Guide Outlines Steps for Businesses to Meet Multistate Tax Requirements

Businesses that operate across state lines or sell online must determine whether they have created a tax obligation in each state where they have activity. Nick Pasquarosa, founder and CEO of Bookkeeper360, said many owners are surprised when their operations trigger filing requirements in additional states.

Nexus is the legal connection that requires a business to register and collect taxes in a state. Physical nexus is created by an office, warehouse, employees, contractors, or inventory in the state. Economic nexus is triggered when annual sales in a state reach the threshold set by that state, typically between $100,000 and $250,000.

The 2018 Supreme Court decision in South Dakota v. Wayfair confirmed that states may require collection based on sales volume alone.

Federal income tax withholding follows uniform IRS rules.

State income tax rules differ by state. Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Employers must withhold state income tax for the state where the employee performs work, not where the company is located.

State unemployment insurance rates and wage bases vary.

6 percent. Pasquarosa recommended tracking each state's obligations in a spreadsheet that lists rates, wage bases, filing frequencies, and due dates.

Businesses should list every state with employees, contractors, inventory, or physical presence. They should compare sales figures against each state's threshold and note registration forms, filing schedules, and deadlines. Common errors include missing registration deadlines, withholding tax for the wrong state, and failing to register when a remote worker is hired in another state.

Pasquarosa advised companies to audit current obligations each quarter and maintain organized records to avoid penalties.