A primer on nexus — the minimum connection between a taxpayer and a state that allows the state to impose a tax — and how the rise of remote work has complicated it.
Currently, forty-four states and D.C. impose a corporate income tax. The determining factor for the state in which corporations are taxed is called nexus, which is the minimum connection between a taxpayer and a state that allows the state to impose a tax. Traditionally, nexus has been relatively straightforward to determine. Corporations always have nexus in their state of commercial domicile, and non-domiciliary corporations may create nexus if they have physical presence within the state. Physical presence typically means employees, property, or delivery trucks.
In some cases, corporations can be protected under Public Law 86-272, which protects non-domiciliary sellers of tangible personal property if they are in a state for solicitation purposes. Certain states also adopt their own factor-based income tax nexus standards. Under these standards, a non-domiciliary business has nexus in a state if it has property greater than $50,000, payroll greater than $50,000, sales greater than $500,000, or 25% of total property, payroll, and sales within the state.
While these rules all seem clear and easy to implement, they were mostly determined in the twentieth century, before the rise of the digital world. The increase of remote and hybrid employees — especially after the COVID pandemic in 2020 — has complicated the idea of physical presence. As employees continue to work from home, often for companies across state lines, states and corporations face growing uncertainty in determining where nexus is established.