage of the payroll savings
Consider: would a Florida-based employee cost only slightly more but avoid the multi-state filing?

Illustrative numbers only, not a real client and not advice for your facts.

How do I know if I need to collect sales tax?

Sales tax obligations depend on nexus, a connection between your business and a state that triggers a collection requirement. Physical nexus comes from having a location, employee, or inventory in a state. Economic nexus, established after the 2018 Supreme Court decision in South Dakota v. Wayfair, triggers when you exceed a state’s revenue or transaction threshold (each state sets its own figure and period; Florida and Pennsylvania use $100,000 of sales, for example, while California and Texas use $500,000). Each state sets its own rules, rates, and exemptions. If you sell online and ship to multiple states, you likely have economic nexus in several states and must register, collect, and remit sales tax in each.

What is the difference between sales tax and use tax?

Sales tax is collected by the seller at the point of sale and remitted to the state. Use tax is owed by the buyer when sales tax was not collected, typically on out-of-state purchases or items withdrawn from inventory for personal use. As a business, you owe use tax on equipment, supplies, or inventory purchased from vendors who did not charge sales tax. Many states combine sales and use tax on a single return. Failing to self-assess use tax can result in back-tax assessments for the full statute of limitations period, typically three to four years, plus interest and penalties.

Related guides:

Is sales tax nexus the same test as income tax nexus?

No. They’re separate tests, and a business can have one without the other. Sales tax nexus decides whether you must collect and remit sales tax in a state, and it comes from physical presence or from crossing that state’s own sales threshold. Pennsylvania, for example, uses at least $100,000 of gross sales in a calendar year, while Texas uses $500,000 over the preceding twelve calendar months.

P.L. 86-272, covered above, only limits state net income tax for sellers of tangible goods whose in-state activity is soliciting orders. It has nothing to say about sales tax.

For a remote hire like the Georgia employee in the example, the sales tax side turns on how that state words its presence rule. Texas lists an employee or representative in the state to sell, deliver or take orders, and Ohio’s statute presumes nexus when a seller regularly uses employees there. Georgia’s own rule is the one that decides it for this business.

Want this checked against your own situation?

Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.

Start a Diagnostic →See prices

Get a fixed price, free

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

Cite this page

Yarik Yarosh, CPA. "Multi-State Tax Obligations: When Your Business Creates Nexus in Another State." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-state-nexus-multi-state-tax-obligations

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