Running a business across multiple states means more customers and more opportunities, but it also means working with more complicated taxes. Sales tax, corporate income tax, and payroll withholding all add up fast, and no two states calculate them the same way. The rules aren’t standardized, the thresholds are easy to miss, and the burden of staying compliant is on your team.

Below, we’ll discuss how multistate tax filing works, how to determine nexus, and how to build a system that scales with your business.

What’s in this article?

• What is multistate tax filing?
  
• Why is multistate tax compliance so important?
  
• How does a business determine nexus?
  
• What steps are involved in filing multistate taxes?
  

What is multistate tax filing?

If your business operates in more than one US state, you likely need to file taxes in more than one state, too. Multistate tax filing is the process of figuring out where your business has tax obligations, then registering, collecting, and filing taxes in each of those states. The types of taxes you’re responsible for can include:

• Corporate income taxes
  
• Sales and use taxes
  
• Payroll taxes
  
• Franchise or gross receipts taxes
  

The taxes that apply depend entirely on your business model, as well as where and how you operate. You can be responsible for taxes in a state if you sell to customers, hire remote employees, or store inventory in a third-party warehouse there. This is true whether or not you have an office location in that state. For example, a software company that’s based in Texas, hires a remote employee in Oregon, and starts selling to customers in Colorado will likely owe Texas franchise tax, Oregon state income tax withholding, and Colorado sales tax.

Why is multistate tax compliance so important?

Multistate tax compliance is so difficult because “tax compliance” means something slightly different everywhere.

Some states tax software-as-a-service (SaaS) and digital services, while others don’t. There are states that let you use a single-factor formula to apportion income and those that let you use a three-factor formula. Some states add city- and county-level sales taxes on top of the state rate—each jurisdiction has its own rules. Some states require the employer to withhold tax for remote employees, while others require remote employees to be taxed where the employer is located. Even the definition of “doing business” varies.

Understanding those nuances—across multiple jurisdictions, all of which change their rules on different timelines—is a serious challenge. These are some of the consequences you can face if you fail to keep up with tax compliance across states.

Penalties for missed filings

Unpaid taxes lead to penalties. If your business is active in a state and doesn’t file the required returns, you’re exposed to:

• Retroactive tax bills
  
• Interest charges and late penalties
  
• Increased audit risk
  

Missed opportunities to save money

Without a solid grasp of state-level rules, businesses can miss out on tax credits or exemptions. For example, some states offer tax credits to prevent double taxation of business income. Others have reciprocity agreements that exempt employees from dual withholding. To correctly use these mechanisms, you have to know what states offer and how to apply any exemptions.

Challenges during expansion

If you’re opening new physical locations, hiring in new states, selling and shipping to new states, or selling the company, your state tax footprint will come up. Acquirers and auditors will likely look at how well you’ve handled your obligations. Unresolved state issues such as late filings, misreported income, and unpaid taxes can complicate or delay expansion. Multistate compliance clears the way for expansion.

How does a business determine nexus?

“Nexus” is the connection between a business and a state that creates tax obligations. If your business has a meaningful link to a state, that state gets to tax some part of your activities, whether it’s sales, income, payroll, or all three. The trick is to know which types of activity create that obligation and where. Two main types of nexus trigger tax responsibilities: physical and economic. Here’s a closer look at both.

Physical nexus

You have a physical nexus in a state when your business has a tangible presence there. That could entail:

• An office or retail location
  
• Employees who work in the state
  
• Inventory stored there
  
• On-site services you’re providing there
  

Even something as minor as storing goods in a warehouse can establish a physical nexus in a state you’ve never visited. Likewise, sending employees to work at trade shows or install products on-site can create tax obligations, even if they’re only visiting.

Once you have a physical nexus in a state, you’re generally subject to sales tax and potentially payroll and income tax.

Economic nexus

Since the 2018 Supreme Court decision in South Dakota v. Wayfair, states have also been allowed to enforce tax collection based purely on economic activity, with no physical presence required.

Once you exceed a certain transaction threshold in a state with sales tax, you establish an economic nexus. That means you have to register, collect, and remit taxes there. Common thresholds are:

• $100,000 in sales per year
  
• $100,000 in sales or 200 transactions per year
  

However, the specifics vary by state. California’s economic nexus threshold, for example, is $500,000 in sales per year.

What steps are involved in filing multistate taxes?

Once you figure out where you owe taxes, you have to register, collect, and file in every relevant state. Here’s how most businesses handle the ongoing compliance process.

Identify your nexus states

Start by confirming where you’ve established physical or economic nexuses. You’ll need to:

• Track where you’ve hired employees
  
• Monitor where your inventory is stored or shipped from
  
• Review your sales volume and transaction count by state
  
• Stay up-to-date on any changes to state thresholds
  
• Watch for expansion into new states (intentional or not)
  

Stripe Tax can automatically monitor your sales across states and alert you when you exceed a threshold that creates an economic nexus. That kind of automation is useful because thresholds can sneak up on you.

Register with each state

Before you collect or file, you need to register with the state tax authority. Depending on your situation, this could involve:

• Applying for a sales tax permit
  
• Registering as an employer for payroll taxes
  
• Securing a Certificate of Authority to do business in the state
  

Every state has its own process, forms, and portals.

Collect and track the right taxes

Once you register, you’re responsible for:

• Collecting sales tax on each in-state transaction at the correct rate
  
• Withholding the correct amount of income tax for employees in that state
  
• Logging tax-exempt sales and storing resale certificates, if applicable
  
• Keeping detailed records that meet each state’s filing requirements
  

Beyond the state level, sales tax rules vary by city, county, and even product type. Automation can make a major impact here. Stripe Tax automatically calculates the correct tax on every transaction based on location, product category, and local rates.

File tax returns on each state’s schedule

Each state will have its own deadlines, forms, and formats. You might file sales tax monthly in one state and quarterly in another. Most states require you to file:

• Monthly or quarterly sales tax returns (depending on volume)
  
• Quarterly payroll withholding returns
  
• Annual corporate income or franchise tax filings
  

To stay organized, build and maintain a compliance calendar to track:

• Filing frequencies by state
  
• Specific deadlines for each return
  
• Login credentials and access details for each state’s filing portal
  

Some filing tools can automate this for you, while others allow you to export your data directly into the formats needed for each state.

Remit payment and stay up-to-date

After you file, you’ll need to pay any taxes you owe on time and in full. Missed payments can lead to penalties, even if your filing was accurate. And as your business develops, so will your tax obligations. You’ll need to:

• Register with new states as you grow
  
• Monitor threshold changes and new nexus triggers
  
• Track updates to the tax code that affect your rates or filing requirements
  

Many businesses run a quarterly nexus and compliance review to ensure they’re still covering the right states. To manage compliance obligations, businesses should build replicable systems that scale with their footprints and use automation wherever possible.