Multistate Tax Nexus for Businesses: What You Need to Know

As your business expands into new markets—whether through product sales, services, digital offerings, remote employees or in-state operations—its state and local tax obligations can become increasingly complex. Consulting firms, professional service providers, SaaS companies, logistics firms, marketing agencies and other nonmanufacturing businesses can develop state tax nexus even without maintaining an office or permanent location in another state.

How a Business Creates Tax Nexus

Economic nexus allows states to impose sales and use tax obligations based on a business’s sales or other economic activity within the state. Once a state’s threshold is reached, the business must determine whether its services, software, subscriptions or digital products are taxable. An offering that is exempt in one state may be taxable in another, particularly when consulting, software, data processing, support or digital content are bundled together.

Nonmanufacturing businesses may also face state income, franchise and gross receipts taxes. The federal income tax protection available to certain sellers of tangible personal property generally does not cover services, SaaS, digital products or other intangible offerings. Some states also impose tax obligations based on revenue and apply different rules for determining where service revenue is earned.

Remote employees are another common source of unexpected multistate tax exposure. An employee working from another state may trigger payroll withholding, unemployment insurance, business registration, income tax or other obligations. Employees traveling to client locations, independent contractors working in another state and property stored by a fulfillment provider can create additional concerns.

Why Tax Nexus Matters When Selling Your Business

Unresolved state tax nexus issues can become a significant concern when selling a business. During due diligence, a buyer may identify unfiled returns, unpaid taxes, interest and potential penalties. This exposure can reduce the company’s value, delay the transaction or make the business less appealing to a buyer. If you are considering selling your business within the next five years, addressing potential multistate tax exposure now can help protect its value and make the eventual transaction smoother.

Businesses should regularly track sales, customers, employees, contractors and property by state. Each state and each type of tax should be evaluated separately because sales tax, income tax and payroll tax do not necessarily follow the same rules.

We can help you evaluate your multistate tax nexus, address potential compliance gaps and develop practical procedures for monitoring future obligations. Contact us to learn more.

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