Income tax nexus
A state can tax a business with sufficient connection ("nexus") to the state. Physical presence (office, employees, inventory) creates nexus. Economic nexus (sales volume above a state-specific threshold) increasingly creates income tax nexus too, though enforcement has lagged behind sales-tax economic nexus.
Sales tax economic nexus
Since the 2018 Wayfair Supreme Court decision, states can require remote sellers to collect sales tax based on sales volume alone — typically $100,000 in sales OR 200 transactions per year (varies by state). Marketplace facilitator laws push collection responsibility to platforms (Amazon, Etsy, eBay) for sales made through them.
Apportionment
A multi-state business apportions income across states using formulas. Most states use "single sales factor" (income apportioned by the percentage of sales sourced to each state). Some still use "three-factor" formulas (sales + payroll + property). The result determines how much income each state can tax.
Pass-through entity considerations
Pass-through entities (partnerships, S-corps, multi-member LLCs) generally file information returns in each state where they have nexus, plus issue state K-1s allocating income to owners. Owners may need to file individual returns in those states (often with a credit for tax paid by the entity).
Compliance tools
Sales tax automation services (Avalara, TaxJar, Anrok) handle multi-state sales tax collection, filing, and remittance. Payroll providers (Gusto, ADP) handle multi-state payroll registration and withholding. Get the right tool early — manually managing 10+ state filings is error-prone and expensive.
Where the IRS publishes guidance on this topic
The IRS publishes a layered set of free resources on most small-business tax topics: a relevant publication (usually one of Pub 334, 463, 535, 587, 946, 560, or 583), the instructions to the relevant form, the "Small Business and Self-Employed Tax Center" landing pages on IRS.gov, and the Audit Techniques Guides written for IRS examiners. Reading the agency's own materials is the cheapest tax education available. They are written in plain English, updated annually, and they reflect exactly the framework an examiner will apply if your return is selected.
How experienced filers approach this
Experienced self-employed filers and the CPAs who advise them treat this question as a recurring planning exercise rather than a one-time decision. They model the multi-year tax impact rather than just the current year, document the reasoning in a short workpaper that survives staff turnover and software changes, and revisit the analysis annually as facts and laws change. The discipline is not difficult — a half-day in January with last year's return, the current-year IRS publications, and a spreadsheet — but it is rare among DIY filers, which is precisely why it produces outsized results.