Multi-State Taxation and Nexus Practices: What Colorado Businesses Need to Know in 2026

If your Colorado-based business sells into other states, employs remote workers outside Colorado, or has expanded operations since the pandemic, you likely have tax filing obligations in states where you have never had an office. The rules that determine where you must file and collect tax (collectively known as “nexus”) have shifted significantly in the past several years. In 2026, those rules continue to tighten.

This guide covers the two main types of nexus (sales tax and income tax), how remote employees and out-of-state sales create filing obligations, the states that demand the most attention, and the most common pitfalls we see with Colorado businesses expanding across state lines.

Sales Tax Nexus: The $100,000 Threshold

Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., all 45 states with a sales tax (plus the District of Columbia) enforce economic nexus laws. A business can be required to register, collect, and remit sales tax in a state based entirely on its sales volume, even without any physical presence there.

The most common threshold is $100,000 in gross sales into a state during the current or prior calendar year. Several states previously included a 200-transaction alternative, but the trend in 2025–2026 is to eliminate the transaction count. Illinois, Alaska, and Utah have all dropped their 200-transaction threshold (Illinois effective January 1, 2026 under HB 2755), leaving revenue as the sole trigger.

Notable exceptions to the $100,000 standard:

• California: $500,000 in sales, the highest threshold in the country. Gross sales include exempt and non-taxable transactions.
• New York: $500,000 in sales and more than 100 separate transactions, measured over the preceding four sales tax quarters. Both conditions must be met.
• Texas: $500,000 in sales (no transaction threshold)
• Connecticut: $100,000 in sales and 200 or more transactions. Both conditions must be met.

One Colorado-specific note: unlike most states, Colorado excludes wholesale and resale transactions from its $100,000 nexus calculation. The threshold counts retail sales only.

One detail that catches many businesses off guard: in most states, exempt sales count toward the nexus threshold. A company selling $120,000 of exempt products into a state has triggered nexus even though no tax was actually owed on those transactions. The obligation is to register, file returns, and report the exempt sales, even if the tax due is zero.

Income Tax Nexus: A Separate and Broader Question

Sales tax nexus and income tax nexus are two different concepts with different triggers, and crossing one does not automatically mean you have crossed the other. Many businesses confuse the two, which is one of the most common sources of multi-state tax exposure.

Income tax nexus determines whether a state can require your business to file a corporate income or franchise tax return and pay tax on income apportioned to that state. It can be established through either physical presence or economic activity.

Physical Presence Nexus

If you have property, payroll, or employees performing business activities in a state, you almost certainly have income tax nexus there. This includes:

• Owning or leasing office space, a warehouse, or equipment
• Employing anyone who works in the state, including remote workers
• Using independent contractors who perform services in the state
• Storing inventory in third-party fulfillment centers

A single remote employee can create income tax nexus, requiring your company to file corporate income or franchise tax returns in that employee’s state. States are aggressively enforcing remote-work nexus, and many companies that allowed employees to “work from anywhere” during and after the pandemic have unknowingly expanded their filing footprint.

Factor-Presence (Economic) Nexus for Income Tax

Even without any physical presence, some states assert income tax nexus based on economic activity alone. The Multistate Tax Commission (MTC) model uses these thresholds: $500,000 in sales, $50,000 in property, $50,000 in payroll, or 25% of any of these factors in the state.

Approximately 10–12 states apply some form of economic nexus to corporate income or franchise tax, but the specifics vary widely:

• Colorado, Connecticut, Tennessee: standard MTC bright-line ($500K receipts / $50K property / $50K payroll / 25%)
• California: $757,070 sales (2025, indexed) layered on a broader “doing business” doctrine
• New York: receipts-only “deriving receipts” test at $1,283,000 for tax years 2024–2026
• Michigan: hybrid test — $350K Michigan-sourced receipts plus active solicitation

A handful of states apply factor-presence to gross-receipts taxes rather than income tax: Ohio (Commercial Activity Tax), Washington (B&O tax), and Oregon (CAT). The list above is non-exhaustive and continues to evolve.

One important caveat: the California Office of Tax Appeals has ruled that these factor-presence thresholds are not a safe harbor. A taxpayer below the thresholds can still be deemed “doing business” in California if it is actively engaging in any transaction for financial gain in the state. Falling under the dollar figures does not guarantee no California filing obligation.

Public Law 86-272: Shrinking Protection

Federal Public Law 86-272 has historically protected businesses from state income tax when their only in-state activity is soliciting orders for tangible personal property that are approved and fulfilled from outside the state. For decades, this shield allowed companies to send salespeople into a state without triggering an income tax filing obligation.

Two developments have significantly narrowed that protection:

It does not cover services or digital products. PL 86-272 applies only to sellers of tangible goods. If your business provides consulting, SaaS, digital subscriptions, marketing services, IT support, or any other service, the law does not protect you. Most modern business models fall outside its scope.

Internet activities can eliminate the protection. In 2021, the MTC revised its interpretation to treat certain internet-based activities as unprotected under PL 86-272. Common triggers:

• Placing cookies on in-state customers’ devices for purposes beyond order solicitation
• Providing post-sale technical support through chat
• Allowing employees to telecommute from the state

As of May 2026, three states have formally adopted the MTC framework via regulation:

• New York — December 2023 (retroactive to January 1, 2015)
• New Jersey — effective June 16, 2025
• Massachusetts — effective October 10, 2025

California asserted the same interpretation through FTB Technical Advice Memorandum 2022-01, but a San Francisco Superior Court declared the TAM and Publication 1050 void on procedural grounds in December 2023 in American Catalog Mailers Association v. FTB. California’s published guidance on internet activities is not currently enforceable, though the MTC framework continues to expand state-by-state regardless.

The practical result: if your business sells services, digital products, or tangible goods with any post-sale support, do not rely on PL 86-272 as a shield from income tax in states where you have economic activity.

High-Interest States: New York and California

New York

New York is one of the most aggressive states on nexus enforcement. Two features make it especially challenging for Colorado businesses with employees or clients in the state:

The convenience-of-the-employer rule. New York taxes nonresident employees on income earned while working remotely for a New York-based employer unless the employee’s out-of-state work is for the “necessity” of the employer rather than the employee’s “convenience.” If a New York company allows a Colorado-based employee to work remotely because the employee prefers it, New York will still claim taxing rights on that income. This creates double-taxation risk when the employee’s home state also taxes the same income, though many states offer credits for taxes paid elsewhere.

Combined sales and transaction threshold. New York is one of only two states (along with Connecticut) that requires both a sales-dollar threshold and a transaction-count threshold to be met before triggering sales tax economic nexus. New York’s bar is $500,000 + more than 100 transactions; Connecticut’s is $100,000 + 200 transactions. New York’s higher dollar bar means fewer small sellers trigger sales tax nexus there, but the income tax rules are far broader.

California

California operates what is effectively a two-track nexus system:

Sales tax: $500,000 in gross sales of tangible personal property, including exempt and resale transactions. This is the highest sales tax economic nexus threshold in the country.

Income/franchise tax: Inflation-adjusted factor-presence thresholds (approximately $757,000 in sales for 2025; FTB 2026 amounts pending publication). California’s narrow interpretation of PL 86-272 (which treated telecommuting employees and many internet activities as creating nexus) was judicially invalidated in December 2023, but the FTB and CA Office of Tax Appeals have continued to apply factor-presence + a broader “doing business” standard. California also imposes a minimum franchise tax of $800 on every corporation and LLC doing business in the state, regardless of whether net income is positive. Exceeding the income tax nexus threshold triggers this minimum even if your apportioned income results in a lower tax amount.

Remote Employees: The Post-Pandemic Nexus Trap

Remote employees are the most frequent source of accidental multi-state nexus for Colorado businesses.

A remote employee in another state can simultaneously create:

• Income tax nexus, requiring your company to file a corporate return and apportion income to that state
• Payroll tax and withholding obligations, requiring registration with the state’s employment agency and withholding of state income tax from the employee’s wages
• Sales tax nexus, because the employee’s physical presence in the state constitutes physical nexus, which triggers sales tax collection regardless of whether you have met the economic nexus threshold
• Loss of PL 86-272 protection, because an employee performing non-solicitation activities in a state falls outside the law’s narrow shield

If your company has employees working remotely in states where you are not currently registered and filing, review the exposure immediately. The exposure accrues from the date the employee began working in that state, and in most states, the statute of limitations does not begin to run until a return is filed.

Common Multi-State Tax Pitfalls

These are the issues we see most frequently with Colorado businesses that have expanded their geographic footprint:

• Confusing sales tax nexus with income tax nexus. A business may correctly determine that it has not triggered sales tax nexus in a state (because sales are below $100,000) and wrongly conclude it has no filing obligations at all. Income tax nexus has different and often lower thresholds.
• Assuming no physical presence means no obligation. Factor-presence nexus standards in states like California, New York, and Texas can create income tax obligations based on sales volume alone, with no employees or property in the state.
• Not tracking where remote employees work. Companies that allow flexible or hybrid work arrangements often lack a system for recording where employees are physically located. Without this data, nexus exposure cannot be assessed.
• Relying on PL 86-272 for service businesses. The law protects only sellers of tangible goods whose in-state activity is limited to solicitation. Consulting firms, SaaS providers, professional services businesses, and companies providing post-sale support are not protected.
• Ignoring apportionment. Having nexus in a state does not mean all of your income is taxable there. Most states use a single-sales-factor apportionment formula, meaning only the portion of income attributable to sales in that state is taxed. Proper apportionment often reduces the liability substantially, but the returns must still be filed.

Voluntary Disclosure Agreements: Cleaning Up Prior Exposure

If your business discovers that it should have been filing in a state for several years, most states offer a Voluntary Disclosure Agreement (VDA) program. VDAs typically provide penalty abatement, a limited look-back period (usually three to four years instead of the full statute of limitations), and in many cases anonymity during the initial negotiation.

The critical requirement: you must initiate the VDA before the state contacts you. Once a state sends a notice, audit letter, or questionnaire, the VDA option is generally off the table. If a nexus review reveals prior-year exposure, initiating a VDA quickly is often the difference between paying three years of back tax and paying the full statute-of-limitations exposure plus penalties.

Building a Nexus Monitoring Process

Multi-state compliance is manageable with the right system in place. At minimum, your business should:

• Map all states where you have sales, employees, property, contractors, or inventory
• Track sales by state quarterly and flag any state approaching the $100,000 threshold (or the applicable state-specific threshold)
• Maintain a record of where every employee and contractor performs work
• Review your nexus exposure annually with your CPA, especially after adding remote employees, entering new markets, or changing your product or service mix

How WhippleWood Can Help

Multi-state taxation is a rapidly expanding area of compliance risk for Colorado businesses, especially those in professional services, manufacturing and distribution, and franchise operations. Our state and local tax (SALT) practice helps businesses assess their nexus footprint, quantify prior-year exposure, evaluate VDA options, and build ongoing compliance processes that keep pace with their growth.

If you have remote employees in multiple states, sell into states where you are not currently registered, or have questions about where your filing obligations begin, our team can help you map your exposure and determine the right path forward.

Contact WhippleWood to schedule a nexus review.