Tax Talk Thursday: Understanding State Income Tax Nexus

One of the most important but often overlooked issues for businesses operating across state lines is nexus—the legal connection that determines whether a state has the right to impose its income tax on your business. Nexus can be established in many ways, and understanding how it works is crucial for compliance. Traditionally, states required a physical presence such as offices, warehouses, or employees. But in recent years, economic presence has become just as significant, meaning you can trigger income tax obligations in a state even without setting foot there.

For example, California applies a bright-line test based on sales, property, or payroll. If your California-sourced sales exceed $711,538 in 2025 (threshold adjusted annually), you may need to file an income tax return there—even if you don’t have a physical office. New York has similar rules: corporations with more than $1 million in receipts sourced to the state are considered to have nexus. In Texas, while there is no state income tax, businesses with over $2.47 million in revenue must file a franchise tax report. These thresholds vary by state, which means a company could owe filings in multiple jurisdictions simultaneously.

Remote work has further expanded nexus risks. Having just one employee telecommuting from another state can create a taxable presence there. States like Massachusetts and New Jersey have clarified that remote workers may establish nexus. Similarly, if independent contractors are soliciting business in a state, or if your company is regularly providing services to clients there, those activities may trigger filing requirements.

For businesses growing online or expanding into new markets, nexus can quickly become complex. Failing to recognize obligations can lead to back taxes, penalties, and interest. Conducting a nexus review is essential, especially if your business has sales in multiple states, remote staff, or significant e-commerce activity. With proper planning, businesses can manage their exposure through apportionment strategies, credits for taxes paid to other states, and structuring operations to minimize tax burdens.

At MKHS Tax Group, we specialize in helping clients navigate these multi-state rules with clarity and confidence. If you’re unsure whether your business has filing obligations outside your home state, now is the time to review. Contact us today at info@mkhstaxgroup.com for professional guidance tailored to your business.