NEWS & RESOURCES

Authored by: Efron Alvarado, Senior Manager

As businesses grow, crossing state lines—whether through sales, employees, or remote operations—can create new tax obligations that are easy to overlook. Many business owners are surprised to learn that they may be required to file state tax returns in states where they don’t have a physical office.

Understanding when a business has a state filing requirement starts with one key concept: nexus.

What Is Nexus?

Nexus refers to the connection between a business and a state that gives the state authority to tax that business. Each state sets its own rules, thresholds, and deadlines for establishing nexus, meaning there is no universal standard that applies everywhere.

Once nexus is established, a business may be required to register with the state, file tax returns, and remit applicable taxes. Because the rules vary widely, it’s best to consult with a CPA as soon as your business expands beyond its home state.

Common Nexus Triggers to Watch For

States typically evaluate nexus using one or more of the following checkpoints:

1. Economic Presence

Economic nexus is triggered when your business earns sufficient revenue or completes enough transactions in a state. A common benchmark is $100,000 in sales into a state during a calendar year, although some states set higher or lower limits. In addition to dollar thresholds, some states also look at transaction volume. A frequently used standard is 200 or more transactions in a state within a year.

2. Physical Presence

Physical presence almost always creates nexus for both sales tax and income tax purposes. Examples include:

• Maintaining an office, storefront, or warehouse
• Storing inventory in a fulfillment or distribution center
• Having sales representatives or service providers operating in the state

3. Employee Presence

An employee working in another state, whether full-time, part-time, or remote, generally establishes nexus. This applies even if the employee works from home and the company has no other physical presence in that state.

Secretary of State and Department of Revenue Filings

Once a business registers in a state where it has nexus, the state’s Department of Revenue assigns a filing frequency—monthly, quarterly, or annually—based on sales volume or tax activity. Businesses must follow this assigned schedule to avoid penalties and interest.

It’s important to note that registration with the Secretary of State and tax registration often go hand in hand, but they are not the same process. Missing one step can create compliance issues down the road.

State Apportionment: Avoiding Double Taxation

When a business has nexus in more than one state, state apportionment becomes critical. Apportionment determines how much of a company’s income is taxable in each state, helping prevent the same income from being taxed multiple times.

Most states use a formula based on one or more of the following factors:

• Property: The value of property located in the state compared to total property everywhere
• Payroll: Employee compensation paid in the state compared to total payroll
• Sales (Receipts): Sales attributable to the state compared to total sales

Each state applies its own weighting and rules, making proper calculation essential.

A Washington-Specific Advantage

Washington’s Business & Occupation (B&O) tax is based on gross receipts (top-line revenue earned in the state) rather than net income. In some cases, businesses can use apportionment to allocate income to another state that taxes net income (revenue minus deductions), which often results in a lower overall tax liability.

Strategic apportionment planning can make a meaningful difference for multi-state businesses.

Pass-Through Entity (PTE) Tax: A Powerful Planning Tool

For pass-through entities such as S corporations and partnerships, the Pass-Through Entity (PTE) tax can be a valuable strategy.

PTE taxes allow eligible businesses to pay state income tax at the entity level. That tax then flows through to owners via Schedule K-1, effectively creating a business-level deduction.

This structure was designed as a workaround to the federal State and Local Tax (SALT) deduction limit, which was originally capped at $10,000 under the Tax Cuts and Jobs Act.

Recent SALT Deduction Changes

Under the One Big Beautiful Bill Act (OBBBA), the SALT deduction cap has temporarily increased to $40,000 for tax years 2025 through 2029. However, for married taxpayers filing jointly with adjusted gross income over $600,000, the deduction phases back down to the original $10,000 limit.

Because of this phaseout, the PTE tax remains especially favorable for higher-income business owners who would otherwise lose much of their SALT deduction.

Once your business crosses state lines through sales, employees, or economic activity, state tax filing obligations can arise quickly and quietly. With varying nexus rules, apportionment formulas, and planning opportunities like PTE taxes, proactive guidance is key.

If your business is expanding or operating in multiple states, consulting with a CPA can help ensure compliance while identifying opportunities to reduce overall tax exposure.