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Hi, it's CJ Gustafson and welcome to Looking for Leverage.
Today's term: nexus. Specifically, the fact that you can establish it without selling a single dollar into a state, and that some states will hold onto you with both hands once you do.
Setting the scene
A few years ago I was the CFO of a fully remote company. We had employees in 18 states. I used to joke that for a tech company we had a weirdly random map… engineers in Idaho, a customer success lead in Vermont, two people in Virginia for some reason… and zero people in New York. I thought it was funny. Eighteen states and somehow no one had landed in the obvious one.
Then we hired a senior engineer who lived in Brooklyn. Great hire. We were thrilled, as the role had been open for more than eight months. About four months later, as we were wrapping up our tax filing, our outside tax accountant sent me an email with the subject line "NY nexus? need to discuss".
That's when I learned why we didn't have anyone in New York.
The dumb version
Nexus is the connection between your business and a state that gives the state the right to tax you. There are two flavors.
Physical nexus, where you have people, property, or inventory in the state.
Economic nexus, where you sell enough into the state to cross a threshold (usually $100K in sales) even with no physical presence.
Economic nexus is the newer of the two, and counterintuitively, the better understood one. Until 2018, you had to have actual presence in a state for it to tax you. Then the Supreme Court ruled in South Dakota v. Wayfair that crossing a sales threshold counts too. Every state with a sales tax adopted some version within a year or two (Wayfair must have shipped a lot of furniture). Stripe, Avalara, and every Big 4 tax practice built a cottage industry around it before the ink was dry.
Physical nexus has been around forever and got way more dangerous when everyone went remote, but there was no single Supreme Court moment to wake CFOs up to it. So it sits in the blind spot.
Making it real
The version of nexus that gets all the airtime is economic nexus. Watch that threshold, set up the dashboard, sleep at night. Stripe can do a lot of this for you.
The one that actually catches you is physical nexus. And its bar is one employee.
The triggers under the physical nexus umbrella that actually catch CFOs off guard:
Employees. One full-time employee living in a state is almost always enough. Not "a sales rep covering the territory." Just a person, on your payroll, who happens to call the state home. The remote work era turned every hiring decision into a tax decision.
Independent contractors performing services in the state. In some states, a 1099 contractor doing meaningful work for you counts. The "they're not employees" defense doesn't hold up the way you'd hope.
Inventory. If you sell physical product and you store it in an Amazon FBA warehouse in Pennsylvania, you have Pennsylvania nexus. Amazon moves inventory between fulfillment centers based on their logistics, not your tax planning. Also, don’t store all your laptops in a random state (I did that… woops).
Trade shows, traveling salespeople, on-site implementations. A few days a year of "boots on the ground" is enough in some states.
Once you have nexus, physical or economic, you owe filings. Plural. The big ones:
State income tax or franchise tax (the corporate-level tax)
Sales and use tax (if you sell taxable goods or services into the state)
Payroll tax (withholding, unemployment, sometimes local taxes)
Sometimes a gross receipts tax (Washington's B&O, Ohio's CAT, Oregon's CAT, Tennessee's franchise tax base)
And the exit is way harder than the entry. To stop filing in a state, you generally have to formally withdraw. That means file a final return, get a tax clearance certificate, sometimes pay a fee or settle outstanding liabilities. New York and Washington in particular are notorious. New York will keep you on the list and assess franchise tax until you formally withdraw, even after the employee is long gone (I’ve made that mistake, thinking an employee’s departure meant our company’s exit from the tax burden. Wrong.) Washington's B&O system treats your registration as live until you affirmatively close it, and the Department of Revenue is in zero rush to help (the phone wait time is aggressive).
Net net: you can't just stop; you have to leave.
The math (with numbers)
Let's say you're a $50M SaaS company headquartered in Delaware with most of your team in California. You hire one engineer in New York in March. Here's what that hire actually costs you in nexus terms in the first year (try not to throw up):
Direct payroll cost (the part you budgeted): salary, benefits, employer payroll taxes. Say $220K all-in for a $180K base engineer. Expected.
NY corporate franchise tax: apportioned to NY based on payroll factor. With one NY employee out of fifty total, your NY apportionment is roughly 2%. On a $50M revenue base with a ~10% margin, your apportioned NY taxable income is small but not zero. Minimum tax floors mean you owe at least $25 to $4,500 depending on your NY receipts, and meaningfully more if you have NY customers.
NY sales tax registration and ongoing filing. Even if you sell zero into NY, you may need to register and file zero returns. Compliance burden, not dollars, but it costs you to hire a third party to help.
NY payroll tax setup: withholding, SUI, MCTMT (the commuter tax in the NYC metro), local NYC tax if applicable. Setup is a few thousand dollars in accountant time. This is a quarterly rhythm.
The accountant bill. Your outside tax firm will charge you for the new state. Figure $3,000 to $8,000 in year one for nexus study, registration, and first filings. Then $2,000 to $5,000 annually to keep the state on your return.
The exit, if and when you part ways with the employee. Final returns, withdrawal filings, tax clearance. Another $3,000 to $6,000 in professional fees, plus several months of calendar time before NY confirms you're out. If you miss one important email you can screw the whole thing up.
So one $220K hire generated, conservatively, $8,000 to $15,000 in year-one tax compliance cost on top of the salary, and a multi-year tail of filings (at least $2,000 a year) until you formally exit. Multiply by however many states your remote workforce lives in.
When it clicked
The accountant got on the call and started by walking me through the NY filing burden. Then she paused and asked if anyone had told me about the prior year. I said no (they might have, but I had a lot going on).
It turned out the company had previously had an employee in New York, and my predecessor had spent the better part of a year… with the prior accountant, who I had since replaced… getting us out. They had completed final returns, tax clearance, the whole withdrawal process. They had finished the arduous exit from New York maybe nine months before I started. Yet nobody had written it down anywhere I'd seen. The 18-state map I thought was charmingly random was actually the result of someone else's deliberate, painful, year-long cleanup project.
And I had walked us right back in.
What I learned, the hard way, is that the institutional memory of a tax footprint doesn't live in your accounting system. It lives in your predecessor's head, and in the email threads you were never on. We then spent the next two years cleaning up what one offer letter had created… registering, filing, eventually withdrawing again when that engineer moved on.
After that, every time we considered a hire in a new state, I asked our recruiter to flag it, and I looped in our tax accountant before we extended the offer. Not to block the hire, just so we knew what we were buying. A few times we steered candidates toward our existing nexus states when they were geographically flexible. A few times we hired anyway and ate the cost because the candidate was worth it. The point was that the decision was made with eyes open. And the point was that I would never again accidentally undo someone else's two-year cleanup project.
What to do Monday
Three things.
Pull a list of every state where you currently have an employee, contractor, office, or material customer base. Your HR system can give you the employee piece in five minutes. Compare it to the list of states your tax accountant is currently filing in. Any gap is either an exposure you don't know about or a withdrawal you haven't completed. Both deserve a meeting.
Ask your accountant, or your predecessor, if you can get them on the phone to determine which states the company has exited in the past few years. Those are the states you do not want to walk back into casually. The map of where you're not is just as important as the map of where you are.
Add a "nexus check" step to your hiring approval workflow. Before any offer goes out for a candidate in a new state, your tax person sees the state and gives a one-line read. New state? Existing state? Recently exited state? You're not blocking hires, you're pricing them honestly.
Wishing you a footprint you actually chose,
CJ
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