What determines when a state or local government can tax you? In a word, “nexus”, or a substantial connection or link to a state. For most taxpayers, that means physical presence, which may be achieved by having property in the state, renting space, or having employees with a permanent office. If you do not have nexus with the state, even though you ship goods there via common carrier (FedEx, UPS, etc.) or have traveling salesmen or independent sales representatives that canvas the state, it is unlikely that the state would have the right to tax you. If you do have nexus with a state, you will need to file annual income tax returns and allocate a portion of your overall income based on a number of factors. Your state tax burden usually doesn’t increase dramatically due to having nexus in a number of states, because as you allocate income to another state you also allocate income away from your home state.

Nexus also applies to Sales & Use Tax. If you have nexus with a state and you sell items that are subject to sales tax, you will need to register as a sales tax vendor, charge sales tax to customers in that state and remit the funds to the state government. So if your main office with 100 employees is in California but you also have a warehouse in New Jersey, you would need to collect and pay in New Jersey sales tax on goods shipped to New Jersey customers.