Expanding into a second or third location is an exciting step for any franchise business. Growth usually brings stronger brand presence, more customers, and higher revenue potential. It also introduces new tax considerations that are easy to overlook when the focus is on operations and expansion.
For many franchise owners, state tax nexus becomes a concern for the first time during this stage of growth. You may hear the term from a CPA, a lender, or another owner and start wondering what it actually means for your business. Does opening additional locations automatically create new state tax obligations, and if so, how far do those obligations extend?
Multiple Locations Alone Are Not The Test
State tax nexus is about connection, not scale. A state has the right to tax a business when that business has a sufficient connection to the state. That connection is created by specific activities, not by the number of locations you operate overall.
If all of your franchise locations are in a single state, you generally only have nexus in that state, even if you operate 10 or 20 units. Adding more locations in the same state increases complexity, but it does not automatically expand your tax footprint across state lines.
Nexus comes into play when your business activities extend into other states, either physically or economically.
Why A Physical Location Almost Always Creates Nexus
A physical location is one of the clearest and strongest nexus triggers. When your business owns or leases property in a state, operates a store, employs staff, or holds inventory there, most states consider that a sufficient connection to impose tax obligations.
For multi-location franchises, this means that each state where you have a physical location will almost always require some level of compliance. That compliance often goes beyond sales tax and can include income tax, franchise tax, gross receipts tax, payroll withholding, and state unemployment insurance.
Once you have a physical presence, many of the nuances around economic thresholds disappear. You are no longer treated as a remote seller in that state. The focus shifts from whether you have nexus to what taxes apply and how filings should be handled.
Sales Tax Nexus Is Often The First Issue Owners Encounter
Sales tax is usually the most visible and immediate nexus issue for growing franchise brands. States have the authority to require sales tax collection based on economic activity, even without physical presence.
Most states with a sales tax now have economic nexus rules. These rules typically require registration once a business exceeds a certain amount of sales into the state, even if there is no store or office there. Thresholds vary by state and can change over time.
For multi-location operators, this creates two parallel considerations. First, states where you have physical locations almost always require sales tax registration and collection. Second, states where you ship products or deliver taxable services may also require registration if economic thresholds are met.
A practical step here is tracking sales by destination state, not just by store location. This helps you see where thresholds may be approaching and avoids reactive registrations after notices arrive.
Income Tax Nexus Is A Separate Analysis
One of the most common mistakes franchise owners make is assuming that sales tax nexus rules apply to income tax as well. In reality, states treat these taxes separately, with different standards and thresholds.
Income tax nexus often depends on factors such as property, payroll, and in-state activity. Some states use factor presence thresholds, which look at whether your property, payroll, or sales exceed specific amounts within the state. Others rely more heavily on physical presence and business operations.
There are also federal rules that can limit a state’s ability to impose net income tax in certain situations, but those protections are narrow. Activities that go beyond basic solicitation, such as services, installations, repairs, or certain online activities, can quickly eliminate those protections.
For multi-location brands, the takeaway is simple. Do not assume that because you are compliant for sales tax, your income tax obligations are fully addressed. Each tax type deserves its own review.
Common Nexus Triggers That Are Easy To Miss
Not all nexus comes from storefronts. Many multi-location operators create tax exposure without realizing it through everyday operational decisions.
Having employees or contractors working in a state, even temporarily, can create nexus. Storing inventory in third-party warehouses or fulfillment centers can do the same. Attending trade shows, performing installations, or providing in-state services may also establish a taxable connection, depending on the state.
These triggers often come from centralized decisions made at the brand level. A fulfillment change, a new service offering, or a remote hire can quietly expand your tax footprint across multiple states.
Why Entity Structure And Operations Matter
Nexus is determined at the entity level, not the brand level. In franchise and multi-entity structures, the details matter. The entity that makes the sale, employs the staff, holds the lease, or owns the inventory is typically the one with the tax obligation.
If you operate multiple entities, such as a management company, an intellectual property company, or an e-commerce entity, each one may have a different nexus profile. Even when locations look identical from the outside, the underlying structure can change the tax analysis significantly.
This is why documenting who does what, and where, is so important. Clear records make it easier to determine obligations and support positions if questions arise later.
What This Means For Growing Franchise Brands
Expansion almost always increases tax complexity, but it does not have to create chaos. Multiple locations do not automatically create nexus everywhere, but each new activity should be evaluated through a nexus lens.
The earlier you build nexus awareness into your expansion plans, the easier compliance becomes. Waiting until notices arrive or audits begin often leads to rushed decisions and higher costs.
State tax nexus is not about how big your brand is. It is about where and how you operate. For multi-location franchise owners, understanding that distinction is key to sustainable growth.
At Specialized Accounting Services, we work with franchise and multi-location brands to map their state tax footprint, identify filing obligations, and put practical compliance systems in place. If you are expanding, adding new revenue streams, or are unsure whether your current filings match your operations, it may be time for a proactive review.
Go ahead and book a call with us. With the right guidance, your tax structure can support your expansion instead of slowing it down.
