Daperis CPAMulti-State Tax Filing for Small Businesses: Nexus Rules Explained
Here's something that catches remote businesses and real estate investors off guard: you don't need an office in another state to owe that state taxes. The threshold for owing tax somewhere is called nexus, and it's a lot lower than most owners assume, low enough that you can trip it without ever setting foot in the state.
So What Actually Is Nexus?
Nexus is the legal term for a business having enough connection to a state that the state can require it to file and pay tax there. Historically, that meant physical presence, an office, a warehouse, an employee physically working in the state. That's still true, but it's no longer the only way nexus gets created, and that's exactly where remote businesses get tripped up.
Physical Presence Nexus
This is the traditional trigger, and it's broader than people expect. It includes having an employee who lives and works in another state, even remotely, owning or renting property there, storing inventory there, or regularly sending employees into a state to perform services, like a contractor or consultant traveling for client work.
Here's the part that surprises people: a remote business with one employee working from home in a different state than the business is registered in has, in most cases, already created nexus in that employee's state, whether or not anyone intended that. Your employee's home office is doing more legal work than they realize.
Economic Nexus
Since a 2018 Supreme Court decision (South Dakota v. Wayfair), states can also require a business to collect and remit sales tax based purely on economic activity, sales revenue or transaction volume into that state, with no physical presence required at all. Every state with this rule sets its own dollar and transaction thresholds, and they vary enough that it's worth checking state by state rather than assuming one number applies everywhere. This matters most for businesses selling products or certain services across state lines, less so for a purely local service business.
Where Does This Show Up for Remote and Virtual Businesses?
A business built to operate anywhere, no physical office required, is exactly the kind of structure that can accidentally create nexus in multiple states without anyone noticing. Hiring a remote employee in a new state, working extensively with a client in another state, or simply growing sales into new states, can each independently trigger a filing obligation somewhere you never intended to register.
And for Multi-Property Real Estate Investors?
Owning rental property in a state generally creates nexus there by itself, regardless of how the property is managed or how often the owner visits. An investor with properties in three states is very likely filing three separate state returns, plus their home state, even if the entire portfolio is managed remotely through a single LLC.
What Does a Filing Obligation Actually Look Like Once Nexus Exists?
Once nexus is established, a business typically needs to register with that state, file an income tax return (or, for pass-through entities, an information return with income allocated to owners), and, if applicable, collect and remit sales tax on transactions sourced to that state. States also differ on how they tax pass-through entities, some have their own pass-through entity tax elections that can meaningfully change the math, which is worth its own conversation once multi-state filing is confirmed.
What Happens If You Just Don't File?
Ignoring an out-of-state filing obligation doesn't make it go away, it just means interest and penalties quietly accrue until the state catches it, often through data-matching with other states or the IRS. States have gotten more aggressive about this in recent years, particularly around remote work creating nexus nobody meant to create.
Keep It Simple / Key Takeaway 🍕
Think of nexus less as "do I have an office there" and more as "have I sent a person, a product, or enough sales into that state." Any one of those can be enough on its own. If your business touches more than one state in any of those ways, it's worth a real nexus check rather than just assuming your home state is the only one that matters.
Disclaimer: This article is for educational and informational purposes only and is not intended as financial, investment, legal, or tax advice. The author assumes no liability whatsoever in connection with its use. This content is not an exhaustive explanation of any topic, practice or process. You should always seek the advice of a licensed professional before making any accounting, tax, financial, investment or legal decision.