What multi-state growth changes for your tax footprint

Companies used to think about state taxes when they opened an office. Today, a remote hire, an online sale, or inventory in a third-party warehouse can create obligations in a new state well before that.

Sales tax follows sales

Since the Supreme Court's 2018 decision in South Dakota v. Wayfair, states can require out-of-state sellers to collect sales tax based on sales into the state alone. Most states set an economic nexus threshold around $100,000 of annual sales, while a few, including Texas and California, use $500,000. Whether a product or service is taxable varies widely. Software, SaaS, and digital products are taxed in some states and exempt in others.

Once a threshold is crossed, the company generally needs to register, collect tax on future sales, and submit returns. Tax that should have been collected but was not usually becomes the company's own cost.

Income and franchise taxes follow activity

A federal law, Public Law 86-272, protects some sellers from state income tax when their only activity in a state is soliciting orders for tangible goods. It does not cover services, software, or digital products, and activities beyond solicitation can remove the protection. Many states also apply their own economic thresholds. Texas, for example, imposes franchise tax on out-of-state entities with $500,000 or more in Texas gross receipts.

People create nexus too

An employee working from home in another state can create income tax nexus for the company, a payroll withholding requirement, and an unemployment insurance account in that state. A few states also tax nonresidents who work remotely for an employer based there.

What to review as you grow

• Where employees and contractors live and work.
• Sales by state, compared with each state's thresholds.
• Which products and services are taxable in each state.
• Where inventory, equipment, or other property is located.
• Whether pass-through entity tax elections make sense for owners.

Fixing past exposure

Companies that find gaps can often come forward through a state's voluntary disclosure program. These programs typically limit how many prior years are reviewed and waive some penalties. The cost is usually lower when the company acts before a state, auditor, or buyer raises the issue.

Vallou tracks where clients have nexus, handles state registrations and returns, and manages voluntary disclosures when past exposure exists.