The Tax Bill From the State You’ve Never Been To
The exposure to out of state taxes goes deeper than most small businesses realize.
In 2018, the Supreme Court decided South Dakota v. Wayfair. If you sell anything across state lines — physical products, digital goods, software subscriptions, certain services — it’s one of the most consequential decisions affecting your business in the last decade.
Most small business owners have never heard of it.
The short version: states can now require you to collect and remit sales tax even if your business has no physical presence there. No warehouse. No office. No employees. If you hit certain sales thresholds in a state, that state has a legal claim on a portion of every transaction — and if you haven’t been collecting it, the liability has been accruing in the background since the day you crossed the threshold.
That’s the nexus time bomb. It’s boring. It’s complicated. It has nothing to do with anything your customers would notice. And it’s bigger than most people think.
What Nexus Actually Means
Nexus is the legal term for the connection between your business and a state that gives that state authority to impose tax obligations on you. Before Wayfair, nexus required physical presence. That was settled law for decades.
Wayfair changed it. Economic activity alone is now enough for sales tax. Most states moved quickly to set thresholds — typically $100,000 in annual sales or 200 separate transactions in the state. Cross either one and you have nexus. The obligation starts the day you crossed the threshold, not the day you found out.
Nobody sends you a notice. No light turns on. You just have it.
And here’s what most businesses miss: sales tax is only one piece. Income tax nexus and service taxability have been expanding quietly alongside it, creating a layered exposure that goes well beyond the Wayfair conversation.
The Service Business Blind Spot
A lot of service business owners assume sales tax isn’t their problem. That assumption is increasingly wrong.
Most states don’t tax services by default — but they tax specific ones, and the list has been growing. Repair and maintenance services, landscaping, janitorial, computer and IT services, consulting, staffing, advertising — each state has its own enumerated list, and it changes. Four states (Hawaii, New Mexico, South Dakota, and West Virginia) tax services broadly, with exemptions for specific categories rather than the other way around.
If you provide services in multiple states — including remotely — you need to know how each state treats what you do. The fact that your home state doesn’t tax your service is irrelevant to the analysis in the state where your customer is.
Digital businesses face a parallel problem. SaaS, digital products, streaming subscriptions, downloaded software — states have been racing to address taxability for these categories, and the rules vary sharply. Some states tax SaaS as a service. Some treat it as a software sale. Some don’t tax it at all yet. The analysis is a two-step exercise: first, do you have nexus in the state; second, is what you’re selling taxable there. Getting only one of those right is not enough.
Income Tax Nexus: The Problem Nobody’s Talking About
Sales tax gets most of the attention. But crossing state lines can also trigger state income tax and franchise tax obligations — and the threshold for that exposure is lower than most businesses expect.
Under traditional rules, income tax nexus required physical presence. That standard has eroded in two directions simultaneously.
First, remote employees. Having even one employee working remotely in a state may be sufficient to create nexus and make the business liable for income tax there. When a remote employee works from home, that presence is attributed to the employer — the employee’s home office effectively becomes a company location in the eyes of the state’s tax authority. This means a business that hired one remote employee in Colorado or New Jersey for operational convenience may now have a corporate income tax filing obligation in that state — even if the business has never crossed the sales tax threshold there.
Second, economic nexus has extended beyond sales tax. Some states have applied Wayfair-style logic to income tax, franchise tax, and gross receipts tax — so even if you don’t owe sales tax, you could still owe other types of taxes if you cross economic thresholds.
Service businesses have an additional limitation to understand. Public Law 86-272 is a federal rule that protects businesses from state income taxation when their only in-state activity is soliciting orders for tangible goods. Modern business models — SaaS, digital products, consulting, subscription services — are often not protected by that rule at all. If your business sells services or digital products, the traditional safe harbor that product companies have relied on may not apply to you.
Crossing State Lines Without Realizing It
The common thread across all of these is the same: the exposure isn’t something you decide to create. It’s a consequence of normal business decisions.
You hire a talented developer who lives in another state. You run digital ads that bring in customers from across the country. You service clients remotely in states you’ve never visited. You store inventory through a national fulfillment partner. Each of these decisions makes operational sense. None of them come with a tax notice.
The states aren’t forgiving accumulated exposure — but most have voluntary disclosure programs that allow businesses to come into compliance with reduced back liability. Those programs require you to initiate the process proactively. Once a state finds you first, the leverage shifts.
What the Exposure Actually Looks Like
When a state audits a business and finds unreported sales tax liability, the exposure is the uncollected tax — which you may not have charged customers and will be paying out of margin — plus interest, plus penalties, typically covering three to four years.
Income tax exposure follows a similar pattern: back filings, interest, and penalties for the years the business had nexus but didn’t file. In states with responsible-party statutes, owners and officers can be personally on the hook, not just the entity.
And the law keeps moving. States adjust sales tax thresholds. They add service categories. They update their positions on digital goods. An analysis that was accurate two years ago may not be accurate today. This is not a set-it-and-forget-it compliance area.
Getting Your Arms Around This
Start with a geography audit. Where are your customers? Where are your employees and contractors? Where is your inventory? Those three questions map your potential nexus footprint across sales tax, income tax, and payroll tax simultaneously.
For sales tax, check the economic nexus thresholds in states with significant customer volume — and check whether what you sell is taxable there. Those are separate questions.
For income tax, look at where your remote employees are located. If you have people in high-scrutiny states like California, New York, or New Jersey, understand what that means for your filing obligations.
If you’ve already crossed thresholds in states where you haven’t been filing, talk to a CPA or tax attorney about voluntary disclosure before the state finds you. The proactive path is almost always better.
Sales tax compliance software — Avalara, TaxJar, and others — can automate the collection and remittance side. But software handles the mechanics of compliance. It doesn’t tell you whether you have nexus, whether your service is taxable in a given state, or whether you have income tax obligations you haven’t addressed. Those questions require judgment, not just automation.
The Same Pattern, Every Week
Over four weeks we’ve covered cyber hygiene, contractor classification, operating agreement gaps, and now multi-state tax exposure. The through line is the same every time.
None of these are dramatic failures. They don’t announce themselves. They accumulate quietly — as a consequence of ordinary business decisions made without full information — and they surface at the worst possible moment.
The businesses that find these problems first are the ones that go looking. The ones that don’t tend to find out the hard way.
Mike Lang is a transactional lawyer who writes weekly for founders and family business owners navigating the deals that define their companies. Questions or topics you want covered? Reply to this email.