Many states, given their budget crisis, are aggressively searching for new sources of revenue, and in most cases businesses stand out as easy targets.
Registering to do Business
Many states require that you register to do business within their state. Once you are registered and income is earned within the state you may be required to pay taxes and file annual tax returns in that state.
Income Tax "Nexus"
The issue for any entity operating in multiple states is determining the states where it must file tax returns and pay income tax.
An entity is generally subject to income tax in the state in which it is incorporated or it has been formed. Historically, entities will clearly have "nexus" in other states where they have presence of property, employees, or other agents who are physically present on a regular or systematic basis in those states. "Nexus" is a Latin term meaning "connection". It describes the amount and degree of business activity that must be present before a state can tax an entity's income. If a taxpayer has nexus in a particular state, the taxpayer must pay and collect/remit taxes in the state.
The more difficult issue is determining in which, if any, states the entity may have economic nexus. That is nexus without a physical presence or attributory or agency nexus.
Nexus determinations are fact specific and subject to interpretation, therefore multiple sources may need to be consulted to gauge whether a taxpayer's activities do indeed subject the taxpayer to income tax in a particular state.
Sales Tax "Nexus"
Companies that have sales tax nexus are responsible for collecting sales tax on any sales made to residents of that state (for product or services that are subject to sales tax).
The presence of property or distribution warehouse, company employees or other agents is generally regarded as an essential prerequisite for establishing nexus in a state for sales and use tax purposes.
It is important that each situation is carefully considered to ensure compliance.
Taxation of Employee Compensation by Multiple States
A state will generally tax the compensation of a non-resident employee if the employee's compensation is earned in the state i.e. the employee physically works in the state. There is a risk of double taxation for employees since all employee compensation is taxed in the state of residence, while other state-sourced compensation is taxed in the state of non-residence. Some states, not all, alleviate this problem by making credits for taxes paid to non-resident states. In some instances, many states have reciprocal agreements with bordering states. In these reciprocal agreements, states agree not to tax nonresident compensation and employers are not required to withhold for a state other than the state of resident.
If an employee performs services in a state other than their home state, it is the responsibility of the employer to determine whether or not they are subject to the withholding laws of that other state. States that impose a personal income tax require employers to withhold tax from employee's wages. In some states, there are cities and local government units that also impose their own income tax. There are also a few states with state mandated disability insurance programs.
