State Tax Legislation for Businesses: Income Tax, Nexus & Franchise Fees

Federal classification is only half the compliance picture; every state where a business has a taxable connection imposes its own overlapping rules. Because rates, thresholds, and entity-level fees differ by jurisdiction — and because legislatures amend them yearly — the operative skill for any multistate operator is mapping where obligations are triggered and what each state charges. The figures below are representative and should be verified against current statutes before filing.

The State Income-Tax Landscape

A handful of states impose no broad-based individual income tax: Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming levy none, while Washington taxes only certain capital gains and New Hampshire has been phasing out its tax on interest and dividends. The remaining states use either a flat rate or graduated brackets, and most tax pass-through income (from LLCs, S-corps, and partnerships) on the owner’s state return.

Operating in a no-income-tax state does not eliminate state-level cost, because those states frequently recover revenue through gross-receipts taxes, franchise fees, or higher sales-tax regimes. The absence of an income tax should therefore be weighed against the full basket of state levies, not treated as a blanket savings.

Representative State Entity-Cost Matrix

The matrix contrasts how several states tax businesses; verify current rates before relying on them.

Economic Nexus and the Wayfair Standard

Before 2018, a business generally needed physical presence in a state to be required to collect its sales tax. The Supreme Court’s decision in South Dakota v. Wayfair overturned that rule and authorized economic nexus — an obligation based purely on sales volume into a state. Most states adopted thresholds modeled on South Dakota’s: $100,000 in annual sales or 200 separate transactions, though the exact figure varies.

Once a seller crosses a state’s threshold, it must register, collect, and remit that state’s sales tax. Marketplace facilitator laws shift collection to platforms such as Amazon or Etsy for sales made through them, but direct sales remain the seller’s responsibility. E-commerce businesses must therefore monitor cumulative sales by state continuously rather than annually.

Franchise and Entity-Level Taxes

Many states impose taxes that exist independent of profit. California levies an $800 minimum annual franchise tax on LLCs and corporations doing business there, plus a graduated gross-receipts fee on LLCs above defined revenue tiers. Delaware, the dominant incorporation state, charges an annual franchise tax and report. Texas imposes a franchise “margin” tax measured on margin rather than net income despite having no personal income tax.

Gross-receipts regimes are a related category: Washington’s Business and Occupation (B&O) tax and Ohio’s Commercial Activity Tax apply to revenue regardless of profitability. Because all of these are decoupled from income, a business can owe meaningful state tax in a year it reports a federal loss.

Pass-Through Entity Tax (PTET) and the SALT-Cap Workaround

The 2017 federal cap limiting the state-and-local-tax (SALT) itemized deduction to $10,000 prompted most states to enact an elective pass-through entity tax. Under PTET, an S-corp or partnership pays state income tax at the entity level — a fully deductible business expense for federal purposes — and the owners receive a corresponding state credit, effectively restoring the SALT benefit the cap removed.

More than thirty states have adopted some form of PTET, but the election mechanics, deadlines, and credit calculations differ in every one. Owners of multistate pass-throughs should evaluate each state’s PTET annually, because the election is often made at the entity level and can be missed if not calendared.