Your Tax Footprint Is Probably Bigger Than You Think: What Finance Leaders Need to Know About State Nexus

by | Apr 1, 2026 | ASC 740, Events, Federal Tax, Podcast, State and Local, Tax News | 0 comments

A conversation with Marc Gordon, Head of State and Local Tax, and Lindsay Haskell, Partner at TaxOps

There’s a question that keeps CFOs up at night more than a surprise audit: “Do we have nexus somewhere we don’t know about?“

If you’re not sure of the answer, you’re not alone. In the inaugural podcast episode of “Tax Intelligence with TaxOps” Marc Gordon and Lindsay Haskell walk through everything finance leaders need to understand about state nexus — from the basics of what creates it, to managing prior-year exposure, to when a Voluntary Disclosure Agreement is the right strategic move.

Here’s a summary of the conversation.


What Is Nexus, Exactly?

Nexus is a business’s connection to a state — and it’s the threshold a state must clear before it can legally assert tax on your business. There are two kinds.

1. “Physical Nexus” is the more intuitive category. If you have property, payroll, or employees performing activities in a state, you almost certainly have physical nexus — and that triggers both income tax and sales tax obligations. The dollar amounts don’t matter much here; presence is presence.

One important nuance: a federal law called Public Law 86-272 can protect sellers of tangible personal property from income tax nexus even when they have some physical activity in a state. But this protection has been steadily eroding. Recent guidance has found that certain website cookies can eliminate PL 86-272 protection entirely, so sellers relying on this shield need to understand how their website activity might be undercutting it.

2. “Economic Nexus” emerged as a response to the rise of e-commerce. As online retailers grew without physical stores, state sales tax revenues declined sharply. States pushed back, and the issue landed at the Supreme Court.

The landmark South Dakota v. Wayfair decision in 2018 changed everything. It established that a business can have nexus in a state based purely on economic activity — no physical presence required. The bright-line test: $100,000 in sales or 200 separate transactions in a state. Today, every state that has a sales tax has an economic nexus threshold based on this standard.

(Quick memory trick for the five states with no sales tax: “Oh DAMN, No Sales Tax” — Oregon, Delaware, Alaska, Montana, New Hampshire.)

On the income tax side, economic nexus is more complex. The Wayfair ruling doesn’t directly translate to income taxes. Many states rely on a vague “doing business” standard — essentially, are you building and maintaining a market of customers in their state? About 15 states have adopted clearer bright-line tests based on apportionment factors (property, payroll, and sales), which makes analysis much cleaner in those jurisdictions.

The Remote Work Factor

Post-COVID, many companies have a significantly larger tax footprint than they realize. A single remote employee in a new state creates physical nexus — and that exposure doesn’t disappear because management wasn’t aware of it.

A real-world example: one client had an employee relocate to California without telling management. The employee updated their profile in ADP, so California payroll withholding was being paid on $3,000 of wages. California identified the business, and despite having no sales in the state whatsoever, the company still faced an $800 minimum tax filing obligation. For $800, the state came calling.

The lesson: states share data. The Department of Revenue, the Secretary of State, and the employment security department may all be talking to each other. “How will they know?” is not a reliable compliance strategy.

We Think We Have Prior-Year Exposure. Now What?

This is one of the most common questions the TaxOps team hears. The answer starts with data gathering: where are your property, payroll, and sales? How have those changed over time? What’s the apportionment picture for income tax purposes?

From there, the process resembles building a state tax exposure model — running state income tax calculations for the states where nexus may exist, layering in sales tax exposure, and developing a clear picture of the liability across all relevant periods.

One critical point: if you’ve had nexus in a state but haven’t filed, the statute of limitations has never started running. That means exposure can theoretically go back 10 or more years. This is why the look-back analysis matters so much — and why understanding your options before taking any action is essential.

As a practical starting point, TaxOps generally recommends modeling a three-year look-back, while keeping in mind that longer periods may be relevant depending on the facts.

What Is a Voluntary Disclosure Agreement (VDA), and Should You Use One?

A Voluntary Disclosure Agreement is a formal program offered by most states that lets a business proactively come forward, acknowledge prior noncompliance, and resolve the issue under structured terms. The key benefits:

  • Penalty abatement. Penalties typically run 25–50% of the underlying tax liability. On a large sales tax exposure, that’s significant. The larger the liability, the more valuable this benefit becomes.
  • Limited look-back period. Instead of facing 10 years of exposure, a VDA typically limits the look-back to three or four years — sometimes fewer. That can dramatically reduce the total exposure.
  • Anonymity (in many cases). Most VDA programs allow a business to approach a state anonymously through a representative, getting preliminary buy-in on the terms before formally disclosing who they are.
  • A clean slate going forward. Completing a VDA gets all the administrative setup done — account IDs, registration — so you can hit the ground running on prospective compliance.

The most important caveat: a VDA must be initiated before the state contacts you. If you’ve already received a nexus questionnaire, a notice, or have proactively registered in the state, you typically can no longer participate. This also means that if you’re planning to start filing prospectively, be prepared for the possibility that a state may ask when you started doing business there — and understand what that answer means for your options.

VDA or Just File Prospectively? How to Think About the Decision

The right answer depends on the specific circumstances — and it doesn’t have to be the same answer for every state.

Factors pointing toward a VDA:

  • Large or uncertain prior-year exposure
  • An M&A transaction is pending or anticipated (buyers want clean books)
  • The business is growing and expanding its state footprint
  • You want certainty and a formal resolution

Factors pointing toward prospective-only filing:

  • Exposure is small and the cost/benefit doesn’t support a formal VDA process
  • The business is winding down and risk tolerance is higher
  • The look-back period is manageable without a formal agreement

The key is to make the decision intentionally, with a clear picture of the exposure. Doing nothing — or hoping states won’t notice — is a strategy that typically ends badly, especially as companies scale, get acquired, or face increased audit activity.

Key Takeaways

1. Your nexus footprint is probably larger than you think. Physical presence and economic nexus have both expanded significantly in recent years.

2. Remote employees create immediate nexus — regardless of whether management is aware of it.

3. The statute of limitations doesn’t run until you file. Prior-year exposure can go back a decade or more.

4. VDAs offer meaningful benefits — penalty abatement, limited look-back, and often anonymity — but must be initiated before a state contacts you.

5. There’s no one-size-fits-all answer. The right strategy depends on your exposure profile, your growth plans, and your risk appetite.

If today’s post prompted a closer look at your state tax footprint, start by mapping your property, payroll, and sales by state. Then reach out to your tax advisor — or contact the TaxOps team directly at taxops.com/contact — to model the exposure and determine the best path forward.

Listen to the full conversation on Tax Intelligence, available now.

Tax Intelligence with TaxOps

This is the podcast where experienced tax professionals share clear, practical insight on today’s most complex tax issues–from SALT and federal tax strategy to ASC 740, tax minimization, and investment fun considerations. Each month, our experts break down what matters, what’s changing, and how to think strategically about tax–so you can make informed decisions with confidence. Listen today!

About TaxOps

At TaxOps, business tax is all we do. Our teams have the knowledge and focus to solve tax problems with practical tax answers. By hiring our Big Four-veteran leaders and experienced teams, you get tax strategists on your side supporting your strategy wherever business takes you. We deliver the strength, experience, and resources of a national tax brand with the hands-on client engagement of a boutique firm in federal, corporate, state and local and international tax as well as tax minimization strategies for businesses. For an introductory call, visit TaxOps.com/contact.

 

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