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.

State Individual Income Tax Rates (Top Marginal Rates, Selected States)

State	Top Individual Rate	Applies Above	Flat or Progressive
California	13.3%	$1,000,000+	Progressive (10 brackets)
New York	10.9%	$25,000,000+	Progressive (9 brackets)
New Jersey	10.75%	$1,000,000+	Progressive (7 brackets)
Oregon	9.9%	$125,000 (single)	Progressive (4 brackets)
Minnesota	9.85%	$193,240 (single)	Progressive (4 brackets)
Massachusetts	9.0%	$1,000,000+ (5% + 4% surtax)	Flat + surtax
Illinois	4.95%	All income	Flat
North Carolina	4.5% (2025)	All income	Flat
Arizona	2.5%	All income	Flat
Texas	0%	N/A	No income tax
Florida	0%	N/A	No income tax
Wyoming	0%	N/A	No income tax
Nevada	0%	N/A	No income tax

State Corporate Income Tax Rates (Selected States)

State	Corporate Rate	Notes
Iowa	8.4% (flat)	Reduced from graduated rates
New Jersey	9% (over $100K income) + 2.5% surtax (over $1M)	11.5% effective for large corps
Pennsylvania	8.99%	One of the highest flat rates
Minnesota	9.8%	Highest single-rate corporate tax
California	8.84%	Plus $800 minimum franchise tax
New York	7.25% (over $5M)	Graduated rates
Illinois	7.0% (+ 2.5% PPRT)	9.5% combined
Florida	5.5%	On income over $50,000
North Carolina	2.5%	Heading to 0% by 2030
Ohio	0% (corporate income tax)	Uses Commercial Activity Tax instead
Texas	0% (corporate income tax)	Uses Franchise/Margin Tax instead

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.

States with notable franchise taxes:

• Texas: Margin tax of 0.375% (retail/wholesale) to 0.75% (other businesses) on total revenue minus the greater of cost of goods sold, compensation, or 30% of total revenue. No-tax-due threshold for small businesses (check the Texas Comptroller's website for the current figure).
• Delaware: $400+ minimum for corporations; calculated using either the Authorized Shares Method or Assumed Par Value Capital Method. The Assumed Par Value method is usually cheaper for companies with many authorized shares.
• California: $800 minimum franchise tax for all LLCs and corporations, charged even with zero income. Plus the LLC fee for LLCs with gross receipts over $250,000.
• Illinois: $75 annual report fee for LLCs, $75 for corporations.
• New York: Fixed dollar minimum based on New York receipts ($25 to $200,000 for corporations).

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.

State	Tax Name	Rate	Threshold
Ohio	Commercial Activity Tax (CAT)	0.26%	Gross receipts over $150,000
Washington	Business & Occupation Tax (B&O)	0.471% - 1.5% (by industry)	Nearly all gross receipts
Oregon	Corporate Activity Tax (CAT)	0.57%	Commercial activity over $1,000,000
Nevada	Commerce Tax	0.051% - 0.331% (by industry)	Gross revenue over $4,000,000
Texas	Franchise/Margin Tax	0.375% - 0.75%	See franchise tax section

Important: Gross receipts taxes hit low-margin businesses hardest. A retailer with $5 million in revenue and $250,000 in profit pays the same gross receipts tax as a service business with $5 million in revenue and $2 million in profit. If you operate in a gross receipts tax state, factor this into your pricing and margins.

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.

Business personal property tax is often overlooked. If you own desks, computers, machinery, vehicles, or other tangible assets used in your business, many states and localities require you to file an annual personal property tax return and pay tax on the depreciated value of those assets. Failure to file can result in penalties and estimated assessments that are usually higher than what you actually owe.

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.

State unemployment insurance rate ranges:

State	New Employer Rate	Rate Range	Wage Base
California	3.4%	1.5% - 6.2%	$7,000
New York	4.1%	2.1% - 9.9%	$12,500
Texas	2.7%	0.25% - 6.25%	$9,000
Florida	2.7%	0.1% - 5.4%	$7,000
Washington	Variable	0.27% - 6.09%	$67,600
Massachusetts	1.87%	0.56% - 8.62%	$15,000
Oregon	2.4%	0.7% - 5.4%	$52,800

Note the massive difference in wage bases. In Washington, SUI applies to the first $67,600 of wages. In California, it applies only to the first $7,000. This means the same employee costs dramatically different amounts in SUI depending on the state.

Additional State-Level Payroll Taxes and Requirements

Beyond unemployment insurance, several states impose additional payroll-related obligations:

State/Program	Tax	Rate	Who Pays
California SDI (State Disability Insurance)	1.1% (2025)	On wages up to $174,000	Employee
New York SDI	$0.60/week	Varies slightly	Employee
New Jersey SDI	0.47%	On wages up to ~$165,000	Employee
New Jersey FLI (Family Leave Insurance)	0.09% (employer) + 0.28% (employee)	On wages up to ~$165,000	Both
Washington PFML (Paid Family/Medical Leave)	0.8% (2025)	Employer pays 28.57%, employee pays 71.43%	Both
Oregon Paid Leave	1%	Employer pays 40%, employee pays 60%	Both
Colorado FAMLI	0.9%	Employer pays 50%, employee pays 50%	Both
New York MTA Tax	0.34%	On payroll in MTA district	Employer

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.

Apportionment Methods by State

Apportionment Method	States Using It
Single sales factor	Majority of states (CA, NY, TX, FL, IL, and most others)
Three-factor (equal weight)	Alaska, Montana, and a few others
Three-factor (double-weighted sales)	A handful of states (check current rules)

Example: Your business is based in Ohio with a single employee. You sell software to customers in California, Texas, and New York. Under single-sales-factor apportionment, the percentage of your income taxable in each state matches the percentage of your sales in that state. If 40% of your sales go to California, 40% of your income is apportioned to California (and subject to California's 13.3% top rate for pass-through income).

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 ($250,000-$499,999), $2,500 ($500,000-$999,999), $6,000 ($1,000,000-$4,999,999), $11,790 ($5,000,000+)
• First-year LLCs exempt from the $800 franchise tax
• 1.5% entity-level tax on S corporation net income
• State Disability Insurance (SDI) required for employees

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)
• No state-level income tax return for pass-through entities or individuals
• Sales tax: 6.25% state + up to 2% local = max 8.25%

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): 0.34% on payroll in the MTA commuting district
• NYC Unincorporated Business Tax (UBT): 4% on net income over $95,000 for sole proprietors, partnerships, and LLCs
• Combined NYC + NY state rate for individuals can exceed 14%
• Pass-through entity tax (PTET) election available

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
• 6% state sales tax + up to 2% county surtax
• No franchise tax for LLCs (just annual report fee of $138.75)
• Reemployment (unemployment) tax applies to employers

Delaware

• Popular state for incorporation but has franchise tax ($400+ annually for corporations)
• No sales tax
• Corporate income tax of 8.7%
• LLC annual tax: $300 flat fee
• Gross Receipts Tax: 0.0945% - 0.7468% depending on business type (often overlooked)

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

Annual Report and Filing Fee Comparison (Selected States)

State	LLC Annual Report Fee	Corporation Annual Report Fee	Due Date
California	$20 (+ $800 franchise tax)	$25 (+ $800 franchise tax)	Due by 15th day of 4th month after fiscal year-end
New York	$9 (biennial)	$9	Every 2 years (anniversary month)
Florida	$138.75	$150	May 1 annually
Texas	$0 (franchise tax return serves as annual filing)	$0	May 15 annually
Delaware	$300 (LLC tax)	$225 + franchise tax	March 1 (corporations), June 1 (LLCs)
Ohio	$0	$0	No annual report required
Illinois	$75	$75	Anniversary date
Georgia	$50	$50	Between Jan 1 and Apr 1

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.

How the PTET Election Works: An Example

Without PTET: You earn $300,000 through your S corp in New York. Your state income tax is approximately $20,000. On your federal return, you can only deduct $10,000 of state and local taxes (SALT cap). You lose $10,000 in deductions.

With PTET: Your S corp makes the PTET election and pays the $20,000 in state tax at the entity level. This payment is a deductible business expense on the S corp's federal return (no SALT cap applies to business deductions). You receive a $20,000 credit on your personal New York return. Net result: you deduct the full $20,000 of state tax against federal income.

Federal tax savings: $10,000 (the lost deduction) x 32% (federal bracket) = $3,200 in annual federal tax savings from the PTET election alone.

States Offering PTET Elections (Partial List)

Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia, Wisconsin

Check your state's specific rules: Election deadlines, calculation methods, and credit mechanics vary. Some states require the election be made before the tax year begins. Others allow retroactive elections. Your CPA should review this annually.

Common State Tax Mistakes

1. Assuming No State Tax Obligations in "No Income Tax" States

Texas has no income tax but has a franchise (margin) tax. Washington has no income tax but has a B&O gross receipts tax. Nevada has no income tax but has a commerce tax for large businesses. Always check for alternative taxes.

2. Not Filing Annual Reports

Many states require annual (or biennial) reports from LLCs and corporations. Failing to file can result in administrative dissolution of your entity -- meaning you lose your liability protection. California charges $250 for late LLC annual filings. Delaware charges $200 for late corporation reports plus 1.5% monthly penalty on unpaid franchise tax.

3. Forgetting State Estimated Tax Payments

Most states with income tax require quarterly estimated payments, similar to the federal system. Deadlines often match federal dates but not always. Missing state estimated payments triggers penalties just like at the federal level.

4. Not Taking Advantage of the PTET Election

If your state offers a PTET election and your SALT deduction is capped at $10,000, you are leaving money on the table. The PTET election is essentially free money -- there is no downside. Many business owners are unaware it exists or assume their CPA is handling it (ask explicitly).

5. Ignoring Nexus in New States

When you hire a remote employee in a new state, you create nexus in that state for income tax, payroll tax, and potentially other obligations. The same applies when you send an employee to work in another state temporarily (many states have "convenience of the employer" rules). Each new state nexus requires registration, withholding, and filing.

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
7. File annual reports on time to maintain good standing
8. Budget for state-specific taxes (franchise tax, gross receipts tax, etc.) that may apply regardless of profitability

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.

Remote Workers and State Tax Implications

The rise of remote work has created significant state tax complications for businesses. Hiring a remote employee in a new state can trigger multiple new tax obligations:

What Happens When You Hire a Remote Employee in a New State

1. Income tax nexus: You now have physical nexus in the employee's state, requiring you to file a state income tax return and potentially pay state income tax on apportioned business income
2. Payroll tax registration: You must register for state income tax withholding and state unemployment insurance in the employee's state
3. Workers' compensation: You need coverage in the employee's state
4. Sales tax nexus: Having an employee in a state creates physical nexus for sales tax purposes
5. Business registration: Some states require you to register as a foreign entity (file for "qualification to do business")

Example: You are an LLC based in Texas (no income tax) and hire a remote developer in California. You now must:

• Register with California Franchise Tax Board
• Pay California's $800 minimum franchise tax
• Withhold California income tax from the employee's wages
• Register for California unemployment insurance
• File a California state income tax return, apportioning income based on the percentage of your sales, payroll, and/or property in California
• Potentially collect California sales tax if you sell taxable goods to California customers

The cost of a single remote hire in a new state can include $500-$2,000 in registration and initial compliance, plus $800-$2,000+ annually in additional state taxes and filing fees, plus increased CPA fees for multi-state returns.

"Convenience of the Employer" Rules

Several states (notably New York, Connecticut, Delaware, Nebraska, and Pennsylvania) have "convenience of the employer" rules that tax employees based on where the employer is located rather than where the employee works. If your business is in New York and your employee works remotely from New Jersey, both New York and New Jersey may try to tax that employee's income. The employee typically gets a credit for taxes paid to the other state, but this creates additional complexity and filing requirements.

Best and Worst States for Small Business Taxes

While many factors determine the right state for your business, here is a comparison of overall tax burden:

Most Tax-Friendly States for Small Businesses

State	Key Advantages	Potential Drawbacks
Wyoming	No income tax, no franchise tax, low fees	Small economy, limited talent pool
South Dakota	No income tax, no corporate tax, low property tax	Small economy
Nevada	No income tax, no franchise tax (under $4M revenue)	Commerce tax above $4M, higher cost of living in Las Vegas/Reno
Florida	No income tax, moderate corporate tax (5.5%), growing economy	Insurance costs, sales tax at 6%+
Texas	No income tax, large economy, business-friendly	Franchise/margin tax, high property taxes, sales tax at 6.25-8.25%

Highest Tax Burden States for Small Businesses

State	Key Challenges	Why Businesses Stay
California	13.3% income tax, $800 min franchise tax, high compliance costs	Largest economy, talent, customers
New York	10.9% income tax, NYC adds 3.876%, high payroll taxes	Financial hub, dense market
New Jersey	10.75% income tax, 11.5% corporate tax (surtax), high property tax	Proximity to NYC and Philly markets
Minnesota	9.85% income tax, 9.8% corporate tax	Strong workforce, quality of life
Oregon	9.9% income tax, Corporate Activity Tax (0.57%), no sales tax	No sales tax is an advantage for retailers

Important disclaimer: The "best" state for your business depends on many factors beyond taxes -- access to customers, talent, cost of living, industry clusters, and quality of life. Never choose a state solely based on tax rates.

State Tax Planning Strategies

1. Review the PTET Election Annually

If your state offers a pass-through entity tax election, evaluate it every year. Your eligibility and the benefit amount can change based on income levels and state law changes. Some states require the election before the tax year begins, so plan ahead.

2. Consider Entity Type Impact at the State Level

Some states treat different entities differently. California charges LLCs an additional fee based on total income ($900-$11,790) that does not apply to S corps. New York City does not recognize S corp status. Evaluate your entity type through a state tax lens, not just a federal one.

3. Monitor Nexus Triggers

As your business grows, track when you approach nexus thresholds in new states. Proactive registration before a state contacts you is always better than retroactive compliance. Set up quarterly reviews of sales by state.

4. Use Multi-State Apportionment to Your Advantage

If you operate in multiple states, the apportionment formula determines how much income each state can tax. Understanding the formula (especially single-sales-factor apportionment) can help you make strategic decisions about where to locate operations, employees, and property.