Sales Tax Nexus vs Income Tax Nexus: State Returns You May Owe

Does sales tax nexus create income tax nexus?

Not automatically. Nexus is a connection to a state strong enough that the state can require a business to file and pay taxes there (Minnesota Revenue). A state tests sales tax nexus and income or franchise tax nexus under separate rules.

Sales tax nexus follows physical presence or enough sales into the state, since the Supreme Court's Wayfair decision let states require remote sellers to collect (Texas Comptroller). Income and franchise tax nexus follow each state's own rule. Public Law 86-272 can bar a state's net income tax (a tax on profit) on a seller whose only in-state activity is taking orders for goods, but even then a state can still require a filing or charge a minimum or gross receipts tax (a tax on sales). Mapping where each test applies is the first job; the filing detail is in business income tax in other states.

Your case is not simple if any of these is true:

• You just registered, or are about to register, for sales tax in a state and nobody has checked whether an income, franchise or gross receipts return is also due there.
• The state sent a nexus questionnaire or notice, or an earlier year may need a return.
• You sell services or digital items, not only physical goods.
• An employee, or a contractor who is not a multi-client sales agent, works in the state, or goods you own sit there, including in a marketplace fulfillment center.
• The state charges a franchise or gross receipts tax, not only a net income tax, or a permit or registration there starts a tax or a filing of its own.
• More than one state, or more than one year, is open.

Gather sales by state and month, where people worked and what they did, where goods were stored, the date of each registration or permit, and where the entity was formed and where each owner lives.

How do sales tax nexus and income tax nexus differ?

Sales tax nexus decides who collects tax from customers. Income or franchise tax nexus decides whether the business itself files and pays. They rest on different laws, count different things and carry different federal limits.

For where a state's sales tax test starts, see when you must collect sales tax.

When can a state make me collect sales tax but not tax my profit?

Public Law 86-272 limits a state's net income tax, and sales tax is not a net income tax. The law defines that term as any tax imposed on, or measured by, net income (15 U.S.C. 383).

A state cannot impose a net income tax on income from interstate commerce when all three of these hold (15 U.S.C. 381):

1. The only business activity in the state is soliciting orders for sales of tangible personal property (goods).
2. The orders are sent outside the state for approval or rejection.
3. Approved orders are filled by shipment or delivery from outside the state.

The law does not apply to a corporation formed in the taxing state or to an individual who is a resident or domiciled there (15 U.S.C. 381). It is judged one tax year at a time: an unprotected activity at any time in the year removes the protection for the entire year, unless the activity is trivial (de minimis); one done regularly or by company policy normally is not (Multistate Tax Commission statement, FTB Publication 1050).

Under the Multistate Tax Commission statement, a web store that only lists goods, takes payment and ships from outside the state stays protected, and static text or photos are not an in-state activity. Cookies that gather search data to plan inventory or choose new products defeat the protection; cart-only cookies do not. That statement describes how the states that support it apply the law, and Congress has not updated the law for online sales (Multistate Tax Commission statement). Check the destination state's own position.

What does Public Law 86-272 not protect?

Public Law 86-272 does not protect services, leased or licensed items, goods kept in the state, in-state work beyond taking orders, or any tax that is not a net income tax.

California shows the last row: a protected seller is exempt from taxes based on net income but may still be doing business there and liable for filing and paying the applicable amounts (California FTB). In its example, a protected internet seller with sales but no property or payroll in California must file a return and pay the minimum tax ($800), but is not subject to the franchise tax on its income (California FTB). For gross receipts taxes such as Washington's, see gross receipts taxes in other states.

Can I owe income tax in a state where I collect no sales tax?

Yes. The two taxes attach to different things, so an income tax duty can exist with no sales tax duty.

• Stock in a marketplace warehouse. A marketplace may collect the sales tax on your sales, yet goods held for you at its fulfillment center end Public Law 86-272 protection in that state (table above).
• Services. Minnesota says any service received there can be taxed, even if performed remotely, and creates nexus (Minnesota Revenue).
• A state with no sales tax. Montana has no general sales tax, so there is nothing to collect (Montana DOR). Yet generally any activity performed there other than soliciting sales of tangible goods creates nexus and a filing requirement (Montana DOR). See Montana sales tax nexus.

Registered for sales tax in another state: does the permit or LLC registration create income tax nexus?

Registering to do business does not by itself end Public Law 86-272 protection, but some states attach a tax or a filing to a registration or permit, so test each one.

• Federal protection. Merely registering or qualifying to do business in a state, without more, does not forfeit Public Law 86-272 protection; seeking an added benefit of state law through an unprotected activity, such as protecting a corporate name, does (Multistate Tax Commission statement, FTB Publication 1050). The statement addresses registering to do business; it does not mention sales tax permits.
• California. Every corporation, C or S, that is incorporated, registered or doing business there must pay the $800 minimum franchise tax; a newly incorporated or qualified corporation is generally excused in its first taxable year (California FTB: C corporations, S corporations). An LLC owes the $800 annual tax if it is organized or doing business there, and files Form 568 if it is registered or doing business there, even with no California activity. An LLC taxed as a corporation follows the corporation rules instead (California FTB: LLC, Form 568 instructions). See California minimum tax and LLC fee.
• Texas. A foreign taxable entity with a Texas use tax permit is presumed to have franchise tax nexus. An entity that overcomes the presumption still has nexus from the earlier of its physical presence or the first day of the federal accounting period in which its Texas gross receipts reach the franchise threshold. Public Law 86-272 does not apply to the Texas franchise tax (Texas Register: Rule 3.586). See Texas franchise tax.

Registering the entity itself is a separate question; see registering in another state.

Do states use dollar thresholds for income tax nexus like they do for sales tax?

Some do and some do not, and the income tax number often differs from the sales tax number within one state.

California's doing-business lines are annually indexed dollar amounts for sales, property and payroll, or any of them above 25% of the total. Take the dollar amounts for the tax year in question from the FTB table; if that year is not posted yet, do not reuse an earlier year's figure (California FTB).

Texas uses $500,000 for both taxes, but one test looks back over the preceding twelve calendar months and the other over a federal accounting period, so do not carry a sales tax count into an income tax decision.

The Multistate Tax Commission recommends a model standard: nexus if property in the state exceeds $50,000, payroll exceeds $50,000, sales exceed $500,000, or any of the three exceeds 25% of the total. It is a recommendation, not the law of every state, so staying under it is not a safe harbor, and its amounts adjust for inflation (Multistate Tax Commission statement). Every state's sales tax line is in sales tax thresholds by state.

What should I map after I register for sales tax in a new state?

Build one grid by state and month, starting with the earliest sales to customers there, work done or received there, property or registration. Include remote activity from before any physical presence or permit.

Then, for each state:

1. Read that state's income and franchise tax nexus page for a dollar line, a services rule and a questionnaire.
2. Mark which taxes apply to the business: net income, franchise, gross receipts.
3. Mark each year as open or unfiled, and note any notice received.

The sales-by-state report that feeds this grid is set up in tracking sales by state for nexus.

How do I find out where I stand when I am not sure?

Start with the state's own nexus page; some states also decide it through an activity questionnaire.

• Minnesota. A C corporation, S corporation or partnership completes Form C101 if it sells products or has business activity in Minnesota, or Form C102 if it sells or provides services to Minnesota customers. Minnesota reviews the form and makes a nexus determination (Minnesota Revenue). Its voluntary disclosure program offers a limited look-back and possible penalty relief, accepts anonymous applications, and excludes a business already under review or contacted by the department (Minnesota Revenue).
• Montana. An entity still unsure after reading Montana's rules can submit its Nexus Questionnaire (Form NEXUS); a Nexus Auditor reviews it and the department provides a determination (Montana DOR).

If earlier years may be unfiled, settle the facts for every open year and check disclosure eligibility before sending a questionnaire that names the business. Other states may use other processes; check the state's own revenue department.

Example

These examples are illustrative; all figures are in US dollars.

Goods shipped from Florida into Minnesota

A Florida shop ships US$400,000 of goods a year into Minnesota. It has no staff, stock or office in Minnesota, takes only web orders, sends every order to Florida for approval or rejection, and fills accepted orders by shipment from Florida. These sales are above Minnesota's remote seller line, so Minnesota sales tax applies if they are retail sales. Public Law 86-272 may bar a Minnesota net income tax, because the only Minnesota activity is soliciting orders for goods shipped from outside. If the shop also regularly answers customer chats about using the products, or uses cookies to plan inventory, the Multistate Tax Commission statement treats that as an unprotected activity in the customer's state, and the protection can be lost for that whole tax year.

Services billed from Oregon into Minnesota

An Oregon consulting S corporation bills US$200,000 to Minnesota clients from a home office in Oregon. Minnesota says a service received there creates nexus, and Public Law 86-272 covers goods, not services. The S corporation needs to check whether Minnesota requires a return from it, and Minnesota's service questionnaire (Form C102) is how it asks for a determination. Whether Minnesota sales tax applies to the work is a separate question; the income tax test does not wait for it.

A home-based employee in California

A seller has one employee who takes orders and does warranty repairs from a California home. California lists repairs and in-state work beyond taking orders as unprotected, and treats employees who sell and do warranty work from home as doing business there even under its dollar lines. Both California sales tax and a California income tax return may need review for the period the employee worked there.

Different for you?

• You registered, or are about to register, for sales tax in a new state and cannot tell whether an income, franchise or gross receipts return is also due there, this year or earlier: an unprotected activity that is more than trivial removes goods-only protection for the whole tax year, and a state can tie a filing to a registration or permit. Fill in the grid above, then see corporate tax help for testing each state and each open year.
• A state sent you a nexus questionnaire or notice: see corporate tax help before you answer.
• A state income or franchise return was never filed for an earlier year: see catching up on unfiled business returns. Ask about the state's voluntary disclosure program before the state contacts you; Minnesota's excludes a business it has already contacted or is reviewing.
• Your books cannot yet show sales, staff and stock by state and month: see tracking sales by state for nexus and get bookkeeping help.
• Sales tax was not collected where it was due: see catching up on uncollected sales tax.
• You have a Texas use tax permit or entity, or the state charges a gross receipts tax: see Texas franchise tax or gross receipts taxes in other states.
• An employee works in another state: see employees in another state.
• You are a sole proprietor, an LLC owner, or a partnership or S corporation with owners in different states: Public Law 86-272 covers any person, not only corporations (15 U.S.C. 381), but each state's rules decide which entity and owner returns are due. See business income tax in other states.
• You are a Canadian seller shipping into the US: the federal law covers interstate commerce only, so it does not protect you unless a state chooses to apply it to foreign commerce (Multistate Tax Commission statement). See foreign sellers and sales tax; for stock in a US warehouse, see Canadian sellers with US inventory.