Nexus is the connection between your business and a state that gives that state the power to tax you. For decades the rule was simple: physical presence — an office, a salesperson, inventory, property — created nexus, and nothing else did. Remote work, e-commerce, and a wave of state legislation have made it far more complicated. Today a business can owe income-tax filings in a state it has never physically entered, purely on the strength of its sales volume there. Getting this wrong is expensive: states can assess back taxes, penalties, and interest for every open year, and unlike a filed return, an unfiled return in a nexus state never starts the statute of limitations — the exposure stays open indefinitely.
The trigger most owners miss is their own team. Hiring a single remote employee in a new state almost always creates physical-presence nexus there — plus payroll withholding and state unemployment obligations — the moment that person starts working. A warehouse, a trade-show booth held over a threshold of days, inventory stored in a third-party fulfillment center, or a contractor doing installation work can do the same. Layer economic nexus on top, and a company selling nationwide can accumulate filing duties in a dozen states without a deliberate decision to expand. The fix is a nexus review before you grow, not after a notice arrives.
Physical presence vs. economic nexus
There are two independent paths to income-tax nexus, and either one is enough. Physical presence is the older, more intuitive standard. Economic nexus — the idea that enough sales alone can create a filing duty — expanded rapidly after the Supreme Court's 2018 South Dakota v. Wayfair decision, which was a sales-tax case but gave states confidence to apply the same logic to income tax.
Physical-presence nexus
- An office, store, or leased space in the state
- Employees — including a single remote worker — living and working there
- Inventory stored in the state, including third-party fulfillment centers
- Owned or rented equipment, vehicles, or real property
- Employees or contractors traveling in to perform services
Economic nexus
- Sales into the state above a dollar threshold, with no physical footprint
- Thresholds vary — a common income-tax factor is around $500,000 of in-state receipts
- Applies increasingly to services and digital products, not just goods
- Measured on a rolling or prior-year basis depending on the state
- Can exist even if you have never set foot in the state
The practical takeaway is that you must test both. A business with no property or people in a state can still owe an income-tax return there on economic nexus alone, and a business under every economic threshold can still owe one because it parked inventory in an Amazon warehouse in that state.
The remote-employee trap
The single most common way a growing business acquires new state obligations is by hiring people who work from home in other states. When an employee performs their duties from within a state, that is your business operating in that state. The consequences arrive as a bundle.
- State income-tax nexus — a business income-tax return in that state going forward
- Payroll withholding — you must register and withhold that state's income tax from the employee's wages
- State unemployment insurance (SUTA) registration and contributions in the employee's state
- Possible local taxes — some cities and counties impose their own income or payroll taxes
- Apportionment changes — the new state's payroll now factors into how much of your income it can tax
None of this is optional or negotiable, and it applies whether the hire is a senior engineer or a part-time customer-service rep. Before extending an offer to someone in a new state, price in the registration and compliance cost. It rarely changes the decision, but it should never be a surprise.
When you must register and file
Discovering you have nexus is the beginning, not the end. Each state has its own registration process, its own return, and its own deadline. The order of operations matters — register before you file, and file before the state finds you.
Run a nexus review
Inventory every state where you have people, property, inventory, or meaningful sales. Test each against that state's physical-presence and economic-nexus rules.
Register with the state
Register for income/franchise tax, and separately for payroll withholding and unemployment tax if you have employees there. Registration is usually with the Department of Revenue and, for payroll, the labor/workforce agency.
Apportion your income
Multi-state businesses don't pay full tax to every state. You apportion income using each state's formula — most now use single-sales-factor, based on the share of sales sourced to that state.
File the returns
File each state's income or franchise return by its deadline. Many states also impose a minimum tax or franchise fee even in a loss year.
Consider voluntary disclosure for back years
If you already have unfiled obligations, a Voluntary Disclosure Agreement typically limits the look-back period and waives penalties in exchange for coming forward before the state contacts you.
A federal law from 1959, P.L. 86-272, prohibits a state from taxing your income if your only activity there is soliciting orders for tangible personal property that are approved and shipped from outside the state. It is a genuine shield — but a narrow one. It does not protect sales of services, software-as-a-service, or digital goods, and the Multistate Tax Commission has issued guidance treating many website interactions (chat support, cookies, app downloads) as activities that exceed mere solicitation. Treat 86-272 as a fallback you confirm with a professional, not a blanket exemption.
The Florida advantage — and its limits
Florida is one of a handful of states with no personal income tax, which is a real structural advantage for business owners. If your company is an S-corporation, partnership, or sole proprietorship, the income flows through to your personal return — and Florida imposes no state income tax on it. That is a permanent, meaningful savings compared with operating out of a high-tax state.
Florida's no-income-tax status applies to pass-through owners residing and operating in Florida. It does not travel with you into other states. If your Florida-based business has a remote employee in California or hits an economic-nexus threshold in New York, you still file — and pay — in those states on the income apportioned to them. C-corporations also pay Florida's own 5.5% corporate income tax. The Florida advantage is best understood as "no tax on the Florida-sourced, pass-through slice," not "no state tax anywhere."
What it costs to ignore nexus
Because an unfiled state return generally keeps the statute of limitations open forever, ignored nexus is one of the few tax exposures that grows unbounded with time. States are also increasingly good at finding non-filers — through 1099 data, marketplace reports, payroll records, and cross-state information sharing.
| Scenario | Typical consequence |
|---|---|
| Filed on time | Statute of limitations runs (often 3–4 years); exposure closes |
| Filed late | Late-filing and late-payment penalties plus interest, but the clock starts |
| Never filed | No statute of limitations — every open year stays assessable indefinitely |
| Caught by the state first | Back tax, penalties, and interest for all open years; VDA benefits usually lost |
| Came forward via VDA | Limited look-back (commonly 3–4 years) and penalties typically waived |
Nexus is decided by where you operate, not where you're headquartered. Test every state against two independent standards — physical presence and economic nexus — and re-test whenever you hire remotely, hold inventory, or grow your sales into a new state. Register before you file, apportion your income correctly, and use a voluntary disclosure agreement to clean up back years before a state finds you. Florida's no-income-tax status is a genuine advantage for pass-through owners, but it protects only your Florida-sourced income — it does not excuse filings in the other states where you've built a footprint.
Find out where you actually owe returns
Growing into new states can quietly create tax obligations you didn't plan for. Talk to our team about your footprint before growth turns into a stack of state notices.
Talk to a tax proSources
- U.S. Supreme Court — South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018)
- Public Law 86-272 — Interstate Income Act of 1959 (15 U.S.C. §§ 381–384)
- Multistate Tax Commission — Statement of Information Concerning P.L. 86-272 (revised 2021)
- Florida Department of Revenue — Corporate Income Tax (5.5% rate)
- IRS — State Government Websites and Business Taxes overview
Frequently asked questions
Two things: physical presence — an office, employees, inventory, or property in the state — or economic nexus, where enough sales into the state trigger a filing obligation even with no physical footprint. A single remote employee working from a state generally creates physical-presence nexus there.
Almost always, yes. An employee performing work from within a state is physical presence, which creates income-tax nexus and usually payroll-withholding and unemployment-tax obligations too. This is the most common way growing businesses accidentally acquire filing duties in new states.
Florida has no personal income tax, so pass-through owners (S-corp, partnership, sole proprietor) pay no Florida tax on business income. Florida does levy a 5.5% corporate income tax on C-corporations. But operating from Florida does not exempt you from filing in other states where you have nexus.
P.L. 86-272 is a federal law that bars a state from taxing your income if your only activity there is soliciting orders for tangible goods that are shipped from outside the state. It does not protect sales of services or digital products, and many states now treat website interactions as exceeding its protection — so rely on it cautiously.
