Growing your business beyond state lines is an exciting milestone. A larger market, new opportunities, and the ability to serve more customers await. However, with expansion comes additional responsibilities, particularly in the realm of taxes. Navigating these issues early on can save your business both time and money, ensuring a smoother transition as you grow.

Here are the key tax considerations when expanding your business into other states:

1. Understand Nexus and How It Applies to Your Business

Expanding your business into new states may create a “nexus.” This term refers to a tax connection between your business and a state. State nexus laws vary, but they typically depend on your business’s physical or economic presence, such as having employees, offices, or a significant amount of sales in the state.

For instance, if you open a physical retail location or deploy a sales team in a new state, you’ve likely established a nexus and will need to comply with that state’s tax obligations. Similarly, e-commerce businesses may trigger nexus thresholds if their remote sales volume exceeds state-specific limits (commonly tied to $100,000 in sales or 200 transactions).

Action Tip: Work with a tax professional to review each state’s nexus rules to ensure compliance before expanding operations there.

2. Register for State Tax IDs

Once you determine that your business has nexus in a new state, you’ll need to register for state tax IDs, which are used for income tax, sales tax, or other state-specific levies. Operating without these IDs could lead to penalties, delayed filings, and other roadblocks.

Each state has unique requirements, so you’ll need to research what’s required for your business type and industry before registering. Whether you’re collecting sales tax on goods or withholding payroll taxes for employees in a new state, proper registration is essential.

Action Tip: Visit the new state’s website or engage a professional team to guide you through the registration process.

3. Multistate Payroll Taxes and Compliance

Hiring employees in another state involves more than just adding them to your payroll system. Multistate employment triggers new tax obligations, including state income tax withholding and unemployment insurance tax.

If you have remote employees who work in different states, further complexities arise. For example, some states have reciprocal agreements that allow employees to avoid double taxation, but it’s your responsibility to ensure compliance with these rules.

Action Tip: Partner with a payroll provider familiar with multistate tax laws to help manage withholding and reporting requirements.

4. Sales Tax Collection and Remittance

When expanding to other states, understanding sales tax requirements is critical since each state’s rules differ. Regulations dictate not only whether your business should collect sales tax but also how much, based on jurisdictional differences in rates. Additionally, some states require marketplace facilitators to collect taxes on a seller’s behalf for online sales, which can further complicate things.

Action Tip: Utilize sales tax automation tools and consult with a tax expert to ensure your business collects and remits taxes accurately.

5. State Corporate Income Tax

Operating in multiple states often requires filing corporate income tax returns in those new jurisdictions. This involves determining how much of your earnings come from each state, an area commonly referred to as income “apportionment.” Apportionment varies by location but is often based on a mix of revenue, property, and payroll in the state.

Complexity grows when states with inconsistent apportionment methods are involved. Navigating these discrepancies often requires advanced tax planning.

Action Tip: Take this opportunity to work with a CPA who can guide you on multistate corporate tax filing and apportionment strategies.

6. Tracking Local Tax Obligations

Taxes often extend beyond the state level. Local jurisdictions may have their own taxes, such as business licenses, gross receipts taxes, or additional sales taxes. These taxes vary by city or county and must be managed properly to avoid fines.

Action Tip: Before choosing locations to set up shop, research any local taxes associated with those areas to understand their potential impact on your business finances.

7. Available Tax Incentives for Expanding Businesses

Many states offer tax incentives to attract new businesses or specific industries to their regions. These incentives may include credits, grants, or deductions for hiring locally, investing in specific areas, or creating sustainable practices.

For example, some states provide hiring tax credits when you employ residents of economically distressed zones. Taking the time to investigate such programs can help offset the costs of expansion.

Action Tip: Reach out to state economic development offices to learn about incentives you might qualify for during your expansion process.

8. Staying Up to Date With Changing Tax Laws

Tax regulations are constantly evolving, and staying compliant across multiple states requires monitoring these changes. Any adjustments to nexus thresholds, corporate income tax rules, or sales tax requirements could impact your obligations almost overnight.

Action Tip: Invest in ongoing support from tax consultants or legal experts to help stay compliant across jurisdictions as your business grows.

Expansion Doesn’t Have to Be Daunting

Expanding your business into new states is a critical growth opportunity, but it also presents significant tax challenges. By understanding and addressing key tax considerations like nexus, payroll taxes, and state income tax filings early, you can confidently set up shop in new territories.

At Holbrook & Manter, we specialize in helping growing businesses like yours anticipate and address these tax complexities. Whether it’s identifying potential incentives or managing multistate compliance, our team is here to ensure your expansion is as smooth as possible.

Contact Holbrook & Manter today and partner with a team that’s ready to grow with you. Together, we’ll make your success our priority.