State Nexus and Multistate Taxation: When Your Business Owes Taxes in Another State

State nexus is the threshold of connection between a business and a state that gives that state the legal authority to impose taxes. Before the Supreme Court’s decision in South Dakota v. Wayfair (2018), physical presence (an office, employee, warehouse, or inventory) was generally required for a state to impose tax obligations. After Wayfair, states can establish “economic nexus” based purely on the volume of sales into the state, even without any physical presence. This means a business operating entirely from one state can have tax obligations in 20, 30, or more states based on where its customers are located. The two primary types of state tax nexus are income tax nexus (which determines where business income is taxable) and sales tax nexus (which determines where the business must collect and remit sales tax). Each state sets its own thresholds, rates, and rules, creating a complex compliance landscape for multistate businesses.

How does multistate taxation work for a growing business?

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 Use tax is owed by the buyer when sales tax was not collected, typically on out-of-state purchases or items withdrawn from inventory for personal use.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:

• Sales Tax Nexus and Obligations for Small Business Owners
• State Nexus and Sales Tax for Small Businesses: Complete Guide
• Sales Tax Nexus for Small Businesses: When You Must Collect and Remit

Does a software firm’s Texas revenue create sales tax nexus?

At $200,000, it doesn’t under the remote seller rule. Texas doesn’t require a permit until total Texas revenue reaches $500,000 over the preceding twelve calendar months. That revenue counts taxable and nontaxable sales of goods and services into Texas, so a software company can’t leave out sales it thinks are exempt when it measures.

California’s and New York’s $500,000 tests are written for sellers outside those states, and this company has an employee in each, so the presence question comes first there. A physical link changes things: Texas treats an employee or representative in Texas who sells or takes orders, or owning or using property there, including software, as engaged in business.

Income tax nexus is a separate question. P.L. 86-272 only covers soliciting orders for tangible goods, so it doesn’t protect a software subscription business from state income tax.

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