The biggest compliance mistake US businesses make

Many founders believe:

“Once federal taxes are filed, we’re compliant.”

This assumption is one of the most expensive mistakes businesses make in the US.

Federal tax compliance does not automatically cover:

• State income tax
• Franchise tax
• Payroll tax
• Sales & use tax
• Local and municipal taxes

Each US state operates like a separate tax authority, with its own rules, deadlines, and enforcement powers.

What are US State Taxes?

US State Taxes are taxes imposed by individual states, independent of the IRS.

Key facts businesses must understand:

• There is no single ‘state tax’
• Each state defines its own tax structure
• Compliance depends on where and how you do business
• You can owe state taxes even without an office in that state

How businesses trigger state tax obligations

State tax liability begins when a business creates nexus in a state.

Common nexus triggers include:

• Registering a business entity in the state
• Having employees or contractors working remotely
• Earning revenue from customers in the state
• Holding inventory or assets in the state
• Crossing economic thresholds (revenue or transactions)

Physical presence is no longer required.

Types of State Taxes businesses must watch

1️⃣ State Income Tax

Many states tax business income earned within their borders.

Some states use:

• Flat tax rates
• Progressive tax slabs
• Gross receipts taxes instead of income tax

2️⃣ Franchise Tax

Often misunderstood as an “income tax”.

Franchise tax is charged for:

• The privilege of doing business in the state
• Maintaining entity registration

Even loss-making or dormant companies may owe this tax.

3️⃣ Payroll & Employment Taxes

If you have employees in a state, you may owe:

• State income tax withholding
• Unemployment tax
• Disability insurance (in some states)

Remote teams often trigger unexpected obligations.

4️⃣ Sales & Use Tax

States tax the sale of:

• Goods
• Digital products
• SaaS and services (rules vary widely)

Failure to register and file can lead to audits and back taxes.

5️⃣ Local & Municipal Taxes

Some cities and counties impose additional taxes.

Federal compliance does not cover these.

High-risk states businesses often underestimate

Certain states are known for aggressive enforcement:

• California
• New York
• Texas
• New Jersey
• Illinois

These states actively track:

• Economic activity
• Remote workers
• Online sales
• Foreign-owned entities

Common State Tax mistakes businesses make

1️⃣ Assuming entity registration equals tax compliance

Registering an LLC does not mean taxes are handled.

2️⃣ Ignoring remote employees

One employee can trigger multi-layered state taxes.

3️⃣ Missing annual reports and filings

Late or missed filings lead to:

• Penalties
• Interest
• Loss of good standing

4️⃣ Treating all states the same

Each state has different rules, deadlines, and penalties.

Mini Case Study: How a simple review avoided multi-state penalties

A US startup registered in Delaware assumed compliance was complete.

During review:

• Remote employees in CA and NY were identified
• State payroll registrations were missing
• Franchise tax filings were overdue

Result:
✅ Penalties avoided
✅ Registrations corrected
✅ Ongoing compliance framework set up

Most risks are invisible — until reviewed.

US State Tax Readiness Checklist

Ask yourself:

• Do we know which states we operate in?
• Do we have employees or contractors in other states?
• Are we registered correctly for state taxes?
• Are filings and payments done on time?
• Are annual reports and franchise taxes tracked?

Unchecked points = compliance risk.

---

How smart businesses manage State Taxes

Well-managed businesses:

• Track state exposure quarterly
• Align accounting with compliance
• Monitor nexus changes proactively
• Fix issues before state notices arrive

State tax compliance should be planned, not reactive.

Final thoughts

US State Taxes are not an afterthought. They are a core compliance obligation.

Ignoring them doesn’t save money — it delays and multiplies the cost.

Federal compliance is the starting line. State compliance is the real race.

---

Need help with US State Tax compliance?

If your business operates across states or employs remote teams and you’re unsure about state tax exposure, an early review can prevent penalties, audits, and loss of good standing.

Get in touch with us here for a no obligation call to understand how we can help you