When a foreign business establishes a nexus in any U.S. state, it becomes subject to that state’s corporate income tax. In simple terms, “nexus” refers to a connection or presence. Each state has its own definition of what constitutes a nexus. Generally, it includes a business’s physical presence within the jurisdiction as well as other factors, such as the volume of sales or the commercial activities conducted in that state. If a foreign business is determined to have a nexus, the state has the legal right to impose its own taxes on the business.
If a foreign company establishes a nexus in a state, that state will tax the income apportioned to it. Businesses operating in multiple states are generally required to file income tax returns in each of those states.
Some states do not impose a corporate income tax. If your business has a nexus in one of those states, you may not be subject to corporate income tax. However, states that do not collect a corporate income tax often rely on alternative forms of taxation.
For example, Washington does not have a state income tax like many other states. Instead, it imposes a Business & Occupation (B&O) Tax on businesses for the privilege of operating within the state, which is based on gross sales. This B&O tax differs from an income tax, which is imposed on net income; the B&O tax is applied to gross sales instead.
In addition to the B&O tax, several other state taxes are imposed by different states. Therefore, even if some states do not have a corporate income tax, they may not necessarily be the best choice for minimizing taxes. It is important to evaluate tax implications on a case-by-case basis to identify the most advantageous states for tax minimization.