State Tax Planning for Small Businesses: No-Income-Tax States, Nexus, and Multi-State Strategies

Federal taxes are only part of the picture. State income taxes range from 0% to over 13%, and for a business owner in a high-tax state like California (13.3%), New York (10.9%), or New Jersey (10.75%), the state tax bill can exceed $100,000 per year on $1 million of income. Nine states impose no individual income tax: Alaska, Florida, Nevada, New Hampshire (dividends and interest only, repealed effective 2025), South Dakota, Tennessee (formerly on dividends/interest, now repealed), Texas, Washington, and Wyoming. Several of these also have no corporate income tax, making them attractive for both business formation and personal residency. However, state tax planning is not as simple as incorporating in Delaware or registering in Wyoming. The state where you physically work and live will tax your income regardless of where the business is formed, and doing business in multiple states creates filing obligations in each state where you have nexus.

How do multi-state businesses minimize state taxes?

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 Use tax is owed by the buyer when sales tax was not collected, typically on out-of-state purchases or items withdrawn from inventory for personal use.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

Does moving to a no-income-tax state end sales tax nexus?

No. Sales tax nexus runs on its own test, apart from where you live or pay income tax. A state without an income tax can still require you to collect sales tax, and the states you sell into keep applying their own thresholds wherever you’re based.

Two of the no-income-tax states in this guide show it. Florida requires a seller outside Florida to register once its taxable remote sales in the previous calendar year top $100,000. Texas requires a remote seller permit once total Texas revenue reaches $500,000 over the preceding twelve calendar months.

The federal protection people mention, P.L. 86-272, only limits net income tax when all you do in a state is solicit orders for tangible goods. A consulting business like the one in the example gets nothing from it.

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