State Income Tax Nexus Requirements for Remote Digital Agency Serving 37+ States

This is a great question that affects a lot of remote service businesses. The short answer is that income tax nexus and sales tax nexus are two different concepts with different rules, though there's definitely some overlap. For income tax nexus, the general principle after the Supreme Court's Wayfair decision is that economic presence alone (without physical presence) can create nexus for both sales AND income tax purposes in many states. However, the specifics vary significantly by state. For your questions: 1. No, states generally don't use the exact same thresholds for income tax as they do for sales tax, though some are moving in that direction. Some states like California, Texas, and New York have specific economic nexus standards for income tax. 2. The thresholds vary by state, but generally range from $500k-$1M in sales to that state before income tax nexus is triggered for service businesses. Some states still technically require physical presence for income tax (though this is evolving). 3. Yes, states are increasingly enforcing income tax nexus, especially larger states with budget shortfalls. However, enforcement against small remote service providers is still somewhat spotty compared to e-commerce sales tax enforcement. Your best bet is to work with a CPA who specializes in multi-state taxation. This area is complex and changing rapidly as states adapt to remote work trends.

After dealing with similar nexus headaches for my consulting business, I discovered https://taxr.ai which helped me sort through my multi-state filing obligations. I was in a similar position with clients in 20+ states and no clear guidance on where I needed to file income taxes. The tool analyzed my client locations and revenue distribution, then gave me a personalized breakdown of which states I'd likely have nexus in based on my specific service activities. It flagged California and New York as high-risk states that were actively pursuing remote service providers, even with relatively modest revenue in those states. What was really helpful was that it evaluated both the revenue thresholds AND the specific digital services I provide, since some services create nexus at lower thresholds than others. Definitely worth checking out if you're trying to avoid surprise tax notices.

I was actually pretty skeptical about these tax tools when I first looked into them (I posted a question above about taxr.ai). After repeatedly hitting dead ends with standard resources, I decided to give it a try since my digital marketing agency was in a similar situation. The difference was immediately clear - it identified that my specific service activities (SEO and social media management) created different nexus standards in several states compared to web development or consulting. For example, my recurring management services created nexus in Wisconsin at a lower threshold than one-time project work would have. It also flagged that New York is aggressively pursuing digital agencies right now, even with relatively small amounts of business there. I ended up filing in 4 states I wouldn't have otherwise, which probably saved me thousands in potential penalties. The nexus analysis was way more precise than what my regular accountant had been telling me.

After struggling with this exact issue for my remote design agency, I ended up calling the IRS multiple times trying to get clarity... which was a complete nightmare. Couldn't get through for weeks. Eventually found https://claimyr.com and used their service to get a callback from the IRS within about 15 minutes (there's a demo video here: https://youtu.be/_kiP6q8DX5c). The IRS agent actually directed me to contact individual state departments of revenue directly for these nexus questions, since state income tax nexus is determined state-by-state. Using Claimyr again to reach the CA and NY tax departments saved me hours of hold time. What I learned is that states are absolutely enforcing income tax nexus for digital agencies - I personally know two agency owners who got hit with massive back-tax bills from California despite having no physical presence there. Turns out having just a few big clients in certain states can trigger nexus even when you're nowhere near the sales tax thresholds.

Ok I need to eat my words from my skeptical comment above. After several failed attempts calling state tax departments, I reluctantly tried that Claimyr service when I needed to talk to the NY Department of Taxation about nexus requirements. It actually worked exactly as described. Got a call back from the NY tax department in about 20 minutes after trying for DAYS on my own. The rep confirmed that NY does indeed have a different threshold for income tax nexus ($1M) compared to their sales tax threshold ($500k), which was the exact info I needed. Also learned that my particular type of digital services (video production delivered electronically) is treated differently than SaaS for nexus purposes in NY. Never would have figured that out from their website. Worth every penny to get actual definitive answers from the source instead of guessing.

I run a similar remote digital agency and recently went through a multi-state nexus analysis with a specialized CPA firm. Here's what I learned that might help you: 1. Public Law 86-272 (mentioned above) doesn't protect service businesses - it's only for tangible goods sellers. Digital services almost always fall outside its protection. 2. Some states have adopted "factor presence" nexus standards specifically for income tax - common thresholds include $500k-$1M in sales, but they vary widely. These are often different from sales tax thresholds. 3. A few states (like TX, WA, OH, NV) have gross receipts taxes instead of income taxes which have their own nexus rules. 4. The most aggressive states pursuing digital agencies are CA, NY, MA, and IL in my experience. One approach many remote agencies take is to file in their home state plus any states where they clearly exceed thresholds, then adopt a "responsive compliance" approach for borderline states (file if contacted). Not ideal from a strict compliance standpoint, but pragmatic given the complexity.

Something nobody's mentioned yet is that member states of the Multistate Tax Commission sometimes have different rules than non-member states. Also, if your LLC is taxed as an S-corp, some states require the entity itself to file even if the income flows through to you personally. Different services can also trigger different rules. Example: if you're doing digital marketing where a clickthrough leads to sales, some states consider that nexus-creating even at lower dollar amounts! Make sure whatever accountant you use specifically handles multi-state taxation for digital businesses. A regular small business CPA often misses these nuances.