Can I avoid state taxes by forming my business in a no-tax state?
State choice matters, but nexus follows your activity
Usually not. Where you form an entity does not decide where it owes tax. Under South Dakota v. Wayfair, a state can require remote sellers to collect sales tax based on economic activity alone, and states set their own income and franchise tax nexus rules, limited for some sellers of goods by P.L. 86-272 (15 U.S.C. §381). Your home state generally taxes its residents' income wherever the entity was formed.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- Formation state, operating states, and customer states can each have their own tax claims.
- Economic nexus thresholds differ by state and by tax; Texas uses $500,000 for both remote-seller sales tax and franchise tax.
- P.L. 86-272 protects some sellers of tangible goods from state net income taxes, but Texas does not apply it to its franchise tax.
- Owners of pass-through entities are generally taxed by their state of residence on all of their income.
- Moving on paper while the people, customers, and operations stay put creates exposure, not savings.
What it is
Choosing where to form and where to operate a business is a legitimate decision. States differ in tax rates, filing requirements, fees, and incentives. But the state where an entity is formed is only one of several states that may tax it.
A business generally owes tax where it has nexus, which can come from physical presence (employees, property, inventory, offices) or, for many taxes, from economic activity such as sales into the state. Its owners generally owe individual income tax to their state of residence and, for pass-through income, to states where the business earns income.
What the law says
In South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), the Supreme Court held that the physical presence rule of Quill Corp. v. North Dakota was unsound and overruled it, upholding a South Dakota law that required remote sellers above a sales threshold to collect sales tax. Wayfair addressed sales tax, but many states also apply economic nexus standards to income and franchise taxes under their own laws.
Public Law 86-272, codified at 15 U.S.C. §381, bars a state from imposing a net income tax on a person whose only in-state activity is soliciting orders for tangible personal property that are approved and shipped from outside the state. It does not protect sales of services or intangibles, and it does not apply to taxes that are not net income taxes.
In Texas, the franchise tax applies to a foreign taxable entity that has $500,000 or more of gross receipts from business done in Texas, under 34 Tex. Admin. Code §3.586, and the Comptroller's rule states that P.L. 86-272 does not apply to the franchise tax. For reports due in 2026 and 2027, the no-tax-due threshold is $2,650,000 of annualized total revenue. For sales tax, the Comptroller does not require remote sellers with less than $500,000 of Texas revenue in the preceding twelve months to obtain a permit or collect use tax.
Requirements and tests
Map your footprint against these questions:
- Where is the entity formed, and where is it registered to do business?
- Where are its employees, contractors, offices, property, and inventory?
- In which states do its sales exceed each state's economic nexus threshold for sales tax, and are the sales taxable there?
- In which states does it meet the income or franchise tax nexus standard, and does P.L. 86-272 protect any of that activity?
- Where do the owners live, and where is the business actually managed?
- Which states require registration, annual reports, or franchise tax filings even when no tax is due?
How it works
Start with where the business is actually run. A company managed from Texas by Texas residents has Texas nexus regardless of where it was formed, and forming it in another state usually adds a second set of annual fees and filings rather than removing the first.
Next, review sales by state. Each state sets its own sales tax threshold, often a dollar amount of sales in the current or prior year. Once you exceed it, you generally must register, collect tax on taxable sales, and file returns.
Then review income and franchise tax nexus. Some states use bright-line receipts thresholds; others look at whether you are doing business there. For sellers of tangible goods, P.L. 86-272 may protect against net income taxes if the only in-state activity is solicitation, but not against gross receipts or franchise taxes such as Texas's.
Finally, consider the owners. A pass-through owner's state of residence generally taxes all of that owner's income, and other states may tax the share earned within their borders, usually with a credit at home for taxes paid elsewhere.
Assumptions: Tax year 2026; an LLC formed outside Texas sells taxable tangible goods online; it has no employees, property, or inventory outside its home state.; State A (hypothetical) requires remote sellers to collect sales tax once sales into the state exceed $100,000 in the current or prior calendar year.; Texas uses its remote-seller safe harbor of less than $500,000 of Texas revenue in the preceding twelve months.; Only sales tax collection is illustrated; income and franchise tax nexus are tested separately.
| Sales into State A | $200,000 |
|---|---|
| State A threshold | $100,000 |
| State A result | Must register and collect |
| Sales into Texas | $200,000 |
| Texas remote-seller threshold | $500,000 |
| Texas result (remote seller with no Texas presence) | No permit required under the safe harbor |
| Texas result if the business is run from Texas | Physical presence nexus; must register and collect |
The same $200,000 of sales creates a collection duty in one state and not in another, and a Texas-based business owes Texas obligations regardless of where it was formed.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
States use data from marketplace facilitators, federal returns, payroll filings, and voluntary disclosure programs to find unfiled businesses. For states where no return was filed, the assessment period may never start. Back taxes, interest, and penalties can accumulate, and sales tax not collected from customers becomes the seller's own cost. Voluntary disclosure agreements can often limit the lookback period and penalties for businesses that come forward first.
Who it is not for
This is not for anyone who wants to move a business to another state on paper while the owners, employees, customers, and bank accounts stay where they are. It is not for someone who believes a new formation erases nexus in states where the business already operates. And it is never for hiding income from a home state.
How ebotCPA helps
We map your nexus by state and tax type, identify registration and filing obligations, estimate exposure for past periods, and help with voluntary disclosure where needed. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
Does forming an LLC in Wyoming or Nevada avoid Texas tax?
No, not if the business is run from Texas or has Texas nexus. Texas taxes entities doing business in Texas, and the out-of-state formation usually adds its own fees and filings.
What did Wayfair decide?
It overruled the physical presence rule for sales tax collection, allowing states to require remote sellers above economic thresholds to collect sales tax.
Does P.L. 86-272 protect me from Texas franchise tax?
No. The Texas Comptroller's nexus rule states that P.L. 86-272 does not apply to the franchise tax, which is not a net income tax.
What is the Texas franchise tax economic nexus threshold?
$500,000 of gross receipts from business done in Texas, under 34 Tex. Admin. Code §3.586.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.