Modern work arrangements have made multi-state taxation more common than ever. Remote workers, traveling professionals, business owners with customers in multiple states, and individuals who relocate mid-year all face questions about where they owe taxes and how much. Getting these answers wrong can result in double taxation, unexpected assessments, and years of back-and-forth with state tax agencies.
Understanding your multi-state filing obligations is the first step toward avoiding these problems.
When Do You Owe Taxes to Multiple States?
States tax income based on two primary factors: residency and source. As a resident of a state, you generally owe taxes on all your income regardless of where you earned it. As a nonresident, you owe taxes only on income sourced to that state.
This creates situations where the same income could be taxed by two states. If you live in Oklahoma but work for a Texas company, Oklahoma taxes you as a resident on all your income. If you live in New York but perform some work in New Jersey, both states may claim the right to tax a portion of your earnings.
Most states address this through credits. Your resident state typically provides a credit for taxes paid to other states on the same income, preventing true double taxation. However, these credits have limits, and the mechanics vary by state. If your nonresident state has a higher tax rate than your resident state, you may end up paying more total tax than you would have paid to your resident state alone.
Residency Disputes and Domicile Questions
States have strong financial incentives to claim you as a resident. A resident owes tax on all income, while a nonresident owes tax only on income sourced to the state. This creates disputes, particularly when taxpayers relocate from high-tax states to low-tax or no-tax states.
New York is notorious for residency audits. If you claim to have left New York, the Department of Taxation and Finance may investigate whether you truly changed your domicile or whether you remain a statutory resident based on maintaining a permanent place of abode in the state and spending more than 183 days there.
These audits examine factors like where you vote, where your driver’s license is issued, where your family lives, where you keep personal belongings, where your professional affiliations are based, and where you spend your time. Cell phone records, credit card statements, and social media posts may all become evidence.
If you are relocating from a high-tax state, proper planning before your move is essential. Establishing clear ties to your new state while severing ties to your old state creates a defensible record if your former state later challenges your departure.
The Remote Work Complication
Remote work has created new multi-state tax challenges. Some states follow the “convenience of the employer” rule, which taxes remote workers based on where their employer is located rather than where the work is actually performed. New York is the most aggressive state applying this rule.
Under New York’s convenience rule, if you work remotely for a New York employer from your home in another state, New York may tax that income as if you earned it in New York. The only exception is if your remote work location is a “necessity” rather than a “convenience.” This doctrine has generated significant litigation and catches many remote workers by surprise.
If you work remotely for an employer in a different state, you need to understand how both states will treat your income. Some states have reciprocity agreements that simplify this analysis, while others do not. Your filing obligations depend on the specific states involved and the nature of your work arrangement.
Business Nexus and Sales Tax Obligations
For business owners, multi-state issues extend beyond income taxes to sales tax, franchise tax, and other business levies. The concept of “nexus” determines whether a state has the right to tax your business activities.
Physical presence in a state, such as having employees, inventory, or an office, clearly establishes nexus. But the Supreme Court’s 2018 decision in South Dakota v. Wayfair expanded nexus to include “economic presence.” Now, if your business exceeds certain sales thresholds in a state, you may have nexus and filing obligations there even without physical presence.
Each state sets its own economic nexus thresholds, typically based on sales revenue or transaction volume. Tracking these thresholds across all states where you have customers requires ongoing attention. Failure to register and collect sales tax where required can result in assessments for uncollected tax, plus penalties and interest.
Getting Into Compliance
If you have multi-state filing issues, whether unfiled returns, unreported income, or uncollected sales tax, voluntary disclosure is often the best path forward. Many states offer formal voluntary disclosure agreements that limit the lookback period and waive penalties in exchange for coming forward before the state contacts you.
The key is addressing these issues proactively. Once a state initiates contact, voluntary disclosure programs are typically off the table, and you lose negotiating leverage. If you suspect you have unfiled obligations in multiple states, consult with a tax professional who can evaluate your exposure and develop a compliance strategy.