Navigating Multi-State Business Taxes

« Back to Business Tax

As remote work expands and businesses operate across multiple states, tax compliance has become increasingly complex. Whether you’re selling products online, hiring remote employees, or expanding locations, understanding multi-state tax obligations is critical to avoid unexpected liabilities.

Here’s what every business owner needs to know about managing taxes in more than one state.

The Concept of Nexus
The foundation of multi-state taxation is “nexus” — a legal term meaning your business has a sufficient connection to a state to trigger tax obligations there. Nexus can be established through physical presence (like an office, warehouse, or employee) or economic activity (such as reaching a sales threshold).

For example, if your business sells products online to customers in multiple states, you may owe sales tax in those states once you exceed certain transaction levels.


Types of Taxes You Might Owe
When operating in multiple states, you may encounter several types of taxes:

• Income tax: Based on profits attributed to each state.
• Sales tax: Applied to goods and some services sold within that state.
• Payroll tax: Required if you have employees working remotely or in-state.

Each state has unique rules, rates, and filing requirements. Even small differences in definitions can significantly impact your total liability.


Common Challenges
Many small businesses underestimate how easy it is to establish nexus. Hiring one remote employee in another state, for instance, could create both payroll and income tax obligations. Similarly, shipping inventory through third-party logistics providers (like Amazon FBA warehouses) can trigger nexus in multiple states.

Failing to comply can lead to penalties, interest, and — in some cases — audits.


How to Stay Compliant

1. Track Your Presence: Maintain detailed records of where your employees, contractors, and inventory are located.
2. Understand Thresholds: Review each state’s nexus laws to see where you might owe tax.
3. Use Automation Tools: Tax software like Avalara or TaxJar can help track sales and calculate taxes across jurisdictions.
4. Consult a Multi-State Tax Expert: Rules change often, and professional guidance helps prevent costly mistakes.

Case in Point
A New York-based consulting firm with clients nationwide realized it owed income tax in three additional states simply because its consultants worked remotely while traveling. After consulting with a tax advisor, the firm registered in those states and avoided future penalties.

The takeaway? Even temporary activity can create a lasting tax obligation — awareness is key.


Multi-state tax compliance may sound daunting, but it’s manageable with organization and expert support. By tracking your operations carefully and staying informed, you can expand confidently while avoiding unpleasant surprises come tax season.