Multi-State Income Tax Nexus: What Business Owners and Controllers Should Know

“Nexus” refers to the degree of connection between a business and a state that allows the state to impose its tax authority on the business. While the concept is often discussed in the context of sales and use tax, the same foundational idea applies to income, franchise and excise taxes.

For income tax nexus specifically, many states use a “factor-presence” standard (such as property, payroll or sales within the state) or an economic presence standard, rather than physical presence.

Why does this matter? Because if your business meets nexus in a state, you may need to:

• File a corporate income or franchise tax return in that state
• Allocate/apportion income to the state
• Pay minimum taxes or fees even if you are not yet profitable

1. Unexpected Filing Obligations: If you assume a state is irrelevant because you don’t have a physical office there, you may still trigger income tax nexus through remote sales, payroll, property or other activities. States are increasingly aggressive.
2. Back-Tax Exposure & Penalties: If you should have filed and didn’t, you may face late-filing interest, penalties, and audit exposure. A proactive nexus study can prevent this.
3. Unintended Minimum Fees: Even if your business isn’t paying much in tax, many states impose minimum franchise or unitary tax fees just for being subject to the jurisdiction.
4. Complexity of Multi-State Apportionment: Once you’re filing in multiple states, you’ll need to allocate income, follow varied rules, and comply with multiple filing deadlines. Missed deadlines involves risk.
5. Sales Tax vs. Income Tax Confusion: Many businesses focus on sales tax nexus and assume that income tax nexus must be the same, but they’re not. Each state treats income tax nexus differently.

It’s critical to differentiate:

• Income tax nexus typically relates to net income of a corporation or pass-through business and is based on business activities in the state.
• Franchise / excise taxes may be imposed simply for the privilege of doing business in a state (or on capital/receipts) and may not correlate to profitability.
  • Example: In Minnesota, the “corporation franchise tax” applies to companies that have business presence in Minnesota or Minnesota-gross income. Minnesota Department of Revenue+1
• Sales/use tax nexus is a related but separate concept that is focused on whether you must collect and remit sales tax because you sold goods/services into a state. Many businesses confuse the rules.

Bottom line: Just because you don’t have to collect sales tax in a state doesn’t mean you’re off the hook for income, franchise or excise tax filings in that state. Each tax has its own nexus triggers and filing requirements.

While we won’t dive into every state, many states nearby adopt different variations. For example, some states allow only minimal solicitation under the protection of Public Law 86‑272 for tangible personal property, while others may have broader nexus standards including services, etc. In Minnesota, for instance, Mn Tax Court recently rejected a company’s reliance on P.L. 86-272, indicating that even solicitation can trigger nexus if other factors exist.

This underscores the need for custom review. You cannot assume uniformity across states.

Minnesota

For companies doing business in Minnesota the nexus rules require careful review:

• The Minnesota Department of Revenue (MnDOR) uses economic presence as part of its income tax nexus standard.
• For sales tax (separate but illustrative), Minnesota has economic nexus thresholds: more than $100,000 in gross sales or 200+ transactions in the prior 12-month period triggers registration.
• On income tax side: Minnesota uses “single sales factor” apportionment (only the sales factor matters for the most part) rather than a three-factor formula. Minnesota House of Representatives+1
• For franchise tax purposes, a partnership, S-Corporation or C-corporation that either is “located in Minnesota,” “has a business presence,” or “has Minnesota gross income” is subject to a minimum fee.
  Minnesota Department of Revenue

Client pain point example: A business based just outside Minnesota may assume it’s safe because no office is in Minnesota, but if it has sales into Minnesota or uses Minnesota-based agents, it could still trigger nexus, and that means decision-makers must plan for filing obligations, potential minimum fees, and apportionment work.

California

The rules in California highlight both how states can broadly interpret nexus and the complexity of multi-state compliance:

• Under California Franchise Tax Board/other guidance, a business is considered “doing business in California” if it meets any of: sales in California exceed a dollar threshold (lesser of X or 25% of total sales), property in California exceeds a threshold, or payroll in California exceeds a threshold.
• California also uses an economic nexus threshold for sales/use tax of $500,000 of tangible personal property delivered into California (current/prior year) for out-of-state sellers.
• Even if a business qualifies for the protection of P.L. 86-272 for income tax purposes (solicitation of orders only), California may still assess minimum fees or unitary taxes because “doing business” triggers differently.
  • Example: A business that sells only tangible personal property into California might be exempt from net income tax via P.L. 86-272 but could still be subject to California’s minimum franchise fee (such as the “minimum tax” for corporations doing business in California).

Take-away: California’s nexus rules illustrate that different tax types (income vs. franchise vs. sales) each have their own thresholds, and crossing one state’s economic nexus threshold could trigger multi-tax obligations.

At Froehling Anderson, we bring a client-centric, process-oriented approach to multi-state filings:

1. Diagnostic Nexus Study

We begin by mapping your business activities (sales flows, property, payroll, agents/contractors, warehouses, affiliates, remote employees) across states to determine where nexus may exist for income, franchise, excise and sales tax filings.

Example: Even if your physical presence is only in Minnesota, remote employees in other states, e-commerce shipments, or contract sales agents may trigger nexus elsewhere.

2. Prior-Period Risk Assessment

We review past periods (typically 3–5 years) to ask: Did you already have nexus in a state and fail to file? If yes, we analyze back-filing risk, penalties, and strategies like voluntary disclosure.

3. Filing Plan & Timeline

We build a clear multi-year filing roadmap: which states to file, what forms, what apportionment rules apply (single-sales vs. three-factor vs. receipts-only), minimum taxes/fees, estimated tax payments, deadlines and budget impacts.

In Minnesota, for instance, we’d consider the single sales factor apportionment and monitor whether property or payroll triggers add risk.

4. Ongoing Monitoring & Compliance Maintenance

We help your team track changes in your business (e.g., entering new states, adding remote employees or warehouses, increased sales into a state) and update the nexus map accordingly. States revise rules and thresholds frequently.

5. Client-Education & Training

We provide your finance/operations teams with understandable briefs and templates (e.g., annual nexus questionnaire, internal dashboards for tracking state activities, internal “nexus hit-list” summaries).

Our aim: empower your teams to flag potential state tax triggers before they become liabilities.

6. Local Presence + National Reach

As strategic accountants based in Minneapolis and St. Cloud, Minnesota, we combine strong regional knowledge of our home state with active coordination with national SALT (State & Local Tax) networks. This means if your business expands beyond Minnesota into multiple states, we align your filings across jurisdictions.

• Clients assume no filing needed because they have no “physical office”, but remote employees or contractors trigger nexus.
• Surprise state notices for minimum taxes/fees because filings weren’t initiated.
• Internal chaos when multiple business lines touch multiple states without centralized tracking.
• Difficulty reconciling different state apportionment formulas, deadlines and penalty rules.
• Keeping up with changing nexus standards (economic threshold rules, factor-presence standards, P.L. 86-272 interpretations).

Froehling Anderson, brings structure and process; research checklists, internal stakeholder alignment (partners, senior managers, tax team, BD pipeline), and ongoing monitoring to make multi-state filings manageable rather than chaotic.

• Conduct a nexus questionnaire for your business this quarter: map all states where you have sales, employees, property, agents, or contractors.
• Identify states where you may have triggered income/franchise tax nexus and check whether prior-period filings are required.
• Establish a nexus-monitoring dashboard: track new states entered, employees relocating, remote work footprint, warehousing/fulfillment changes, sales thresholds exceeded.
• Engage your CPA team early to build your state-tax roadmap ahead of your next fiscal year filing cycle.
• Educate internal stakeholders: operations, sales, logistics, and HR all have nexus-impacting roles. Ensure they understand triggers and escalate when state entry or footprint changes.

For business owners, controllers and CFOs managing operations across state lines, nexus is no longer simply a sales-tax issue; it spans income, franchise and excise taxes, varying by state, and can create significant exposure if overlooked. With the right process, expertise and regional partnership, your business can proactively control multi-state tax risk.

Our team of dedicated and committed professionals are ready to help you build a robust multi-state tax compliance framework tailored to your business.

• Minnesota Department of Revenue+1
• Minnesota House of Representatives+1

Disclaimer: The information provided here is accurate at the time of publication but may change as laws and regulations evolve. While Froehling Anderson aims to share accurate, timely information, we encourage you to reach out to your relationship manager for guidance on your specific situation.

Additionally, this content is for informational purposes only and does not constitute legal, tax, or audit advice. Please consult with your CPA for guidance tailored to your situation.