State and Local Tax Planning for Multistate Businesses
Multistate businesses manage state and local tax (SALT) obligations by first identifying where they have nexus, then minimizing taxable income through apportionment planning, and finally using entity-level elections like pass-through entity taxes (PTETs) to work around the federal SALT deduction cap. The process is continuous because state tax laws change frequently and business footprints evolve with hiring, sales, and expansion. A systematic state and local tax planning program is not optional for any business operating across state lines.
Why State and Local Tax Planning Matters More Than Ever
The 2018 Supreme Court decision in *South Dakota v. Wayfair, Inc.* fundamentally changed the SALT landscape. Before Wayfair, states could only require out-of-state sellers to collect sales tax if those sellers had a physical presence in the state. After Wayfair, economic activity alone is enough. A business can owe sales tax, income tax, franchise tax, or gross receipts tax in a state where it has never set foot.
At the same time, the One Big Beautiful Bill Act (OBBBA) raised the individual SALT deduction cap from $10,000 to $40,400 for 2026 (with a phaseout beginning at $505,000 of modified adjusted gross income), but pass-through owners with significant state tax burdens still face meaningful cap exposure. The PTET workaround survived the OBBBA intact, making entity-level state tax planning a live and valuable tool.
For finance leaders at mid-market companies, a well-run SALT program reduces penalties, avoids double taxation, and often surfaces refund opportunities that reactive compliance misses entirely.
Step One: Nexus Identification
What Creates Nexus
Nexus is the legal connection between a business and a state that gives the state the right to impose a tax. Two broad categories apply.
Physical nexus arises from a tangible presence: offices, warehouses, employees, equipment, or inventory located in a state. A single remote employee working from home in a state your company has never formally entered can create both income tax and payroll tax nexus there. COVID-era nexus relief provisions have almost universally expired, and states are enforcing normal rules for permanent remote work arrangements.
Economic nexus is triggered by revenue or transaction volume, regardless of physical presence. Most states use a $100,000 annual sales threshold. California, New York, and Texas set the bar at $500,000, and Alabama and Mississippi use $250,000. A number of states previously used a 200-transaction count as an alternative trigger, but many have dropped that test because it disproportionately burdened sellers of low-priced goods. As of 2026, roughly 20 states still apply some transaction-count test, down sharply from nearly every state in 2019.
Thresholds are not uniform in how they combine. New York, for example, requires both $500,000 in sales and more than 100 transactions, while most $100,000 states apply a sales-only test. Once a business crosses a state’s threshold, it must register, collect, and remit that state’s taxes going forward.
Income Tax Nexus and Remote Workers
Sales tax nexus and income tax nexus are separate questions. A company may cross the sales tax threshold in one state while simultaneously having a remote employee create income tax nexus in a different state. Most states apply the rule that income tax nexus follows physical activity: where your people are, the state has a claim.
A small number of states, including New York, Pennsylvania, Connecticut, Delaware, Arkansas, and Nebraska, apply a “convenience of the employer” rule. Under this rule, a remote employee’s wages are taxed as if the work were performed at the employer’s office location unless the employee can demonstrate that working remotely was a necessity of the employer, not a personal preference. New Jersey does not maintain its own convenience rule but applies another state’s rule reciprocally against its residents, and Nebraska now limits its rule to employees present in the state for more than seven days a year. These positions can result in both the employee’s home state and the employer’s home state claiming the right to tax the same wages.
Public Law 86-272 offers limited protection for sellers of tangible goods against income tax nexus in states where they only solicit orders. It does not apply to services, software, or other intangibles, so most technology and professional services businesses cannot rely on it. The protection has also narrowed for online sellers: the Multistate Tax Commission’s revised interpretation treats many internet interactions, such as post-sale chat support or placing cookies on in-state devices, as unprotected activity, and states including California and New York have adopted that view.
Voluntary Disclosure as a Starting Point
Companies that discover historical nexus exposure often benefit from Voluntary Disclosure Agreements (VDAs). VDAs generally provide penalty abatement, a limited look-back period (typically 3 to 4 years rather than the full open statute), and a binding resolution of prior non-compliance. The Multistate Tax Commission’s Voluntary Disclosure Program allows businesses to approach multiple states simultaneously and at no charge. For companies with unregistered nexus exposure across several states, the MTC program is usually the most efficient first step.
Step Two: Apportionment and Income Sourcing
How States Divide Taxable Income
Once a business has nexus in multiple states, each state taxes only its share of the company’s income. The mechanism is apportionment, and the formulas vary significantly by state.
Historically, many states used a three-factor formula that averaged property, payroll, and sales within the state as a share of the company’s totals. More than 30 states have since moved to a single-sales-factor formula, weighting everything on where sales are sourced. Single-sales-factor formulas benefit companies with significant in-state employees and property but most of their customers elsewhere, because payroll and property are excluded from the calculation.
The Tax Foundation tracks these apportionment rules state by state, and the mix continues to shift as more states adopt single-sales-factor and drop throwback provisions.
Market-Based Sourcing vs. Cost of Performance
For service businesses, the critical question is where a sale is “sourced.” Two competing standards apply:
- Market-based sourcing assigns the revenue to the state where the customer receives the benefit of the service. This is now the majority approach and is used by California, New York, Texas, and most large states.
- Cost-of-performance sourcing assigns the revenue to the state where the company incurs the greatest costs to deliver the service. Some states still use this method.
The mismatch creates planning opportunities and pitfalls. Two states can both claim a sale under their respective interpretations, resulting in double taxation. Alternatively, a sale may be assigned to neither state, creating “nowhere income” that escapes apportionment entirely. Understanding how each state where you have customers sources your receipts is essential for accurate tax forecasting.
Throwback Rules
About 20 states and the District of Columbia apply a throwback rule, and one state, Maine, uses a related throwout rule. If a company makes a sale into a state where it is not taxable, the throwback rule requires the company to reassign that sale back to the state it shipped from. This increases the home state’s apportionment percentage and raises the company’s tax burden there. Businesses that aggressively avoid nexus in destination states may find the throwback rule erases much of the expected tax savings.
Apportionment Factor Planning
Proactive planning around apportionment includes structuring operations to minimize the payroll and property factors in high-tax states, tracking sales by destination accurately so sourcing positions are defensible on audit, reviewing whether the home state applies throwback and whether nexus in destination states can reduce or eliminate throwback exposure, and considering how entity structure (separate vs. combined/consolidated reporting) affects the group’s overall apportionment across states that require or permit unitary filing.
Step Three: PTET Elections and the SALT Cap
The Problem With the Individual SALT Cap
Individual owners of pass-through entities, S corporations, partnerships, and sole proprietorships deduct state and local taxes on their personal returns. The OBBBA raised the federal SALT cap to $40,400 for 2026, but that cap phases out for high earners (reducing by 30 cents for every dollar of MAGI above $505,000, with a floor of $10,000). For business owners with significant multistate SALT obligations, the cap still bites hard.
How PTET Works
Pass-through entity tax elections allow an eligible business entity to pay state income taxes at the entity level. The entity gets a full federal deduction for the state tax paid, because the deduction flows through as an ordinary business expense, not a personal itemized deduction subject to the cap. Owners receive a corresponding state-level credit or income exclusion that prevents double taxation.
The PTET workaround survived the OBBBA with no restrictions added. More than 30 states now offer PTET regimes, though the mechanics, deadlines, and credit structures differ by state. Some states require an annual election by a fixed date; others allow a standing election. Some require unanimous consent of all owners; others allow a majority election.
For pass-through owners in high-tax states like California, New York, and New Jersey, and for any business with significant state income tax burdens, the PTET election analysis is one of the highest-value planning items on the annual tax calendar.
Step Four: Ongoing Compliance Infrastructure
Registrations and Filing Obligations
Every state where a business has nexus requires registration with the relevant tax authority, and often with the Secretary of State or equivalent for foreign qualification. Separate registrations typically exist for sales tax, income tax, and payroll withholding. Tracking registrations, renewal deadlines, and filing frequencies across multiple states is operationally complex and a common source of penalties for growing mid-market businesses.
Nexus Monitoring as the Business Grows
Nexus exposure changes whenever the business hires, opens a new market, signs a new distributor, stores inventory in a fulfillment center, or begins selling into a new state via a marketplace facilitator. Annual nexus reviews that account for current business activity are more reliable than one-time assessments done at company formation.
Marketplace facilitator laws now require platforms like Amazon, eBay, and Shopify to collect and remit sales tax on behalf of sellers in most states. This reduces compliance burden for sellers, but it does not eliminate nexus analysis, because the seller’s own direct sales and income tax obligations remain separate.
Technology and Automation
Tax technology platforms automate rate determination, filing, and remittance for sales tax across multiple states. For income and franchise taxes, multistate compliance software helps track apportionment factors and filing deadlines. A well-designed SALT planning program integrates these tools with the company’s financial data so that nexus monitoring and apportionment tracking are continuous rather than a once-a-year scramble at filing time.
Modus’s AI-native approach to tax advisory means SALT data is organized and searchable throughout the year, not just assembled at the deadline. For clients managing exposure in 10 or 20 states, this reduces the cost of compliance and surfaces planning opportunities faster.
Frequently Asked Questions
What is nexus, and why does it matter for state taxes?
Nexus is the legal connection between a business and a state that allows the state to impose taxes. Without nexus, a state cannot require you to collect sales tax, file an income tax return, or pay franchise taxes. After the *Wayfair* decision in 2018, physical presence is no longer required for sales tax nexus; revenue above a state’s economic threshold is sufficient. Income tax nexus still typically follows physical activity, including employee locations.
How do states tax a multistate business’s income?
States use apportionment to assign a share of total business income to their jurisdiction. Most states now use a single-sales-factor formula, which means only the proportion of sales within the state drives the state’s taxable share of income. Service businesses must also navigate whether each state uses market-based sourcing (where the customer is) or cost-of-performance sourcing (where the work happens), because the two methods can produce different results for the same transaction.
Does the SALT deduction cap affect businesses?
The SALT deduction cap applies to individuals, not to C corporations. For owners of pass-through entities, state income taxes paid personally are subject to the $40,400 cap (for 2026, before the high-income phaseout). Pass-through entity tax (PTET) elections address this by shifting the deduction to the entity level, where it is fully deductible as a business expense.
What is a PTET election and should my business consider one?
A PTET election lets a partnership or S corporation pay state income taxes at the entity level. The entity deducts the payment as a business expense, bypassing the individual SALT cap entirely. Owners receive a state tax credit or income exclusion to avoid double taxation. More than 30 states offer PTET regimes. The election is almost always worth analyzing for pass-through entities in high-tax states or where owners have significant SALT burdens.
What should we do if we discover we have unregistered nexus in a state?
Do not continue to operate without addressing it. Unregistered nexus creates exposure to back taxes, penalties, and interest for all open tax years. A Voluntary Disclosure Agreement (VDA) is usually the most efficient remedy. VDAs typically limit the look-back period to 3 to 4 years, waive penalties, and provide a binding resolution. The Multistate Tax Commission’s MVDP allows companies to approach multiple states at once. Working with a qualified tax advisor before approaching any state is strongly recommended.
How do remote employees affect our state tax obligations?
Every permanent remote employee creates potential nexus in their home state for income tax, payroll withholding, and possibly sales tax. Seven states with “convenience of the employer” rules can also assert the right to tax those wages in the employer’s home state. Businesses that have grown their remote workforces since 2020 and have not updated their nexus analysis are at meaningful audit risk. A current-year nexus review that maps employee locations to state obligations is the right starting point. Modus’s tax advisory team works with growing businesses to build that map and close any gaps.
Filed under: Business Tax & Credits