When Do Texas Businesses Need to File State Income Tax Returns in Other States?

Many Texas-based businesses are surprised to learn that operating or selling outside of Texas can trigger state business tax filing obligations in other states-even if you don't have an office there. With increased enforcement and evolving "nexus" standards, it's more important than ever to understand when additional state income or franchise tax returns may be required. Below is a practical overview to help you identify when filing outside Texas may be necessary.

Texas Is Home-But It May Not Be the Only State That Can Tax You

Texas does not impose a traditional corporate income tax, but most other states do. Once your business establishes a sufficient connection—called nexus—with another state, that state may require you to file a business income, franchise, or gross receipts tax return, even if the business is headquartered in Texas. States are increasingly aggressive in identifying businesses with nexus and issuing compliance notices.

What Creates Nexus for State Income Tax Purposes?

Each state sets its own rules, but nexus is commonly created through physical presence, economic activity, or certain protected activities losing their protection.

1. Physical Presence Nexus

You will almost always have a filing obligation if your business has any of the following in another state:

Employees or remote workers located in the state
Independent contractors performing services in the state
An office, warehouse, or other place of business
Inventory stored in a third-party warehouse or fulfillment center
Company-owned vehicles making deliveries

Even a single employee working remotely from another state can trigger income tax filing requirements.

2. Economic Nexus (Sales-Based Thresholds)

Many states now impose income or franchise tax filing requirements based solely on sales volume, even without physical presence. These rules—often called economic nexus or factor presence nexus—vary by state but commonly include:

A dollar threshold of sales into the state (often $100,000–$500,000 annually)
In some states, a percentage of total company sales sourced to the state

Once these thresholds are exceeded, a business may be required to file an income or franchise tax return and apportion income to that state.

3. Limited Protection Under Public Law 86-272

Some businesses assume they are protected from filing because they “only sell into” another state. That protection is narrow.

Under Public Law 86-272, a state generally cannot impose a net income tax if all of the following are true:

The business sells tangible personal property (not services or digital goods)
In-state activity is limited strictly to soliciting orders
Orders are approved and fulfilled from outside the state

Importantly:

This law does not apply to franchise, gross receipts, or margin-based taxes
It does not apply to service businesses
Many modern activities (post-sale support, in-state repairs, remote services, certain online activities) can eliminate this protection

As business models evolve, states are narrowing how this protection is applied.

Common Situations That Trigger Filing Outside Texas

You may need to file state business tax returns outside Texas if you:

Have remote employees in other states
Store inventory in out-of-state warehouses (including Amazon FBA)
Provide services to customers in other states
Exceed sales thresholds in states with economic nexus rules
Travel to other states to perform work, installation, or training
License intellectual property used in another state

Filing obligations may apply to C corporations, S corporations, partnerships, and LLCs, including pass-through entities whose owners ultimately pay the tax.

Why This Matters

Failing to file required state returns can lead to:

Back taxes assessed years later
Interest and late-filing penalties
Loss of voluntary disclosure opportunities
Complications during audits, financing, or a sale of the business

The good news: Being proactive often limits exposure and allows income to be properly apportioned rather than taxed twice.

What Should You Do Now?

If your business is based in Texas but has customers, employees, or operations in other states, we recommend:

Reviewing where your business has physical or economic nexus
Evaluating whether Public Law 86-272 protection applies
Confirming which states require income, franchise, or gross receipts tax filings
Addressing any missed filings through voluntary disclosure, when available

We regularly help Texas businesses navigate multi-state compliance and minimize risk.

If you’re unsure whether you should be filing in additional states, please contact us—we’re happy to review your situation.

This newsletter is for general informational purposes only and does not constitute tax advice. State tax rules vary by jurisdiction and facts matter.

GRIFFING & COMPANY, P.C.

(281) 491-8866 Fax (281) 491-8998

info@griffing.com

www.griffing.com