Your business is headquartered in California. You have two remote employees in Texas and one in New York. You sell products online to all 50 states. You attended a trade show in Nevada last month.

Question: how many states do you owe taxes in?

The answer is almost certainly more than you think.

What Is Nexus?

Nexus is the connection between a business and a state that gives that state the legal authority to impose taxes. There are two types:

Physical nexus: Having a physical presence in the state, employees, offices, inventory, equipment, or even regular business travel.

Economic nexus: Exceeding revenue or transaction thresholds in a state, regardless of physical presence. After the Supreme Court's 2018 South Dakota v. Wayfair decision, most states impose economic nexus thresholds (typically $100,000 in sales or 200 transactions).

The Remote Employee Problem

Every remote employee creates nexus in their home state. This triggers:

  • Income tax filing obligations for the business in that state
  • Payroll tax withholding requirements
  • Sales tax collection obligations (if the business sells taxable goods/services)
  • Franchise tax or gross receipts tax in states that impose them
A single remote employee in New York creates a filing obligation that can result in 5-8% of the business's apportioned income being taxed by New York, even if the employee is a junior developer working from their apartment. Most businesses don't discover this until an audit.

Apportionment: How States Divide Your Income

When you have nexus in multiple states, each state taxes a portion of your income based on apportionment formulas. Most states use single-factor apportionment based on sales, meaning the percentage of your sales in that state determines the percentage of your income they tax.

California uses market-based sourcing for services, which means revenue is sourced to where the customer receives the benefit, not where the work is performed. This can create unexpected California tax liability for out-of-state businesses with California customers.

What to Do About It

  1. Nexus study: Determine which states you currently have nexus in (most businesses are surprised by the results)
  2. Voluntary disclosure agreements (VDAs): Many states offer VDAs that allow businesses to come into compliance with reduced or eliminated penalties for prior years
  3. Restructuring: Entity structure, employee location, and sales channel decisions can be optimized to minimize multistate exposure
  4. Ongoing compliance: Once you know where you have nexus, establish proper filing, withholding, and collection processes
Multistate compliance isn't optional. States are increasingly aggressive about nexus enforcement, using data from payroll providers, payment processors, and marketplace platforms to identify non-filers. It's cheaper to get compliant proactively than to pay penalties retroactively.

This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Business owners should consult qualified tax and legal advisors before entering into a transaction.