We recently published an article explaining how to open a company in the United States. The process we described is bureaucratic in nature, but it includes one significant component that requires long-term financial planning: deciding in which state to register the new company.

There are several considerations that influence the choice of state, primarily the tax conditions that vary from state to state. Needless to say, companies operating in the United States must also pay taxes, primarily sales tax, which must be paid to the state where the company is registered for every sale the company makes (similar to VAT in Israel).

So, where is it advisable to register the company in the United States? If there are no significant unique conditions related to the company’s operations, we often recommend registering the company in Delaware, where the incorporation conditions are relatively favorable. In other cases, where there is a clear connection between the company and a specific state (such as offices or a physical store), we might recommend registering the company in that state where the company has a clear presence.

But what if the company’s operations are more complex in terms of presence or financial connection? For example, what if the company has warehouses in California, a store in Illinois, and a development center in New York? In which state should the company be incorporated, and to which states should it pay sales tax?

As the external finance department for many technology companies operating in the United States, we often encounter such situations. So we need to check where the company has a nexus—a term that describes a physical or financial connection to a state that obligates it to pay sales tax.

In the not-too-distant past, the primary parameter for paying sales tax was a physical connection. That is, if a company had stores, warehouses, employees, or any other physical presence, there was a nexus between the company and the state, and the company was generally obligated to pay sales tax to that state.

Over the years, as the economy has become more digital and global, U.S. lawmakers have understood that a connection between a company and a state can exist without a physical presence. For example, a company can have an economic nexus with a state if it makes sales in that state that exceed a threshold defined by law. The significance of this connection was strengthened in 2018 by a ruling of the U.S. Supreme Court, which allowed states to collect sales tax from companies not registered in them if their economic activity in the state is significant.

Other types of nexus that we consider when recommending a state for incorporation include affiliate nexus, where the company has partners or subsidiaries in the state, and nexus based on online marketing activities conducted in a specific state, among others.

Once the state in which the company will be incorporated is decided, and after mapping all the connections to all relevant states, the company will have to pay sales tax to every state it has a nexus with. One of our important roles is to understand how much sales tax our clients are required to pay to each state according to the nature of their operations and connections, and to ensure that all tax payments are made correctly and regularly.

If you are also unsure in which state to incorporate and how to manage your company’s sales taxes, contact us.