Guides
Part of 7 points worth checking on state business tax
State Business Tax Review: Compare Footprint and Filings
State business tax review, made practical: compare your footprint with filed returns, investigate gaps, and check state apportionment and filing records.
A state business tax review is not reading a return. It means comparing two lists: states that have a claim on your business, and states you actually filed in.
The review is the difference between them, in both directions, plus a closer look at each return that survives the comparison. USA.gov's state taxes overview maps what a state can levy, worth knowing before you compare.
Mileage logs and deduction records belong with this review. If you claim vehicle expenses or business mileage, the dates, destinations and business purpose in those records can support where work was done. That location fact also feeds the state footprint.
Keep state totals for mileage and deductions with the return copies you use here. The tax, deduction and mileage records should tell one story. When they do not, either the state footprint or the deduction support is incomplete.
What to take away
- List A is where you have people, property, inventory, sales, contractors or registrations. List B is where you filed. Review the gap.
- Across states, the same income should be divided up, not double-counted or lost.
- Every state acknowledgment, notice and annual report belongs in one place, read within a week of arriving.
- Which states can claim what is their rule, on their own pages. A CPA decides whether it reaches you. Nothing here is a state's rule.
Build list A: the footprint
Write it by state, from documents rather than memory.
Build list A
- Peoplewhere each employee and each owner physically works, including anyone remote, temporary or on a long job away from base.
- Propertyoffices, storage, equipment, and inventory, including stock held in someone else's warehouse.
- Salesrevenue by delivery address for goods and by service location for services. Your invoicing system holds this even if you have never looked.
- Contractors and agents acting for you.
- Registrations already on filewith the business filing office, the department of revenue, and the unemployment agency.
- Movement during the yearhires, departures, moves, new markets.
Treat nexus questions by tax, not as one yes-or-no decision. South Dakota v. Wayfair, Inc. is the Supreme Court case associated with sales-tax economic nexus. South Dakota's annual threshold in the opinion was more than $100,000 of goods or services delivered into South Dakota, or 200 or more separate transactions for delivery into the state on an annual basis. That was South Dakota's threshold in the case, not a nationwide rule; check each state's rule for the tax at issue.
Also check the federal statute called the Public Law 86-272 Interstate Commerce Tax Act (15 USC 381-384). It can limit state net-income taxation in certain solicitation cases involving tangible personal property, but it does not settle sales-tax nexus.
Make the comparison concrete with named records. For a California corporation, identify the California Franchise Tax Board Form 100 (Corporation Franchise or Income Tax Return), California Department of Tax and Fee Administration sales-and-use-tax account and returns, California Employment Development Department DE 9 and DE 9C payroll-tax returns, and the California Secretary of State Statement of Information; for Texas franchise-tax records, name the Texas Comptroller of Public Accounts. These are examples, not a nationwide form set; match the state and entity type before calling a filing missing.
Build list B: what was filed
Build list B
| State | Registrations held | Returns filed | Annual report | Notices received |
|---|---|---|---|---|
| One row per state | Entity, revenue, employment | By tax type | Filed and when | Read and answered? |
If you cannot fill the table from documents in your own possession, that is the first finding. Ask your preparer and your payroll provider for their copies, then keep your own.
Build List B: Filed
- One row per state
- Registrations heldentity, revenue, employment
- Returns filed by tax type
- Annual report filed and when
- Notices receivedread and answered?
Compare the lists
- On A but not on Ba possible unfiled obligation. Take it to a CPA. Do not register in a panic; find out first whether the obligation is real.
- On B but not on Aprobably a stale registration you are still filing empty returns for. Ask what closing it requires.
- On bothreview the return itself, below.
Reviewing one state return
- Does the entity type on the state return match the federal one, and if not, was that deliberate? The entity tax treatment page explains why a state may classify you differently.
- Does the starting income figure reconcile to the federal return, with each state adjustment named?
- Do the inputs used to divide income between states, such as sales, payroll and property by location, match list A? They should be the same facts. UDITPA (Uniform Division of Income for Tax Purposes Act) and the Multistate Tax Commission's model apportionment materials are reference points: states can change the factor mix, weights, and sourcing rules, so check the actual state schedule.
- Do the taxable-sales totals on the sales tax filings reconcile to your revenue by state?
- Does withholding filed with the state match the payroll register by work location? For California, reconcile California EDD's DE 9 and DE 9C; elsewhere, identify the state's equivalent employer filings.
- Were payments credited, and were due dates met? Compare to the tax deadlines the state publishes, not to the federal ones.
Reviewing the preparer's state work
- How did you decide the list of states? Which did you consider and reject?
- What changed from last year, and why?
- Which notices did you receive on my behalf, and where are they?
- Which state figures did you estimate rather than take from a record?
- Where does your responsibility end and the payroll provider's begin?
A preparer who can answer the first question with a written list has done a nexus review. A preparer who answers "the same states as last year" has done something else.
Where to check
| Source | Use it for |
|---|---|
| Each state's department of revenue | Filing history, account status, and the rule the return was prepared under |
| Each state's business filing office | Whether the entity is in good standing and the annual report is current |
| Your payroll provider's state filings | The withholding side of list B |
| A CPA licensed in the state | Whether a gap between the lists is a real obligation |
Reaching each department is the tedious part, and the IRS's directory of state government tax sites removes most of it.
The state business tax overview covers the kinds of obligation the review is looking for.
Common questions
How often should this be done?
Once a year in full, and the list-A part whenever something moves: a hire, a warehouse, a new market, a departure.
I received a notice from a state I have never filed in.
Do not ignore it and do not pay it blind. Find out why the state thinks you are there: an employee's address, a marketplace report, a contractor's filing. Then take the notice and the reason to a CPA.
Can I avoid all this by filing in every state?
No. Filing creates obligations and costs of its own, and states do not thank you for returns you did not owe.
My business passes income through to me. Do I still owe the state anything at the entity level?
Some states tax the entity regardless. Check the state agency's official guidance for your entity type—for example, the California Franchise Tax Board or the Texas Comptroller of Public Accounts; federal pass-through treatment does not settle state entity-level tax.
