Introduction
The rise of remote work and cloud-based services has made state tax nexus a more common and complicated issue for service providers. Nexus determines whether a state can require a business to collect sales tax, pay income tax, withhold payroll taxes, or meet other tax filing requirements. For remote service providers, nexus can arise from a single remote employee, independent contractors, significant sales into the state, or relationships with in-state affiliates. Understanding how and when nexus is created — and the differences among states — is essential to avoid back taxes, penalties, and audits.
Why nexus matters for remote service providers
Nexus is the legal hook states use to assert tax authority. When nexus exists, a business may need to:
- Register with the state tax authority.
- Collect and remit sales or use tax for taxable services or goods delivered to customers in that state.
- File corporate or income tax returns and pay state income/franchise taxes.
- Withhold and remit payroll taxes for employees working in that state.
Ignoring nexus can result in unpaid taxes, interest, penalties, and costly multi-state audits.
A quick legal landmark: Wayfair and the rise of economic nexus
The U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018) removed the strict physical-presence rule for sales tax collection and allowed states to impose sales tax obligations based on economic activity. Many states adopted “economic nexus” rules modeled after South Dakota’s thresholds. (See the full decision: https://www.supremecourt.gov/opinions/17pdf/17-494_lkgn.pdf.)
Types of nexus remote service providers should watch
1) Physical-presence nexus
Physical presence still creates nexus. For a remote services firm that can include:
- A remote employee (W-2) working from an in-state location.
- A leased desk or office space.
- Inventory or servers located in the state.
- Company equipment or contractors regularly performing work on-site.
Many states treat in-state employees as sufficient to establish nexus for sales tax, payroll withholding, and income tax apportionment.
2) Economic nexus
Economic nexus is based on the level of sales or number of transactions in a state — rather than physical presence. States typically set thresholds such as a dollar amount of sales or a number of transactions over a look-back period (commonly the current or prior calendar year). The most common template is $100,000 in receipts or 200 transactions, but states vary, and several jurisdictions use different dollar thresholds or transaction counts. Always check the specific state rule before assuming a threshold applies.
3) Affiliate and click-through nexus
Some states extend nexus to businesses with affiliates, referral arrangements, or in-state agents that help generate sales. Affiliate or click-through nexus rules can bring remote service providers into a state’s tax net if they have closely related entities or marketing/affiliate relationships in that state.
4) Marketplace and digital service rules
States are increasingly taxing digital products, subscriptions, and software-as-a-service (SaaS). Whether a particular service is taxable depends on the state’s definition of taxable services and digital goods. Where sales tax applies to your service, economic nexus or a remote employee can force collection responsibilities.
5) Payroll and income tax withholding nexus
Even if a state doesn’t require sales tax collection for your services, having remote employees in a state can create payroll withholding obligations and state income tax filing responsibilities. Employers must register for withholding, remit payroll taxes, and may have corporate income tax filing obligations under apportionment rules.
How remote work creates nexus: practical scenarios
- One remote employee working from State A: That employee’s presence can create physical-presence nexus, triggering payroll withholding, state income tax withholding for that employee, and possibly business income tax filing obligations.
- Independent contractor performing core services in State B: Some states treat contractors as creating nexus when they perform core business activities, especially if the contractor is effectively an extension of the business.
- Many small sales into State C: Reaching a state’s economic threshold through digital service subscriptions or remote consulting fees can create filing and remittance duties even without employees there.
State-by-state variability: why you can’t assume uniform rules
Nexus rules and how states interpret them differ widely. Some states adopt the $100k/200 transaction standard from South Dakota; others set higher or lower thresholds. States also differ on whether services are taxable, how payroll withholding works for remote employees, and the look-back period used to measure thresholds. For practical guidance on state differences, see the National Conference of State Legislatures (NCSL) summary of sales tax collection by online retailers and state policy variations: https://www.ncsl.org/research/fiscal-policy/sales-tax-collection-by-online-retailers.aspx
Key compliance steps and checklist for remote service providers
1) Map your people and business activities
- Keep a current roster of employee and contractor work locations (city/state) and dates worked remotely.
- Track servers, office spaces, and company property locations.
2) Monitor revenue and transaction counts by state
- Build or request reporting from your accounting system that shows receipts, transactions, and customer locations by state.
- Review these numbers monthly and more formally each quarter.
3) Review whether your services are taxable in target states
- Determine which states tax services similar to yours (consult state tax bulletins and FinHelp’s guide on taxable services).
4) Register proactively when a threshold or presence occurs
- Register with the state’s tax authority for sales tax, payroll withholding, or corporate income tax as needed. Registration dates matter: back taxes and penalties can be substantial.
5) Use voluntary disclosure programs when you have unfiled liabilities
- Many states offer voluntary disclosure or amnesty programs that reduce penalties and limit look-back periods if you come forward voluntarily. See FinHelp’s resource on State Voluntary Disclosure Programs for more on this option: https://finhelp.io/glossary/state-voluntary-disclosure-programs/
6) Consult a multi-state tax specialist
- A CPA or tax attorney experienced in multi-state tax issues can help you interpret state rules, apply apportionment formulas, and choose registration strategies that limit exposure.
Common misconceptions and pitfalls
- “No office, no nexus.” Not true after Wayfair: economic nexus or remote employees can create an obligation.
- “Independent contractors never create nexus.” In many states contractors can create nexus if they perform core business activities or act similarly to employees.
- “Only sales tax matters.” Remote employees often create payroll and corporate income tax obligations in addition to sales/use tax responsibilities.
Practical examples
- Small consulting firm: A consultant with three salaried employees, one working remotely from Florida, discovered they needed payroll registration and withholding in Florida even though the firm has its main office elsewhere. (Employer obligations are commonly triggered by employee work locations.)
- SaaS provider: A SaaS vendor with subscriptions from customers in multiple states hit economic nexus thresholds in two states and had to register and begin collecting sales tax on taxable subscriptions.
Documentation and audit preparedness
Keep contemporaneous records showing where work was performed, client delivery records, invoices showing customer locations, contractor agreements, and payroll reports. States will review these records during audits to determine nexus and back taxes.
When to seek professional help
If you have employees or contractors in multiple states, significant remote sales, or complex affiliate relationships, consult a multi-state tax professional before a state contacts you. Early advice can reduce surprise assessments and help you use voluntary disclosure programs where applicable.
Useful internal resources on FinHelp
- Wayfair Nexus: https://finhelp.io/glossary/wayfair-nexus/
- State tax nexus (remote workers): https://finhelp.io/glossary/state-tax-nexus-remote-workers/
- Economic Nexus: https://finhelp.io/glossary/economic-nexus/
- State Voluntary Disclosure Programs: https://finhelp.io/glossary/state-voluntary-disclosure-programs/
Bottom line
Remote work and digital service delivery have broadened the ways a state can claim taxing authority. For service providers, nexus can arise from a single remote employee, contractors who perform core functions, affiliate arrangements, or reaching a state’s economic threshold. Maintain detailed location and revenue records, monitor state thresholds, register where required, and consult a multi-state tax advisor to reduce the risk of penalties and unexpected liabilities.
External authority
For state-by-state summaries and ongoing updates to nexus rules, the National Conference of State Legislatures is a reliable resource: https://www.ncsl.org/.