Navigating Nexus: Understanding State Income Tax Obligations for Businesses

In the complex landscape of state taxation, businesses face a myriad of challenges as they navigate the ever-evolving requirements imposed by each state. Watch the above video where CK Tax Supervisor of State and Local Taxation, Maria Gordon, talks about the broad spectrum of activities that can establish nexus and the critical roles played by services, vehicle presence, and employee locations when it comes to paying state income tax.


My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation.

Each of the states really wants to get a piece of their pie from taxpayers. There’s lots of different types of taxes that businesses need to be concerned about. Income tax is an obvious one, but also requirements for sales taxes are continually changing with the states. And then we have local income taxes. We have personal property taxes, and even gross receipts taxes based upon total receipts collected in a state and franchise taxes.

Businesses need to be concerned about whether or not they have enough connection with the state to be required to file income tax and that connection is called nexus. Each state has their own specifics about what creates nexus within their state, but very generally speaking for income tax, if a business is performing any sort of services in a state, then they’re going to be required to file income tax there. If they are driving their own vehicles into a state, then they would have nexus. Really, the one instance when a business does not have to worry so much about income tax is if they’re merely shipping products to customers in the state, and that’s their only activity. They may have salesmen in the states, but as long as those salespeople don’t do any services, then generally speaking, the business won’t have nexus with the state. We often ask our clients each year, what the activities look like in states where they have employees, and then we make that determination on a state-by-state basis.

The landscape of workers has changed a lot over the past 10 years. A lot of companies now have remote workers in states where they may or may not have filed in past years and so it is something to be concerned about and it all depends upon what activities the employee is doing for that business as to whether or not that’s going to trigger a nexus with the state. So it is very important to be mindful when you’re adding new employees in states or if an employee who works from home is moving to another state, you always want to take a look at those state requirements to find out if the business would suddenly be responsible for income tax filing.

So if a business determines that they have nexus within a state for income tax, then they need to determine what is their taxable income in that state. And we start with federal taxable income and then each state has their own modifications that they make to federal taxable income. Some really common ones are depreciation of fixed assets. States have different methods of depreciating than what’s allowed on your federal tax return. The states do not allow certain deductions like state income tax deduction. So once you make those modifications to the federal taxable income, then at that point you need to decide which portion of this is going to all of these different states. And there are formulas that the states use for that. Most of the time, it’s just looking at sales to that state versus everywhere.

But there are also states that take a look at the amount of payroll that you have in each state and property. So once you come up with that percentage, you’ve got your state taxable income.

It’s important to remember that when you add a state filing responsibility, if you kind of look at the whole pie, you’re not necessarily paying more state tax, it’s just a question of which state are you paying that tax to. And certainly there are some states with higher tax rates that it’s less favorable to file in those states but it’s best to kind of think of it as a pie and as long as you’re filing where you’re required to then that protects the business going forward.

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What You Need to Know About Sales Tax Nexus

An Introduction to Determining Your Tax Nexus

Perplexing Nexus: Do I Have Nexus?