Income Tax in Other States: Nexus and Apportionment
When a business owes income tax to a state besides its own, the federal law that still protects sellers of goods, how income is divided among states, and what pass-through owners file.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A business owes income tax to another state when it has nexus there — employees, property, or enough sales — and that state apportions a share of total income to itself, usually by sales. Pass-through owners file nonresident or composite returns. A federal law shields sellers of goods who only solicit orders; it does not protect service businesses.
On this page
What creates income tax nexus?
| Trigger | Typical rule |
|---|---|
| Employees working in the state, including remote employees | Nexus from the first employee in most states |
| Property, inventory, or offices in the state | Nexus |
| Sales into the state above a threshold | Economic nexus — many states use the Multistate Tax Commission's factor-presence standard: $500,000 of sales, $50,000 of property or payroll, or 25 percent of the total, with some indexing or setting their own figures |
| Independent contractors performing services in the state | Often nexus |
| Occasional travel to meet clients | Varies; some states have day thresholds |
What does Public Law 86-272 protect?
A federal statute bars a state from taxing income of a business whose only activity in the state is soliciting orders for tangible goods that are approved and shipped from outside the state. It does not cover services, software subscriptions, leasing, or digital products, and the Multistate Tax Commission's 2021 revised statement, which a number of states follow, treats many internet activities — post-sale chat support, cookies that gather data for product development, selling extended warranties — as unprotected. Service firms and SaaS companies should assume it does not apply to them.
How is income divided among states?
Many states now apportion by a single sales factor: the share of total sales sourced to the state. Goods are sourced where delivered. Services are sourced under market-based rules — where the customer receives the benefit — in many states, though some still look to where the work is performed. The same dollar can be sourced to two states under conflicting rules, which is why tracking customer locations matters.
What do pass-through owners file?
Partners and S corporation shareholders report their share of income apportioned to each state on nonresident returns there. Many states allow a composite return filed by the entity on behalf of nonresident owners, and many require the entity to withhold on nonresident owners' shares. The owner's home state generally gives a credit for tax paid to other states — unless the home state is Florida, which has no personal income tax and therefore no credit, so the other state's tax is simply a cost.
What about Florida businesses?
Florida imposes corporate income tax on C corporations — and on S corporations only when they owe federal tax at the entity level, such as built-in gains tax — but no income tax on individuals or partnerships. A Florida S corporation with a New York project owes nothing to Florida on that income but owes New York tax through its owners if it makes New York's separate S election on Form CT-6 — without it, New York taxes the company as a C corporation — and a pass-through entity tax election in New York may reduce the federal cost.
Frequently asked questions
Does one remote employee in another state really create nexus?
In most states, yes — for income tax, payroll registration, and sometimes sales tax.
Can I avoid double taxation?
Resident states credit taxes paid to nonresident states on the same income, within limits. Businesses with employees in two states and conflicting sourcing rules can face some overlap.
What is a throwback rule?
Some states add sales shipped to a state where the seller is not taxable back into the origin state's sales factor, so untaxed sales do not escape entirely.
How far back can a state assess if I never filed?
Without a filed return there is no statute of limitations; voluntary disclosure programs limit the look-back.
Official sources
The Multistate Tax Commission explains: “As a general rule, when a business interacts with a customer via the business's website or app, the business engages in a business activity within the customer's state.” — Multistate Tax Commission, Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272, https://mtc.gov/wp-content/uploads/2023/04/025-MTC-Statement-on-PL-86-272.pdf
The Florida Department of Revenue explains: “Corporations, including entities that are taxed federally as corporations, are subject to the tax. A corporation’s federal income, as adjusted by Florida additions, subtractions, and adjustments, is apportioned to Florida based on the corporation’s activities in Florida compared to its activities everywhere.” — Florida Department of Revenue, Florida Corporate Income Tax, https://floridarevenue.com/taxes/taxesfees/Pages/corporate.aspx
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk tracks where your customers and employees are and files the state returns that follow. See pricing or book a free fit call.
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