Here is our list of corporate tax rates and rules by states, including conditions for each, as well as no corporate income tax states. Bookmark this handy state corporate tax guide as well as our corporate tax by state blog to make sure you stay aware of the rules, conditions and changes to State Tax Nexus.
“The hardest thing in the world to understand is the income tax.” -Albert Einstein. While Einstein may have been the greatest scientific mind we have ever known, even he was daunted by the complexity of the US tax system. A big portion of this complexity comes from the separation of state and federal governments, and how both have separate powers to tax. Then there are the multiple levels of taxes on all kinds of transactions, and on worldwide income. And nowhere do I find clients get so confused as when it comes to the various state taxes - both income and sales taxes.
We have created this as a 50-State Guide to Taxes, and if you want to skip ahead to the full list it is below Keep in mind that this information changes frequently, so we update this page regularly to have the most current information, but there still may be changes beyond what we’ve seen, so always check the resources directly at the state that we have included below. But if you want to understand the general topics first I am including some basic information here to understand how these taxes are assessed.
Income tax is tax paid on the net income after all expenses have been calculated. Sales tax on the other hand is tax paid on the gross sales amount. Income tax is paid by the company or individual who sells something, whereas technically the sales tax is paid by the purchaser of the good or service, but collected and remitted by the seller. Thus state income tax is usually based on where the company is operating, and sales tax is based on where the purchase is made. But as in all things tax, it is not logical, and things are no longer this simple.
In general, “establishing nexus” means that a business has a substantial enough presence in any particular state for that state to have taxing authority. If a business has activity in a state and has income earned within that state, it may have a requirement to pay tax in a state, regardless of whether it registered to do business in that state. Having a physical presence in the state will normally trigger this nexus automatically, but increasingly states have economic presence standards that mean many companies unknowingly have nexus in additional states.
Yes, the US Constitution places limitations on a state’s jurisdiction to tax. These constitutional limitations derive from two clauses in the US Constitution: the Due Process Clause, in Amendment XIV, Section 1; and the Dormant Commerce Clause, taken from Article 1, Section 8. The nexus requirement of both clauses must be satisfied before an out-of-state business may be subject to tax jurisdiction within a certain state.
There was a Supreme Court case in 2018, South Dakota v. Wayfair, that basically turned the traditional nexus treatments upside down. While this case had sales taxes as the subject matter, it opened a Pandora’s Box in the tax world that has allowed states to redefine who is taxable when doing business in their boundaries, both for income and sales tax purposes.
The Due Process Clause is the part of the Constitution that ensures the government cannot deny anyone of life, liberty, or property without following certain reasonable procedures. Due Process Clause nexus is satisfied when a person has minimum contacts with a state such that maintenance of a lawsuit against the person would not offend “traditional notions of fair play and substantial justice”. This legalese statement is quite a protection for individuals, but when applied businesses", is really broad, because if you are selling to someone in a state, then there probably is some precedent of how that consumer can sue you.
Due process clause nexus is satisfied when the person has a physical presence in a state, but physical presence is not necessarily required to establish Due Process Clause nexus. Even without physical presence in the taxing state, Due Process Clause nexus is satisfied when an out-of- state company’s marketing is purposefully directed toward residents of the taxing state. This can open up income tax nexus to companies merely from running ads in a state, using a state address on your website, and some states have even taken the position that just by offering products or services online that is available to residents of that state that a company does business there. Thus, in the world of eCommerce and SaaS platforms, no web-based company is safe.
The Commerce Clause is the part of the constitution that gives the federal government power to regulate disagreements between the states. The Dormant Commerce Clause refers to the prohibition, implicit in the Commerce Clause, that prevents states from enacting laws that hurt interstate business. The Dormant Commerce Clause limits the reach of a state taxing authority to ensure that state taxation does not unduly burden interstate commerce. A state tax will satisfy the Dormant Commerce Clause if it meets the following four requirements:
- The tax is applied to an activity with a substantial nexus with the taxing state.
- The tax is fairly apportioned.
- The tax does not discriminate against interstate commerce, and
- The tax is fairly related to services provided by a state.
The Dormant Commerce Clause “substantial nexus” requirement is not satisfied when the only contacts of a vendor of tangible goods with the taxing state are by mail or common carrier. However, the substantial nexus requirement can now in certain cases be overcome through a showing of “significant economic presence”. What actually rises to “significant economic presence” varies a lot from state to state. Some states set this threshold to where even $1 in sales theoretically creates nexus. These thresholds have yet to be argued meaningfully in the court system to set precedents for the states to follow.
There is one historical exception to the nexus requirements that still applies, for salespeople operating out of state. This law, PL 86-272, places additional limits on a state’s ability to tax interstate commerce. PL 86-272 prohibits a state from taxing the income of an out of state corporation whose only business activities within a state are “solicitation of orders” for tangible personal property, provided that the orders are sent outside a state for approval by a head office, and the tangible personal property is delivered from out of state. Basically, if you have a team of traveling salespeople and you are selling a product, then you are cool.
However, this exception is very narrow, and really doesn’t apply to any web-based business models like SaaS because it doesn’t cover leased property. It also doesn’t apply to any service business, or even to revenue from servicing goods that are sold in the state. And if the person doing sales is also a director or officer of your company it also probably won’t apply. However, if it does apply to the context, this law does cover both employees and independent contractors working in a state, but with slightly different rules for each.
In July of 2020, the Multi-state Tax Commission (MTC) issued a restatement on when PL 86-272 applies in the digital economy. As per the MTC’s restatement, a number of activities that would have previously been considered protected may now create nexus. Examples of digital activities that violate PL 86-272 include providing customer support via online chat tools, extended warranty plans, advertising job openings, accepting job applications through the Company website, putting specific types of cookies into customer’s devices, and providing remote repairs and automatic device updates. California has already adopting the MTC’s restatement, and other states are sure to follow, although the California law has been challenged in court as of August 2022, so it remains to be seen if this will be upheld.
Sales tax nexus is completely different from income tax nexus. While income tax nexus is focused on the operations of the business including where the business is registered, headquartered, and where it markets and sells their goods and services, sales tax nexus is based on where the buyers are located. Thus if you sell a good or service to someone in a certain state, there may be sales tax nexus, even if there is no income tax nexus.
The Supreme Court case mentioned earlier, South Dakota v. Wayfair, changed how states treat sales taxes. This case overturned an earlier longstanding precedent that required a company have a physical presence in a state in order to collect tax there. Justice Anthony Kennedy, writing for the majority, suggested that South Dakota’s law would survive scrutiny under the Dormant Commerce Clause because of parts of the law that intended to avoid undue burdens on interstate commerce. This included a safe harbor for small sellers, a lack of retroactivity, single state-level administration, uniform definitions of products and services, and software for sellers with immunity for any errors arising from reliance on it. Not all states have followed this guideline, and sometimes small sellers are taxed at an early level with the new state rules, but most states have some reasonable exemption at least for sales taxes.
There is an exception for sales of goods that are delivered from out of state or out of the country via common carrier. However, if you use drop-shipping or a FBA type service, you may be subject to sales tax if the drop shipper has facilities in the state where the goods are stored prior to the final delivery to the customer. Same with employees and agents in the state, this can create a sales tax obligation to sales within that state. If you have workers in that state and need to register for state income tax purposes, as then you are doing business in that state.
Software is a little tricky for sales tax purposes because it originally was considered tangible personal property when sold on discs in a store, but now is downloaded, or is a subscription, as a Software as a Service (SaaS) product. Thus, there are many gray areas and every state has different rules as to how they treat this. Currently, about half of all US states have some sort of a sales tax on SaaS purchases.
Marketplaces have also been targeted in the post-Wayfair tax world. The vast majority of states now have Marketplace Facilitator Sales Tax laws that require online marketplaces to collect and remit sales taxes on behalf of their sellers, with extremely low economic nexus thresholds. This can be a substantial burden to launching a new marketplace as from the beginning compliance must be met on nearly all sales
