For many companies, “multistate tax” trouble starts quietly: a remote hire in Denver, inventory parked at an Amazon fulfillment center in Phoenix, or a successful Cyber Monday that pushes receipts past an out-of-state threshold. After South Dakota v. Wayfair (2018), states no longer need your bricks and mortar to tax you; economic nexus—mere sales volume or transaction count—can be enough to trigger sales/use tax collection duties and, in many jurisdictions, income/franchise or gross-receipts filing obligations will follow. South Dakota’s economic nexus law (upheld by the U.S. Supreme Court) became the template for today’s thresholds across the country. The practical result: you can create tax exposure in a state you’ve never set foot in purely by having sufficient “economic contacts” with it.
Companies with California state customers face additional, well-defined “factor-presence” tests under Cal. Rev. & Tax. Code §23101. You are “doing business” (and thus have an income/franchise-tax filing obligation) if your California sales, property, or payroll exceed annually indexed amounts—even without any physical presence. For 2024, the sales threshold is $735,019 (or 25% of total sales, if lower); property and payroll thresholds are $73,502 each. Many businesses trip these thresholds after registering for California sales tax or marketplace facilitator compliance, because agencies cross-match registration data. California state also uses market-based sourcing for services and intangibles, so receipts are assigned to the state where your customer receives the benefit, not where your employees sit—another common surprise for SaaS and service providers.
Common Triggers that Create Multistate Exposure (and High-risk Tax Audits)
- Economic-nexus thresholds and marketplace rules: Nearly every sales-tax state now enforces receipts/transactions thresholds; marketplace-facilitator laws (like California’s) require platforms to collect and remit on third-party sales and have spawned routine nexus questionnaires to sellers. Registering to collect sales tax often places your EIN on additional state radar for income/franchise filings.
- Inventory or fulfillment arrangements: Storing goods in a third-party warehouse (e.g., FBA) usually creates physical nexus for sales tax and often for income/gross-receipts taxes, regardless of your office location. States receive location reports from facilitators and routinely open audits of those feeds.
- Remote employees and telework: A single out-of-state employee can establish nexus for the employer, triggering corporate filings and payroll withholding in that state. COVID-era relief has ended in most jurisdictions; sourcing wages to the work location applies again. California’s 2025 DE-44 confirms withholding rules for residents and nonresidents performing services in-state.
- Affiliate/click-through relationships and online advertising: Revenue-sharing, referral, and affiliate agreements can create “affiliate nexus” in several states and also produce additional taxable gross receipts the IRS (and states) expect to see reported—something auditors now probe as a matter of course in e-commerce files. (Marketplace and 1099-K/NEC data make omissions easy to spot.)
- Apportionment and throwback/throwout: Even when you file correctly, where your receipts land can swing tax. California applies the Finnigan approach to throwback for tangible goods and market-based rules for services/intangibles; missing a filing in a destination state can “throwback” sales to the origin state and spike your sales-factor numerator. Multistate groups must mind unitary combined reporting (required in many states, including California) and, in California, the water’s-edge election under R&TC §25110, which limits the combined group to specified ‘water’s-edge’ members instead of worldwide affiliates.
- P.L. 86-272 and internet activities: The federal safe harbor that protects out-of-state sellers of tangible goods when their only in-state activity is solicitation is eroding online. New York has formally adopted rules narrowing 86-272 for certain internet activities (upheld prospectively by a New York trial court in 2025), while California’s attempt to enforce similar guidance via a technical memo was struck down as an “underground regulation” (though the FTB continues to litigate positions case by case). Bottom line: customer-facing web features (chat, post-sale support, cookies) can defeat 86-272 in some states, driving unexpected income-tax liability even without physical presence.
Why Sales Tax Problems Become Income/Franchise Problems
Wayfair-era registration in California often starts with sales/use tax but rarely ends there. If your remote sales into California exceed $500,000 in a year, you generally must register with CDTFA and collect/use tax (and marketplace facilitators meeting the same threshold must collect for their third-party sellers). Once you register for a seller’s permit, expect follow-up from the Franchise Tax Board: California asserts “doing business” status—and thus corporate income/franchise tax filing—whenever you exceed the state’s factor-presence thresholds under R&TC §23101(b) (sales, property, or payroll; amounts are annually indexed) even if you have no office or employees in the state. For services and intangibles, California uses market-based sourcing (R&TC §25136; Reg. §25136-2), so receipts are assigned to California if the customer benefits here.
What to Do if You See the Warning Signs
Most multistate problems begin with data trails: marketplace facilitator filings, 1099-K/NEC reporting, FBA inventory locations, payroll registrations, or even a single W-2 issued in a new state. From there, notices trigger nexus questionnaires, requests for prior-year returns, and—if missing—estimated assessments. Suppose your apportionment was incorrect (e.g., services sourced to the wrong state). In that case, throwback rules or market-based sourcing can backfill liability, while missed gross-receipts regimes can lead to separate assessments. And because federal and California state agencies share information, a state assessment can boomerang into an IRS exam (and vice versa) when receipts and filings don’t reconcile. (California’s FTB/CDTFA/EDD frequently coordinate in parallel.) Here is what to do if you see the warning signs:
- Don’t self-incriminate through ad-hoc responses: Nexus questionnaires and marketplace letters may look harmless; they are not. Answering before you understand your exposure can forfeit your best options.
- Use voluntary disclosure (VDA) strategically: Many states will limit look-back (often 3–4 years) and waive penalties if you come forward before you are on their radar.
- Automate sales-tax compliance: After Wayfair, manual tracking is a liability. We recommend TaxJar or an equivalent service, to monitor thresholds, compute correct rates, and file returns—creating the contemporaneous records that support reasonable-cause penalty abatement.
- Coordinate the income/franchise side: Model P.L. 86-272 exposure (and state-specific internet-activity rules), choose the correct apportionment positions, and file protective returns to stop throwback and close statutes.
Contact the Tax Law Offices of David W. Klasing if Multistate Questions Are Turning Into Notices
At the Tax Law Offices of David W. Klasing, you get a single team of dual-licensed Tax Attorneys & CPAs that handles the entire multistate problem—from sales-tax nexus and marketplace facilitator questions to income/franchise, gross-receipts, and payroll fallout. We start with a privilege-protected Nexus & Exposure Study that maps where you’ve crossed economic or physical nexus (inventory, remote staff, affiliates), tests your activities against P.L. 86-272 (including the emerging internet-activity limits), and recalculates apportionment under market-based rules so you know precisely which states can assert what. Then we build an action plan: anonymous VDAs to cap look-back and erase penalties; TaxJar implementation so sales-tax tracking and filing run in the background; protective income/franchise filings to neutralize throwback; and, where needed, water’s-edge and unitary-group planning in California to avoid over-inclusion. Every step is run under attorney–client and Kovel protections, so sensitive fact-gathering stays confidential.
If you’ve already received a nexus questionnaire, marketplace inquiry, or assessment—or you’re about to register for sales tax in a new state—talk to us before you speak to them. We’ll maintain a strictly civil engagement, coordinate with FTB/CDTFA/EDD and the IRS to prevent cascading resolutions, and deliver a privileged roadmap that focuses on damage control, finality, and business continuity. Call 800-681-1295 or contact us online HERE to schedule a reduced-rate initial consultation. We’ll help you turn multistate chaos into a manageable, compliant footprint—without paying a dollar more than the law requires.