Running a business that sells into multiple states means you're not just dealing with the IRS. Every state where your company has sufficient activity can require you to register, file tax returns, and pay state-level taxes. That level of activity is called nexus, and getting a handle on it is the starting point for any serious multi-state compliance conversation.
Nexus is the connection between your business and a state that gives that state the legal right to tax you. For decades, nexus meant physical presence: a store, a warehouse, an employee on the ground. A company with customers spread across many states may owe returns in states it never thought to consider.
IRS guidance states that businesses have federal, state, and local tax obligations and should check with state and local governments to determine their additional tax responsibilities and registration requirements. In other words, a clean federal return doesn't mean your multi-state picture is settled.
Texas is one of the more significant nexus states for any growing business. Texas franchise tax economic nexus can apply to a foreign taxable entity even without physical presence in the state. A foreign taxable entity with annual gross receipts of $500,000 or more from business in Texas has economic nexus even without physical presence in the state. This rule applies to reports due on or after January 1, 2020.
Here is where business owners frequently get tripped up. A taxable entity’s Texas nexus begins on the earliest applicable date: the date physical presence begins; January 1, 2019, if it obtained a Texas use tax permit before that date; the permit date if obtained on or after January 1, 2019; or the first day of the federal income tax accounting period in which Texas gross receipts reached $500,000 or more.
Out-of-State Software Company Crosses the Texas Threshold
A Delaware-incorporated software company with no office or employees in Texas invoices Texas-based clients a total of $620,000 over a calendar year. The owner assumes no Texas filing is needed because the company has no physical presence there.
Under Texas economic nexus rules, that $620,000 triggers franchise tax nexus as of the first day of the federal income tax accounting period in which receipts reached $500,000. The company must file a Franchise Tax Report, an Information Report, and pay any franchise tax due. The absence of a physical Texas location does not change that obligation.
Each taxable entity with Texas nexus must file a Franchise Tax Report (No Tax Due, EZ Computation, or Long Form) and an Information Report and pay any franchise tax due.
There is also an exit rule that often goes unnoticed. If your business stops doing business in Texas and nexus ends, you cannot simply stop filing. An out-of-state entity that ceases to have Texas nexus must file a final franchise tax report and pay any remaining amount due within 60 days of ending that nexus. Keep clear documentation of when your Texas activity ceased, and confirm the final filing is accepted by the Comptroller before considering the matter closed.
California requires equally careful attention. The California Franchise Tax Board applies its "doing business in California" standard to determine whether a business must file California franchise or income tax returns. A business is doing business in California if it actively engages in any transaction for financial gain within the state, if it is organized or commercially domiciled there, or if its California sales, property, or payroll exceed amounts specified under California law. Any one of those three conditions, standing alone, can require a California filing.
California's Factor-Presence and Transaction Tests for Doing Business
California’s doing-business standard includes engaging in transactions for financial gain in California, being organized or commercially domiciled there, or exceeding specified California sales, property, or payroll amounts. The first is activity-based: engaging in transactions for financial gain within California triggers the filing obligation regardless of whether the business has property, payroll, or employees in the state. Exceeding specified California sales, payroll, or property amounts also constitutes doing business in California.
A consulting firm based in Georgia earning fees from California clients could satisfy the first test even with no employees or assets in California. Businesses doing business in California are subject to California franchise or income tax filing requirements.
Businesses may have state and local income, sales, and employment tax obligations and registration requirements. They should check with state and local governments to determine the applicable responsibilities.
The practical starting point is to map where your company has activity: revenue, remote employees, property, or other business connections. From there, match that activity against each state's nexus rules and build a filing calendar that reflects what's actually due and when. That mapping exercise is worth revisiting every year as your business grows and your customer base shifts to new states. If you're not sure where to start, bring a list of your top revenue states to your next advisor meeting and work through the nexus analysis state by state.