There is a rule in American tax law that can force you to file income tax returns in states you have never lived in, never owned property in, and maybe never visited twice. Professional athletes have known about it for decades. Most small business owners have no idea it applies to them too.
It is called nexus. Once you understand how it works, you will never look at an out-of-state client, contract, or job site the same way again.
Recently, a conversation about how professional athletes get taxed brought this into sharp focus for me. We talked about the so-called “jock tax” and how a player earning ten million dollars on paper can take home barely half of that. The federal government takes its cut first. Then every state they set foot in lines up behind it.
The numbers were staggering. But the math was not what struck me most. What got my attention was how perfectly the same logic maps onto a regular business owner who just started selling services across state lines.
This is not a niche issue. It is one of the fastest-growing compliance problems I see, and most of the people walking into it have no idea it is happening.
What the Jock Tax Actually Is (And Why It Matters to You)
The jock tax is not a special law written for athletes. It is just regular state income tax applied to nonresidents who earn money inside a state’s borders. States have always had the legal authority to tax income earned within their jurisdiction.
What changed in 1991 was that California went after the Chicago Bulls players who traveled to Los Angeles for the NBA Finals. Illinois fired back with its own version targeting out-of-state players. Other states followed quickly, and by the mid-1990s, most income-tax states had a version of this rule on the books.
Today, 41 states plus Washington D.C. impose income tax on nonresident athletes, coaches, trainers, and support staff. Every game, practice, and team meeting inside their borders counts. The formula they use is called the “duty day” method. It works like this: a player with 180 total duty days who spends 10 of them in California owes California tax on 10/180 of their total annual compensation. California’s top rate sits at 13.3%, so for a player earning $10 million, those handful of appearances can cost over $70,000 in state tax alone.
Now here is the part that should make every business owner reading this sit up straighter. The duty day concept is just a sports-world version of income apportionment. Income apportionment is something states apply to businesses too, not just athletes.
The Version Nobody Warned You About
When your business crosses a state line, whether physically or economically, that state may have the right to tax a portion of your income. This threshold is called nexus, and almost every state defines it differently. The general idea, however, is consistent: if you earn money in a state, that state wants its share.
Historically, nexus required a physical presence. You needed an office, an employee, or a warehouse in the state before it could tax you. That changed after the 2018 Supreme Court decision in South Dakota v. Wayfair, which opened the door for states to claim economic nexus even without a physical footprint.
Since then, most states have adopted economic nexus thresholds. Often the trigger is something like $100,000 in sales or 200 transactions in the state per year. Cross that threshold and you may owe income tax, franchise tax, or sales tax, depending on what you sell and how your business is structured.
For an athlete, the “crossing the line” moment is the day they step on the field. For a business owner, it can be signing a contract, sending an employee for a week-long project, or simply hitting a revenue threshold with out-of-state customers. The triggering event looks different. The tax obligation that follows is remarkably similar.
A Real Number to Put Things in Perspective
Think about the MLB player’s story I referenced above. He signs a contract worth $10.7 million. After federal taxes, he is down to roughly $6.7 million. Michigan then takes almost $700,000. After that, every state he plays in during the season takes its slice based on the days he spent there. By the time the season ends, he is somewhere around $5.8 million on what looked like a $10.7 million deal. He has not spent a single dollar yet.
Now scale that concept down to a business owner. Say you run a consulting firm in Florida and land a major client in New York. You fly up four times that year for meetings and project work. Depending on how your business is structured, you might owe New York state income tax on the portion of your income tied to those days. New York’s top individual income tax rate is 10.9% as of 2025. That is not a rounding error.
Consider a contractor who lives in Tennessee, which has no income tax, but regularly takes jobs in Georgia and North Carolina. Think about a staffing agency in Texas that places employees temporarily across multiple states. Picture a trucking company based in Florida with routes through a dozen states. In every one of these situations, multi-state tax exposure is not theoretical. It is a real filing obligation that most people are completely unprepared for.
The Hidden Pattern Across State Lines
If you have been following the state tax series I have been building out recently, starting with Hawaii and Connecticut and continuing through California and New Jersey, you already know how aggressively some of these states pursue their piece of the pie. The jock tax is just the most visible version of the same instinct.
These states are not shy about it either. California will tax a visiting athlete based on a handful of duty days inside its borders. New York will track down income earned by nonresidents who worked there, even briefly. The rules that protect the well-informed are the same rules that punish the uninformed.
The “I Didn’t Know” Problem
Here is what concerns me most: the penalty for not knowing is the same as the penalty for knowing and ignoring it. States do not grade on a curve for ignorance.
When athletes get surprised by a jock tax bill, the story usually surfaces later as public financial trouble. They saw $10 million in a contract and gave $100,000 to a family member. Another $100,000 went somewhere else. Then they discovered that Uncle Sam and half a dozen state governments had already claimed the majority of what was left. The money was gone before the tax bill arrived.
Business owners make the exact same mistake, just in slower motion. They see revenue coming in from out-of-state clients and treat it like any other income. Filing requirements in states with no office, no employees, and no lease never cross their mind. Then a notice arrives from a state tax authority, usually with back taxes, interest, and penalties covering multiple years they did not even know they owed.
This is exactly why tax planning is not something you do once a year in April. Planning that starts in January, or better yet the prior fall, separates businesses that are always catching up from businesses that are always ahead. My earlier piece on why your CPA can’t save you in January goes deeper on that mindset if you want to explore it.
If your business is growing and you are starting to see revenue from multiple states, right now is the time to map your exposure. Do not wait for a state to send you a letter first.
How Nexus Applies to Your Specific Business
The rules vary enough by state and by business type that no single universal answer exists, which is honestly part of the problem. But some common patterns are worth knowing.
For service businesses, the key question is usually where the service was performed, not where the client is located. However, some states use a market-based sourcing rule, which looks at where the customer received the benefit of the service. That distinction matters enormously.
Under market-based sourcing, a client in California paired with a team working remotely from Florida may still give California the right to tax that revenue. California is particularly aggressive on this point, which is one reason it keeps coming up in this series.
Product Businesses, Remote Workers, and the Duty Day Connection
For product businesses, the nexus analysis usually centers on inventory location, employee presence, and delivery patterns. Goods stored in a warehouse in Ohio almost certainly create nexus in Ohio. Shipping from Florida while a sales rep regularly visits Pennsylvania accounts may give Pennsylvania a nexus argument based on that physical presence alone.
Remote employees represent a newer and growing area of exposure. Hiring someone who works from home in a state where your company is not registered may create nexus in that state based on that employee’s presence alone. Some business owners discovered this the hard way. They were proud of their remote-first model and then received a tax notice from a state they had never filed in.
The duty day concept from the jock tax world maps cleanly onto all of this. Where your people spend their working days matters, just as it matters for the athlete filing in every state their schedule takes them.
What You Can Actually Do About It
The good news is that multi-state tax exposure is manageable. It just requires attention and a willingness to look at it honestly before a state tax authority forces the conversation.
Start with a nexus review. Map where your revenue comes from, where your employees or contractors work, where your projects happen physically, and whether any of those activities cross thresholds in states you are not currently filing in. This is not a one-time exercise. It should happen annually, especially as your client base expands geographically.
Next, get your entity structure right. The way your business is organized plays a real role in how multi-state taxes land. An S-Corp carries different filing obligations than a sole proprietorship, and the difference in how income flows through at the state level can be significant. My piece on LLC vs. S-Corp in 2026 covers this in detail if you want to go deeper.
Finally, if you are already behind, look into voluntary disclosure. Most states have programs that let businesses come forward proactively, often in exchange for reduced penalties or a limited lookback period. Coming forward beats getting caught in almost every case. State tax authorities are increasingly sophisticated at identifying businesses with unfiled obligations, and the gap between what you owe and what you pay grows every year you wait.
The contract says one number. The tax system has already divided it up before you cash the first check. The only question is whether you know it yet.
That line applies to a outfielder in MLB, and it also applies to a contractor in Tennessee. The States just simply do not care.
The Bigger Picture
Think about the divide between informed and uninformed. The athlete who knows the jock tax is coming can plan for it. They structure endorsement income carefully, choose where to establish domicile thoughtfully, and keep the right advisors tracking their duty days across every jurisdiction. The athlete who just sees the number on their contract and starts spending always ends up short.
The business owner who knows multi-state nexus is a real issue can get ahead of it in exactly the same way. They structure their business to minimize unnecessary exposure, think carefully about where they hire remote workers, and make sure their entity handles multi-state income efficiently. The business owner who does not know it is happening will get a letter eventually. Letters from state tax authorities are never good news.
The right advisor changes the outcome completely. Not because the tax law is different for those who understand it, but because knowing it is coming gives you the ability to plan around it. The jock tax shows us that even the most public, well-documented income in the world can look dramatically different from what actually lands in your pocket. Your business income works the same way.
Getting ahead of that reality is the difference between strategy and scrambling.
Because wherever your business earns money, the rules of that game are already set. The only real variable is whether you are playing with or without a plan.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
