The pattern is now so common it barely warrants explanation. A company hires someone who happens to live in another state. Payroll software cheerfully withholds for that state because somebody typed the address in. Nobody registers anything. Two years later a notice arrives, or a diligence process finds it, and what would have been a routine registration has become an assessment with interest.
What one employee actually triggers
Physical presence through an employee generally establishes nexus for corporate income or franchise tax, and almost always for payroll withholding and unemployment insurance. Depending on what the employee does, it may also defeat the protection that would otherwise apply to a company merely soliciting sales.
- Income or franchise tax: a return in that state, with the firm’s income apportioned to it
- Payroll withholding: a registration and periodic filings, even for one person
- Unemployment insurance: a separate account with its own rate and returns
- Sales tax: where the employee’s activity exceeds solicitation, or an economic threshold is crossed
- Local filings: in a handful of jurisdictions, a city or school district obligation as well
The exposure is rarely large. What makes it expensive is the years of penalty and interest accumulated while nobody was looking.
The two routes, priced honestly
The instinctive response is to register now and move on. It is the cheaper option to execute and it is frequently the wrong one, because registering prospectively does nothing about the open back years. States are entitled to look back indefinitely where no return was ever filed, and a new registration is a reasonable prompt to do exactly that.
The alternative is a voluntary disclosure agreement. Your representative approaches the state anonymously, describes the facts without naming you, and negotiates terms before identifying the taxpayer. In most states this produces a limited look-back period, commonly three or four years, and abatement of penalties, with interest usually remaining.
A disclosure agreement costs more to run than a registration. It is nonetheless the better value in almost every case where the exposure spans more than two years, because it converts an open-ended liability into a closed number.
Do the arithmetic before you act
The order matters. Quantify first: tax, interest and penalty by state and by year, built from payroll registers and sales by ship-to state rather than from recollection. Only then choose the route. Registering in a state before you know the size of the exposure is how a manageable problem becomes an assessment.
One further point. Voluntary disclosure is only available while the state has not yet contacted you. A nexus questionnaire in the mail closes that door. If you have received one, the calculus changes and speed matters considerably more.
This note is general information, not advice. Tax and accounting outcomes turn on specific facts and the rules change. Speak to us, or to another qualified advisor, before acting on anything here.