State and Local Tax Obligations: A State-by-State Overview

State and Local Tax Obligations: A State-by-State Overview

Federal taxes get the most attention, but state and local taxes can be just as significant -- and far more confusing. Every state has its own rules, rates, and filing requirements. Operating in multiple states multiplies the complexity. This guide breaks down what you need to know.

Types of State Business Taxes

State Income Tax

Most states impose an income tax on business income. The structure depends on your entity type:

• Pass-through entities (sole proprietorships, partnerships, S corps): Business income flows through to owners' personal state returns. You pay individual state income tax on your share of business profits.
• C corporations: Pay corporate income tax directly to the state. Rates range from roughly 2.5% to nearly 12% depending on the state.

Nine states have no individual income tax: Alaska, Florida, Nevada, New Hampshire (dividends and interest only, phasing out), South Dakota, Tennessee (dividends and interest only, fully phased out), Texas, Washington, and Wyoming.

Franchise Tax

Some states impose a franchise tax for the privilege of doing business in the state. This is separate from income tax and may be based on net worth, capital, or revenue. Texas has a franchise tax (called the margin tax) that applies to most entities. Delaware has a franchise tax that applies to all entities formed in the state.

Gross Receipts Tax

A few states impose a gross receipts tax on total revenue rather than profits. Ohio has the Commercial Activity Tax (CAT), Washington has the Business and Occupation (B&O) tax, and Oregon has the Corporate Activity Tax. Unlike income tax, these taxes apply to revenue -- you owe them even if you are not profitable.

Sales and Use Tax

Forty-five states and D.C. impose a sales tax on tangible goods and some services. If you sell taxable items, you must collect and remit sales tax in states where you have nexus. See our separate guide on sales tax nexus for details.

Property Tax

Business property -- real estate, equipment, furniture, inventory -- may be subject to local property tax. Most jurisdictions require an annual personal property tax return listing your business assets and their values.

Unemployment Insurance Tax

Every state requires employers to pay state unemployment insurance (SUI) tax. Rates vary by state and by your business's claims history. New businesses are assigned a default rate that adjusts over time based on former employees' unemployment claims.

Multi-State Operations

If you operate in multiple states, you must determine how much of your income is taxable in each state. States use apportionment formulas to divide income among states, typically based on:

• Sales: Where your customers are located
• Payroll: Where your employees work
• Property: Where your business assets are located

Most states now use a single-sales-factor formula, meaning your state tax obligation is driven primarily by where your sales occur. However, some states still use a three-factor formula that considers sales, payroll, and property equally.

State-Specific Considerations

California

• Minimum $800 franchise tax for all LLCs and corporations, even with no income
• Progressive individual income tax rates up to 13.3%
• LLC fee based on total income ($900 to $11,790)

Texas

• No individual income tax
• Franchise (margin) tax of 0.375% to 0.75% on total revenue minus cost of goods sold or compensation
• Businesses with revenue under the no-tax-due threshold owe no franchise tax (this amount adjusts annually — check the Texas Comptroller's website for the current figure)

New York

• Corporate franchise tax with a minimum based on receipts ($25 to $200,000)
• NYC imposes its own separate business taxes on top of state taxes
• Metropolitan Commuter Transportation Mobility Tax (MTA payroll tax)

Florida

• No individual income tax
• Corporate income tax of 5.5% on C corporation income over $50,000
• Pass-through entities are not subject to state-level income tax

Delaware

• Popular state for incorporation but has franchise tax ($400+ annually for corporations)
• No sales tax
• Corporate income tax of 8.7%

Filing Requirements by Entity Type

| Entity | State Income Tax | Franchise/Annual Filing | Sales Tax | |---|---|---|---| | Sole Proprietorship | Personal return | Business license renewal | If selling taxable goods | | LLC (single member) | Personal return | Annual report + fee | If selling taxable goods | | LLC (multi-member) | Partnership return | Annual report + fee | If selling taxable goods | | S Corporation | S corp return + K-1s | Annual report + fee | If selling taxable goods | | C Corporation | Corporate return | Annual report + fee | If selling taxable goods |

Pass-Through Entity Tax (PTET)

Since the Tax Cuts and Jobs Act capped the state and local tax (SALT) deduction at $10,000 for individuals, many states have introduced pass-through entity taxes. These allow pass-through businesses to pay state income tax at the entity level, which is fully deductible against federal income. The owners then receive a credit on their personal state returns.

If your state offers a PTET election and your SALT deduction is capped, this can provide a significant federal tax benefit. Over 30 states now offer some form of PTET.

Staying Compliant

1. Identify every state where you have nexus -- physical presence, employees, or economic activity above thresholds
2. Register with each state's department of revenue and secretary of state
3. Determine what taxes apply in each state based on your entity type and activities
4. Calendar all filing deadlines -- they vary by state and may not match federal deadlines
5. Track revenue, payroll, and property by state for apportionment purposes
6. Review the PTET election annually to determine if it benefits you

State and local taxes are where small businesses most commonly fall out of compliance. When in doubt, consult a CPA with multi-state tax experience. The penalties and interest from state tax agencies can be just as aggressive as the IRS.