Business activity in a new state can trigger more than one registration requirement. If your activities meet that state’s definition of “doing business,” you will need to “foreign qualify” with the Secretary of State. If you meet only the state’s sales tax nexus standard, you may need to register with the Department of Revenue or Department of Taxation.
This article explains how each requirement works, where they overlap, and what other registrations may come with your first activity in a state.
When foreign qualification is required
Foreign qualification is the process of registering your business to operate in a state other than the one where the business was initially formed. Your company is "domestic" in its state of formation and "foreign" in every other state. In this context, "foreign" means out of state, not out of the country.
For example, if you formed your LLC in Delaware, it is considered a domestic LLC in that state. If you then register your LLC in New York, it would be considered a foreign LLC in that state. Foreign qualification is handled by the state's business filing office, usually the Secretary of State.
Each state decides what counts as “doing business” within its borders. In general, a business may need to foreign qualify before it begins doing any of the following in the state:
- Maintaining a physical presence, such as an office, store, warehouse, or factory
- Employing people who live or work there
- Owning or leasing property there for ongoing business use
This is not a complete list, and state statutes and courts use different criteria for what counts as doing business.
Failing to foreign qualify when it is required can lead to monetary penalties and limit your ability to bring a lawsuit in that state’s courts. The penalties are covered in more detail in What is doing business in another state (foreign qualification)? An attorney can help you determine whether your business needs to foreign qualify in a particular state.
Sales tax nexus and remote sales
There is an important distinction between “doing business” for foreign qualification and “doing business” for the purposes of state tax. State tax laws apply a separate standard known as sales tax nexus, which is the connection between a business and a state that gives the state authority to require tax collection.
Traditionally, states required only retailers with a physical presence in the state to register with the Department of Revenue for sales tax. Today, a business with no physical presence in a state can still have nexus there through its online or other remote sales. This is known as economic nexus.
Economic nexus is typically triggered when a business’s sales into a state reach a threshold the state sets. Thresholds are usually based on a dollar amount, a number of transactions, or both. Once a business meets a state’s threshold, it must register with the Department of Revenue or Department of Taxation, collect sales tax from customers, and remit it to the state. Thresholds vary by state and are subject to change. Failing to register when required can be expensive. A business that should have been collecting sales tax is generally liable for the uncollected tax out of its own pocket, plus interest and penalties. Penalties and look-back periods vary by state.
Foreign qualification and sales tax registration are separate processes handled by different agencies, and completing one does not satisfy the other.
Business activities that can trigger registration
Here is how some common business activities relate to foreign qualification and sales tax registration. These are general examples, and requirements vary by state.
Activities without a physical presence:
- Selling products online to customers in the state. This can create a sales tax obligation if your sales pass the state’s economic nexus threshold, which can mean registering with the Department of Revenue.
- Selling services online to customers in the state. Some states tax digital services like software subscriptions and web hosting, while others tax only a narrow set of services. Check whether your service is taxable there. If it is, and you pass the state’s economic nexus threshold, you may need to register with the Department of Revenue.
Activities that put people, property, or inventory in the state:
- Opening an office or storefront. A physical location is a strong trigger for foreign qualification and creates physical nexus for sales tax. Local licenses and permits may also apply.
- Hiring a remote employee. An employee who lives or works in the state is a common trigger for foreign qualification. This can also create sales tax nexus and require employer registrations, such as withholding and unemployment insurance.
- Storing inventory in a warehouse you own or lease. This usually requires foreign qualification and creates sales tax nexus.
- Storing inventory at a third-party fulfillment center. Inventory stored in a state creates sales tax nexus, even if a third-party logistics provider manages it. This generally means registering with the Department of Revenue.
How to register your business in a new state
To foreign qualify your business in another state, you must file a Certificate of Authority with that state. Some states also require a Certificate of Good Standing from the state where your business was formed, and you’ll need to appoint an in-state registered agent. Filing fees vary by state. To learn more, read What is doing business in another state (foreign qualification)?
If you have sales tax nexus in a state, you will generally need a sales tax permit, which some states call a seller’s permit or sales tax license. The permit authorizes your business to collect sales tax from customers in the state and requires you to report and remit it on a regular schedule. You’ll apply through the state’s tax authority, typically the Department of Revenue. If you need to foreign qualify, complete that before registering with the Department of Revenue.
Other compliance requirements
Other compliance requirements may apply in addition to foreign qualification and sales tax registration.
- Registered agent. If you foreign qualify, you must appoint a registered agent with a physical address in the state to receive legal and government documents on your behalf.
- Annual report. Most states require foreign-qualified businesses to file an annual or biennial report with the Secretary of State to stay in good standing. Fees and due dates vary.
- Employer registrations. If you hire an employee who lives or works in the state, you must register for state payroll taxes. That means setting up state income tax withholding with the Department of Revenue and a state unemployment insurance account with the state labor or workforce agency. Most states also require employers to carry workers’ compensation insurance.
- Local business licenses and permits. Cities and counties often require their own licenses, whether you open a storefront or office or operate a home business.
- Industry and professional licenses. Regulated businesses, such as contractors, healthcare providers, financial services firms, and food sellers, may need a state license or professional registration before they can operate, even if they’re already licensed elsewhere. There may be additional industry-related licensing requirements at the local level.
- State income and franchise tax. Having nexus in a state can also create an obligation to file business income and franchise tax returns there. Franchise and income tax rules are separate from sales tax, so meeting one standard doesn’t tell you whether you meet the other.
Requirements, agencies, and deadlines differ by state, so check with the state’s Secretary of State and Department of Revenue to confirm what applies to you. Foreign qualification is required before you start doing business in a state. Sales tax registration is generally required once your sales into a state pass its economic nexus threshold, and many states set strict deadlines for registering after that point. An attorney or tax professional can help you confirm which registrations apply to your business.
Learn more
BizFilings' foreign qualification service includes access to business monitoring to help you stay on top of important future state filings. Visit our Foreign Qualification Service page for more information.