Reply to S corporation Tax question (2 states)

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[quote=Anonymous]This is actually not a super straightforward question. Where you incorporate does not matter for state income tax purposes. It maybe useful for other corporate organization reasons, but it won't change your tax liability. 9:45 is not correct. Most major companies are incorporated in Delaware, but they pay income taxes to every state that has such taxes.

States can only tax your income (or require you to pay sales tax) if there is an "economic nexus." It used to mean that you had a physical presence - employees, store, warehouse, etc.  In general, leasing personal property in a state would count as creating a nexus. So you could be liable for state income and sales taxes (plus local taxes) everywhere you did business.

However, for a small business it may be virtually impossible for you to figure out your tax liability without professional help. And, it may be impossible for the state to figure out that you have an economic nexus in their state. So it could make business sense to wait until a state informs you that you have business activity subject to their taxes to file and pay.  It all depends on the scale of your business and risk tolerance.[/quote]

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