State and Local Tax Services

Posted Monday, July 6, 2026

State and local tax planning for small business owners

When most people hear “state and local tax,” they think of the $10,000 SALT deduction cap from the Tax Cuts and Jobs Act. And yes, that cap matters – especially if you own a home in a high-tax state and you are used to deducting $25,000 or $30,000 in property and state income taxes. But the SALT cap is not even close to the full picture. It is a cocktail party talking point that gets all the attention while the real complexity hides underneath.

State and local tax – SALT for short – is a sprawling web of income tax, franchise tax, gross receipts tax, sales tax, payroll tax, property tax, and a collection of fees and filings that vary wildly from state to state. Colorado does things differently than California. Texas has no income tax but hits you with a franchise tax (which is really a margin tax – more on that later). Nevada has no income tax and no franchise tax, but has a commerce tax if your revenue exceeds $4 million. Ohio has a commercial activity tax. Washington has a business and occupation tax. Huh? Every state has its own flavor of getting paid, and if you do business across state lines – or even just have one remote employee in another state – you are potentially on the hook in multiple jurisdictions. That is where things get fun (and by fun, we mean expensive and confusing if you are not paying attention).

We handle clients in all 50 states at WCG. We are based in Colorado Springs, but our client base stretches from Anchorage to Miami and everywhere in between. SALT is one of the fastest-changing areas of tax law right now, and the decisions you make about where you form, where you operate, what entity type you choose, and how you pay your people all have state tax consequences. Sometimes big ones.

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The SALT Landscape for Pass-Through Entities

If you operate as a sole proprietor, single-member LLC, multi-member LLC, partnership, or S corporation, your business income passes through to your personal return. That is the whole point of pass-through taxation – the entity itself does not pay federal income tax. Instead, the income shows up on your 1040, and you pay tax at your individual rates.

Simple enough at the federal level. At the state level? Not so much.

Each state has its own rules for how pass-through income gets taxed. Some states follow the federal treatment closely. Others require separate entity-level returns, impose entity-level taxes, or have unique rules about how income is allocated among owners.

Here we go-

  • Nexus. Before a state can tax you, you need to have nexus – a sufficient connection to the state that gives it the legal authority to impose a tax. Nexus used to be straightforward. If you had a physical presence in a state – an office, a warehouse, an employee, inventory – you had nexus. Now, many states have expanded nexus to include economic activity. If you generate enough revenue from customers in a state, or have enough transactions there, you may have nexus even if you have never set foot in the state. This applies to both income tax and sales tax, and the thresholds vary by state.
  • Apportionment. If you do business in multiple states, you generally do not pay income tax to each state on your total income. Instead, you apportion your income – meaning you allocate a percentage of your total income to each state based on a formula. Most states now use a single-factor apportionment based on sales (meaning the percentage of your revenue sourced to each state determines how much income gets taxed there). But some states still use a three-factor formula that includes property and payroll in addition to sales. And the definition of “sales” varies by state. Service revenue gets sourced differently than product revenue. It is a rabbit hole.
  • Doing Business Requirements. Most states require you to register (known as foreign qualification) if you are “doing business” in their state. The definition of “doing business” is not uniform. Some states define it broadly – if you have a single employee there, or if you regularly solicit customers, you are doing business. Others are narrower. But the consequence of doing business without registering can include penalties, back taxes, and losing the right to enforce contracts in that state. That last one tends to get people’s attention.
  • State-Specific S Corp and Partnership Rules. Not every state follows the federal S Corp election automatically. Some states require a separate state-level S Corp election (looking at you, New York and New Jersey). Some states impose entity-level taxes on S Corps regardless (California’s 1.5% net income tax on S Corps, for example). And certain states treat partnerships differently for withholding and composite filing purposes. If you elected S Corp status at the federal level and assumed that was the end of the conversation, you might have a surprise waiting for you at the state level. Wonderful.

PTET - The Big SALT Strategy

If there is one SALT strategy that has changed the game for pass-through business owners in the last few years, it is the Pass-Through Entity Tax election, or PTET. This is worth its own deep dive, and we have a dedicated PTET page that covers the mechanics, state-by-state availability, and how we implement it. But here is the short version.

Remember that $10,000 SALT cap we mentioned? It limits the amount of state and local taxes you can deduct on your personal return. If you live in a state with a 5% income tax and you earn $300,000, your state income tax alone is $15,000 – but you can only deduct $10,000. The other $5,000? Gone. No deduction. Yuck.

PTET is the workaround. It shifts the state tax payment from the individual level to the entity level. Your LLC or S Corp pays the state income tax directly, and that payment is deductible on the entity’s federal return as a business expense. It is not subject to the $10,000 SALT cap because it is a business deduction, not an itemized deduction. You then get a credit on your personal state return for the tax the entity paid on your behalf.

The IRS blessed this approach in Notice 2020-75, and as of 2026, over 35 states have enacted PTET legislation. The rules, deadlines, and mechanics vary significantly by state. Some states require the election before the tax year begins. Others allow it with the return. Some states have minimum thresholds. A few have quirks that can actually make the election unfavorable in certain situations.

The bottom line – if you own a pass-through business and you live in a state with income tax, PTET should be on your radar every single year. We evaluate this for every eligible client as part of our tax planning process. It is one of the most elegant workarounds in current tax law, and leaving it on the table is just leaving money behind. Period. Full stop.

Learn more about PTET elections →

Multi-State Filing Complexity

Here is where SALT goes from “a little annoying” to “genuinely complicated.” The moment your business touches more than one state – whether through customers, employees, property, or just revenue sourced across state lines – your filing obligations multiply.

Let’s say you run a consulting firm in Colorado. You have two employees – one in Colorado, one in Texas. You serve clients in Colorado, Texas, California, and New York. You just went from one state return to potentially four. Each state has its own filing requirements, its own due dates (which do not always match the federal deadline), its own extension rules, and its own payment requirements.

And it does not stop at income tax. Having an employee in another state triggers payroll tax obligations in that state – withholding, unemployment insurance, and sometimes state disability or paid family leave contributions. Texas has no income tax, so that part is easy – but you still have unemployment obligations there. California? That is a whole different animal. Income tax withholding, state disability insurance (SDI), employment training tax, and California’s famously aggressive Franchise Tax Board that thinks everyone with a California customer owes them money.

  • PL 86-272 Protection. There is a federal law – Public Law 86-272 – that protects businesses from state income tax if their only activity in a state is soliciting orders for the sale of tangible personal property. Sidebar: this law was written in 1959 when “soliciting orders” meant a traveling salesman knocking on doors. The world has changed. Many states are now aggressively narrowing the scope of PL 86-272, arguing that modern activities like website interactions, cookies, and online marketplaces exceed the protection. California, New Jersey, and New York have all issued guidance limiting PL 86-272 in ways that would have been unthinkable a decade ago. If you sell physical products across state lines and have been relying on PL 86-272 to avoid state income tax filings, it is time to revisit that assumption.
  • Economic Nexus for Services. This one catches a lot of service-based businesses off guard. Historically, if you were a consultant or a software company and you did not have physical presence in a state, you probably did not have income tax nexus there. That has changed. Many states now assert economic nexus for income tax purposes – not just sales tax – if you exceed a revenue or transaction threshold in the state. Let’s say you are a marketing agency in Colorado with $600,000 in revenue from California clients. California may assert that you have nexus and owe California income tax on the income apportioned to the state. You have never been to California. You do not have an office there. But your revenue crossed their threshold, and now you are filing a California return and paying California income tax. Welcome to the new normal.
  • Employees in Different States. Remote work has created a SALT nightmare for small businesses. Before 2020, most employees worked where the business was located. Now, you might have a team of five spread across three states. Each state wants its share of payroll taxes, and some states have convenience-of-the-employer rules that tax the income based on where the employer is located rather than where the employee works. New York is the poster child for this – if your company is based in New York and your employee works from home in New Jersey, New York may still tax that income. New Jersey will also want to tax it. The employee gets a credit, but the employer has filing and withholding obligations in both states. Multiply that across several states and you have a compliance headache that requires real attention.

Learn more about multi-state filing →

Sales Tax Compliance After Wayfair

We need to talk about sales tax. It is a different animal from income tax, but it is absolutely part of the SALT picture, and it has changed dramatically since 2018.

In June 2018, the Supreme Court decided South Dakota v. Wayfair and overturned decades of precedent. Before Wayfair, states could only require you to collect sales tax if you had a physical presence in the state. After Wayfair, states can impose sales tax collection obligations based on economic nexus – meaning if you exceed a certain dollar amount or number of transactions in a state, you owe sales tax there even if you have zero physical presence.

Most states have adopted economic nexus thresholds of $100,000 in sales or 200 transactions. But not all. And the rules for what counts toward the threshold (gross sales vs. taxable sales, retail only vs. wholesale included) vary by state. Some states exclude certain transaction types. Some aggregate marketplace sales with direct sales. It is not uniform, and assuming all states work the same way is a great way to get into trouble.

Here is the practical impact. Let’s say you sell handmade furniture online from your workshop in Colorado. You ship to customers in 30 states. If you exceed $100,000 in sales to customers in any one of those states, you may be required to register, collect, and remit sales tax in that state. That means understanding each state’s tax rates (which often vary by county and city), filing returns on each state’s schedule (monthly, quarterly, or annually depending on volume), and keeping track of exemptions and product taxability rules that differ state by state.

For product-based businesses, this is a compliance burden that did not exist before 2018. For service-based businesses, the picture is slightly different because many states do not tax services – but some do, and the list of taxable services varies enormously. SaaS companies live in a gray area in many states – some tax it as software, some tax it as a service, some do not tax it at all. Having said that, if you sell anything to customers in multiple states, sales tax compliance is not optional. It is a legal obligation, and the penalties for non-compliance include back taxes, interest, and penalties that can be substantial.

We help clients evaluate their sales tax exposure, determine where they have nexus, register in the appropriate states, and set up compliant collection and remittance processes. This is not glamorous work, but ignoring it does not make it go away – it just makes the eventual reckoning more expensive.

Learn more about sales tax compliance →

How SALT Connects to Entity Selection

This is something that gets overlooked in almost every “should I form an LLC?” conversation on the internet. Where you form your entity, where you operate, and what entity type you choose all have state tax consequences. Sometimes significant ones.

  • Where You Form. Wyoming and Delaware get a lot of attention as formation states because of their business-friendly laws, privacy features, and low filing fees. But forming in Wyoming when you live and operate in Colorado does not save you from Colorado taxes. You will still owe Colorado income tax on income earned in Colorado. And now you have two states to deal with – annual reports and registered agent fees in Wyoming, plus foreign qualification and filing obligations in Colorado. For most small business owners, forming in your home state is the cleanest path. There are exceptions, but they are less common than the internet would have you believe.
  • Entity Type and State Tax Treatment. The entity type you choose affects your state tax obligations in ways that do not always mirror the federal treatment. California imposes an $800 minimum franchise tax on every LLC and corporation, regardless of income. That applies even if your business loses money. S Corps in California also pay a 1.5% net income tax at the entity level, on top of the income passing through to shareholders. Texas imposes a franchise tax (technically a margin tax) on entities with revenue over $2.47 million. New Hampshire taxes business profits at 7.5% at the entity level for all business types. The point is that the “best” entity structure depends partly on which states you are dealing with – and that analysis should happen before you file your articles of organization, not after.
  • Foreign Qualification. If you form in one state but do business in another, you typically need to foreign qualify – register your entity in the state where you are conducting business. This triggers filing obligations, registered agent requirements, and often an annual report fee. It also puts you on the state’s radar for income tax, sales tax, and other obligations. Foreign qualification is not optional, and operating in a state without it can mean penalties, inability to enforce contracts, and back taxes.

Learn more about entity selection →
Learn more about foreign qualification →

How WCG Handles State and Local Tax

We are not a SALT boutique. We are a full-service CPA firm that happens to be very good at state and local tax because we have to be. When you serve clients in all 50 states – which we do – SALT is not a specialty, it is a daily reality. Every tax return we prepare, every entity we help form, every payroll we process has a state and local tax component. We see the patterns, the pitfalls, and the state-specific traps that catch business owners off guard.

Our approach is practical. We do not write law review articles about SALT theory. We figure out which states you owe money to, make sure you are filing correctly, and look for every legitimate way to reduce your state tax burden – starting with PTET elections and working through apportionment strategies, entity structuring, and compliance optimization.

Sidebar: one of the most common things we see is business owners who are filing in states where they do not have nexus (wasting money on unnecessary returns) while simultaneously not filing in states where they do have nexus (creating exposure). Both problems are fixable. The first step is understanding where you actually have obligations – and that is exactly where we start.

We also coordinate state tax planning with your federal strategy. A decision that saves you federal taxes can sometimes create a bigger state tax problem, and vice versa. SALT is not a standalone topic. It connects to entity selection, compensation strategy, retirement planning, real estate structuring, and virtually everything else we do for our clients. That is why we handle it as part of a coordinated approach rather than in isolation.

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Key Takeaways

  • SALT is more than the $10,000 cap. The SALT deduction cap gets all the headlines, but state and local tax encompasses income tax, franchise tax, gross receipts tax, sales tax, payroll tax, and property tax – each with its own rules, thresholds, and filing requirements that vary by state.
  • Nexus has expanded dramatically. Physical presence is no longer the only trigger. Economic nexus – based on revenue or transaction thresholds – can create tax obligations in states where you have never set foot. This applies to both income tax and sales tax.
  • PTET elections are a game-changer for pass-through owners. The Pass-Through Entity Tax election lets your business deduct state income taxes at the entity level, bypassing the $10,000 SALT cap. Over 35 states offer this election, and leaving it on the table costs real money.
  • Multi-state operations multiply complexity. Every additional state where you have employees, customers, or revenue means additional filing obligations, payroll requirements, and compliance deadlines. Remote work has accelerated this for many businesses.
  • Sales tax changed forever after Wayfair. The 2018 Supreme Court decision created economic nexus for sales tax, meaning online sellers can owe sales tax in states where they have no physical presence. This is not optional – it is a legal obligation.
  • Where you form matters more than you think. Forming in a “business-friendly” state does not eliminate your tax obligations in your home state. It often just adds a second state to deal with. Entity type and formation state both affect your state tax picture.
  • PL 86-272 protection is shrinking. States are aggressively narrowing the federal protection for businesses whose only in-state activity is soliciting sales of tangible personal property. If you have been relying on this protection, it is time to reassess.
  • SALT planning should be coordinated, not siloed. State tax decisions affect federal strategy and vice versa. Entity selection, compensation, apportionment, and PTET elections all interact, and optimizing one without considering the others can create problems.

FAQs

What does SALT stand for?

SALT stands for State and Local Tax. It covers every tax imposed by a state or local government – income tax, sales tax, property tax, franchise tax, gross receipts tax, payroll tax, and various fees and surcharges. When people reference the “SALT cap,” they are specifically referring to the $10,000 limit on the itemized deduction for state and local taxes on your personal federal return, which was enacted as part of the Tax Cuts and Jobs Act in 2017.

Do I need to file tax returns in every state where I have customers?

Not necessarily. You need to file in states where you have nexus – a sufficient connection that gives the state the legal authority to tax you. Nexus can be established through physical presence (office, employee, inventory) or economic activity (exceeding revenue or transaction thresholds). Having a single customer in a state does not automatically create nexus. But if you generate significant revenue from customers in a state, you may have an obligation. We evaluate nexus on a state-by-state basis for our clients.

What is economic nexus?

Economic nexus is a standard that allows a state to impose tax obligations on a business based on its economic activity in the state, even without physical presence. For sales tax, most states use a threshold of $100,000 in sales or 200 transactions. For income tax, the thresholds vary more widely. The concept gained momentum after the 2018 Wayfair Supreme Court decision, and most states have adopted some form of economic nexus.

How does the PTET election save money?

The PTET election allows your pass-through entity (LLC, S Corp, or partnership) to pay state income tax at the entity level. That payment is deductible as a business expense on the entity’s federal return, which is not subject to the $10,000 SALT cap that limits individual itemized deductions. The owners then receive a credit on their personal state returns for the tax the entity paid. The net effect is a federal tax deduction that you would otherwise lose to the cap. For a business owner in a 35% combined federal bracket paying $20,000 in state income tax, the PTET election can save $3,500 or more in federal taxes.

Does my S Corp election carry over to every state automatically?

No. Most states recognize the federal S Corp election automatically, but some require a separate state-level election. New York and New Jersey are common examples. Additionally, some states impose entity-level taxes on S Corps regardless of the election – California charges a 1.5% net income tax on S Corps, and its $800 minimum franchise tax applies to all entities. We review state-level S Corp treatment as part of every entity election engagement.

What is PL 86-272 and does it still protect me?

Public Law 86-272 is a federal law enacted in 1959 that prevents states from imposing net income tax on a business if its only activity in the state is soliciting orders for the sale of tangible personal property, and the orders are sent outside the state for approval and fulfillment. It was designed for traveling salespeople. Several states – including California, New Jersey, and New York – are now interpreting the law narrowly, arguing that modern business activities like maintaining a website, placing cookies, or providing post-sale support exceed the protection. If you sell physical products across state lines and have been relying on PL 86-272, we strongly recommend a current nexus review.

What happens if I have employees in multiple states?

Each state where you have an employee generally requires payroll tax compliance – income tax withholding, state unemployment insurance, and sometimes additional taxes like disability insurance or paid family leave. Some states also have “convenience of the employer” rules that can tax remote employees based on where the employer is located rather than where the employee works. New York is the most aggressive on this front. Having employees in multiple states also creates income tax nexus in each of those states, which may require filing business income tax returns there as well.

Is sales tax compliance really that complicated?

Yes. After the Wayfair decision, businesses that sell products (and in some states, certain services) across state lines may have sales tax collection obligations in dozens of states. Each state has its own rates, exemption categories, filing schedules, and product taxability rules. Some states tax SaaS, some do not. Some tax shipping, some do not. The volume of rules is genuinely overwhelming for a business owner trying to handle this alone. We help clients identify where they have sales tax nexus, register in the appropriate states, and implement compliant collection and remittance processes.

Should I form my LLC in a different state to save on state taxes?

Probably not. Forming in Wyoming, Delaware, or Nevada does not eliminate your tax obligations in the state where you actually live and operate. You will still owe income tax in your home state, and now you have two states to manage – the formation state and your home state (where you will need to foreign qualify). There are legitimate reasons to form in another state, such as privacy, specific legal protections, or multi-state operations where a neutral formation state makes sense. But for a single-owner business operating in one state, forming at home is almost always the right call.

How does WCG handle multi-state tax filing?

We serve clients in all 50 states and handle multi-state filing as part of our standard tax preparation process. We evaluate nexus, determine filing obligations, prepare all required state returns, manage PTET elections where applicable, and coordinate state strategy with your overall federal tax plan. We also handle state registrations, foreign qualifications, and sales tax compliance when needed. The goal is to make sure you are filing where you need to, not filing where you do not, and taking advantage of every legitimate strategy available.

Pass-Through Entity Tax (PTET) Elections

How PTET elections work, which states offer them, and how we implement them to bypass the $10,000 SALT cap.

Multi-State Tax Filing

Everything you need to know about filing in multiple states, from nexus determination to apportionment and compliance.

Sales Tax Compliance

Post-Wayfair sales tax obligations, economic nexus thresholds, and how to set up compliant collection and remittance.

Foreign Qualification

When and how to register your entity in states where you do business, and what happens if you skip it.

Business Entity Selection

How entity type and formation state affect your state tax obligations, and how to choose the right structure.

Tax Planning and Strategy

Our comprehensive approach to federal and state tax planning, including how SALT fits into the bigger picture.

Tax Planning Season

Tax planning season is here! Let's schedule a time to review tax reduction strategies and generate a mock tax return.

Tax Planning Services
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The tax advisors, business consultants and rental property experts at WCG CPAs & Advisors are not salespeople; we are not putting lipstick on a pig expecting you to love it. Our job remains being professionally detached, giving you information and letting you decide within our ethical guidelines and your risk profiles.

We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. As Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea. In other words, let’s not automatically convert “you can” into “you must.”

Let’s chat so you can be smart about it.

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