Should My Business Be Filing Income/Franchise Taxes in Other States?

Ryan Working, CPA, MST

Tax Director

As a small to midsize business navigating the world of state income/franchise taxes can be difficult.  Every state has different rules, tax rates, and requirements for filing.  In this article, I will provide some basic concepts we use to help decide if an income/franchise tax return may be required in another state.

Economic Presence:

Historically, in order to be subject to taxes in a state you would need to have a physical presence in the state.  In recent years due to the development of significant court cases and e-commerce, the vast majority of state taxing authorities have now adopted an economic presence standard for determining if there is a filing requirement in the state.

The economic presence standard is focused on the minimum level of activity in a state needed to have an impact on the state’s economy.  Once you hit that minimum threshold the state will deem your business to have nexus in the state and require an income/franchise tax return to be filed.

Thresholds for filing:

Some states have  defined this minimum threshold and others have not.

For example, in California:

For the 2022 tax year, nexus is created if any of following thresholds are exceeded:

• $69,015 of property;
• $69,015 of compensation paid;
• $690,144 of sales, including sales by agents or independent contractors; or
• 25% of total property, total compensation paid, or total sales.

For states that don’t specifically provide these threshold factors we generally lean on the model recommended by the Multistate tax Commission (MTC), which is:

• $50,000 of property;
• $50,000 of compensation paid;
• $500,000 of sales, including sales by agents or independent contractors; or
• 25% of total property, total compensation paid, or total sales.

Conclusion:

If you find your business generating sales, having wages, or property in a state other than your home state in excess of the above mentioned amounts or if you register to do business in a new state, please contact a WFY advisor here to evaluate the need for a new state filing. You can sign-up for our newsletter here to receive more updates like this.