Income tax nexus by state is the connection that lets a state tax an out-of-state company’s income, and it can be triggered by physical presence, an in-state affiliate, or simply crossing a revenue threshold from sales to that state’s customers. Forty-four states impose a corporate income tax, and each writes its own rules for when your business owes returns there. A single remote employee, inventory sitting in a fulfillment center, or $500,000 in sales into a state you’ve never visited can all pull you into the filing net. The stakes are retroactive: once a state establishes that nexus existed, tax, penalties, and interest run from the date the connection began, not the date you found out.
Physical Presence Still Creates Nexus Everywhere
The clearest way to owe income tax in a state is to have something or someone there. Owning or leasing property, running an office, or storing inventory in a warehouse each count on their own. Inventory sitting in a third-party fulfillment center generally creates physical presence nexus in the state where the warehouse sits, which is why sellers who let a marketplace distribute their stock can end up with nexus in a dozen states they’ve never entered.
People trigger it too. A single employee working remotely from another state can establish nexus for their employer. The National Conference of State Legislatures has documented how remote work arrangements cascade into unexpected tax obligations when employees sit in states where the employer previously had no presence.1National Conference of State Legislatures. State and Local Tax Considerations of Remote Work Arrangements Sales representatives traveling into a state to meet clients or work a trade show can also trigger nexus, though the number of days it takes varies by state.
Nexus Through Related Entities
A company with no direct footprint can still inherit nexus through an affiliate. When a parent, subsidiary, or commonly owned entity operates in a state, many states will attribute that presence to the out-of-state company, especially when the entities share branding, management, or customer relationships. Trademark holding companies see this often: licensing intellectual property to an in-state retailer, without any employees or property of your own in the state, can be enough for the state to reach the licensor’s income.
Economic Nexus: Sales Alone Can Be Enough
Physical presence is no longer required. In South Dakota v. Wayfair, the Supreme Court held that a state can impose tax obligations on out-of-state sellers without any physical footprint.2Supreme Court of the United States. South Dakota v. Wayfair, Inc. The case addressed sales tax, but states quickly extended the same reasoning to corporate income tax. If you earn significant revenue from a state’s customers, that state can tax a share of your income even if you’ve never set foot inside its borders.
Thresholds are not uniform. Some states set the bar at $100,000 in annual gross receipts sourced to the state; others use $500,000 or higher. A handful combine a dollar figure with a transaction count. Companies selling digital software, cloud services, or licensed content face the widest exposure because their revenue can flow from every state at once with no physical distribution chain to point at.
The MTC Factor Presence Thresholds
The Multistate Tax Commission built a standardized test that many states have adopted in whole or in part. Under the factor presence nexus standard, a business has nexus in a state if any one of these is true during the tax year:
- More than $50,000 of property owned or rented in the state
- More than $50,000 of payroll paid to workers in the state
- More than $500,000 in receipts sourced to the state
- 25 percent or more of total property, payroll, or sales attributable to the state
The MTC’s model statute includes a mechanism for adjusting the dollar amounts when the consumer price index rises by five percent or more since the last adjustment, though the base figures remain $50,000 and $500,000 in the model language.3Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes States that adopt the framework can set their own numbers, so the MTC figures are a reference point rather than a universal answer. Their value is that a controller can actually calculate them from financial statements, in place of vague “doing business” tests.
Public Law 86-272 and Where the Shield Fails
One federal law limits state reach. Public Law 86-272, at 15 U.S.C. §§ 381–384, bars a state from imposing a net income tax on a business whose only in-state activity is soliciting orders for tangible personal property, provided those orders are sent outside the state for approval and shipped from outside the state.4Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax A sales rep who visits a state solely to pitch physical goods, takes orders back to the home office for approval, and ships from out of state is shielded from that state’s income tax.
The shield is narrow. It covers only tangible personal property. Businesses that sell services, license software, stream media, or earn royalties from intellectual property get no protection. The MTC’s statement on the law is explicit that transactions involving intangibles such as franchises, patents, copyrights, and trademarks are not protected.5Multistate Tax Commission. Statement on PL 86-272 For tangible goods, the shield breaks the moment your people do anything beyond taking orders: installation, repairs, collecting on overdue accounts, or running training sessions all destroy the immunity.
Website Activity That Breaks the Protection
The MTC’s revised guidance concluded that a range of common internet activities go beyond solicitation and fall outside the safe harbor. Placing cookies on a user’s device to gather data for product development or market research, providing post-sale customer support through live chat or email, streaming content for a fee, and running targeted advertising based on in-state user data are all treated as unprotected.5Multistate Tax Commission. Statement on PL 86-272
Several states have moved in the same direction. New York adopted regulations substantially incorporating the MTC approach, and New Jersey issued similar formal guidance. Kansas, Utah, Alaska, and Michigan have signaled positions generally consistent with the revised statement. California attempted to implement the MTC approach through a technical advice memorandum, but a court voided that guidance on procedural grounds in late 2023, though businesses report that California auditors continue applying its principles during examinations. If your website does anything beyond displaying a catalog and taking orders for physical products, treat P.L. 86-272 as unreliable in a growing list of states.
The Six States Without a Corporate Income Tax
Nevada, Ohio, Texas, and Washington skip corporate income tax and impose gross receipts taxes instead. South Dakota and Wyoming levy neither a corporate income tax nor a gross receipts tax, making them the only two states with essentially no broad-based business tax at the state level.
“No corporate income tax” is not “no business tax,” and P.L. 86-272 only blocks net income taxes. Gross receipts taxes fall outside the federal shield entirely. Seven states currently impose gross receipts taxes at the state level: Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, and Washington. Ohio’s Commercial Activity Tax applies to businesses exceeding $6 million in taxable gross receipts.6Ohio Department of Taxation. Commercial Activity Tax (CAT) Washington’s B&O Tax can reach 3.3 percent for certain classifications, and Texas applies its franchise tax at rates up to 0.75 percent of margin. A company that carefully stays under P.L. 86-272 for income tax purposes can still owe gross receipts tax in any of these states if it crosses their thresholds. For low-margin businesses, a tax on gross receipts can be proportionally larger than an income tax would have been.
What Nexus Actually Costs
Nexus in a state does not mean that state taxes all of your income. States use apportionment formulas to calculate the share of your total income attributable to their jurisdiction. Of the 44 states with a corporate income tax, roughly 34 now primarily use a single sales factor, meaning the portion of your sales sourced to the state drives the outcome. The remaining states use variations that still include property and payroll but weight sales more heavily.
How each sale gets sourced matters just as much. Under cost-of-performance sourcing, service revenue is assigned to the state where your costs were incurred. Under market-based sourcing, the same revenue is assigned to the state where the customer is located or the benefit received. A majority of states now use market-based sourcing, and Kansas and Arkansas switched to it effective January 1, 2025. For a consulting firm headquartered in one state and serving clients in twenty, the choice reshapes the tax picture entirely.
There’s a second wrinkle worth knowing about. Roughly 22 states and the District of Columbia use throwback rules, which reassign sales made into states where you lack nexus back to your home state’s sales factor numerator. One state uses a throwout rule that removes those sales from the denominator instead. Either way, the effect is that “nowhere income” you didn’t think was taxable ends up increasing your home state bill. Establishing nexus in your customer states can, counterintuitively, reduce your overall tax burden by pulling income out of the throwback calculation.
Fixing Prior Nexus You Missed
The retroactive nature of nexus is the part that hurts. A state can assess tax, penalties, and interest back to the date nexus was first established, not the date it was discovered. For a business that unknowingly had nexus for five years, accumulated liability can dwarf what timely returns would have cost.
Voluntary disclosure agreements exist to soften this. Under a VDA, a state typically limits the look-back period to a set number of prior years, commonly three to six, and waives penalties in exchange for the business registering, filing returns for the look-back period, and paying tax plus interest. The MTC runs a Multistate Voluntary Disclosure Program that lets a business resolve obligations in multiple states through a single process. To qualify, the business must not have had prior contact with the state about the specific tax type, meaning no previous filings, no payments, and no inquiries from the state. The program also requires a good-faith estimate of at least $500 in tax due to each state for the look-back period.7Multistate Tax Commission. Multistate Voluntary Disclosure Program Each participating state sets its own look-back window, and in return waives penalties and agrees not to assess tax for periods before that window.8Multistate Tax Commission. FAQ – Multistate Tax Commission
One exception carries weight. If the business collected sales tax or withheld employee income tax but never remitted it, those trust taxes typically must be paid in full regardless of the look-back period, and penalty waivers may not apply. A VDA is better than waiting for an audit, but the interest on several years of back tax is still substantial. Monitoring nexus triggers as they happen costs far less than cleaning up after them.