Multi-State Tax Compliance for Architecture Firms: A Complete Guide to Out-of-State Work

Expanding your architecture firm to out-of-state projects is a  significant milestone, but it also introduces a labyrinth of multi-state tax compliance challenges. Failing to navigate these complexities can lead to substantial penalties, interest, and back taxes, turning a profitable project into a financial liability.

This guide provides a comprehensive overview of the key tax issues architecture firms must consider before expanding their operations across state lines, focusing on corporate income tax, sales tax, individual income tax, and special considerations for states like Washington, California and New York.

Corporate Income Tax Nexus: You Don’t Need an Office to Owe Taxes

One of the most significant shifts in multi-state taxation is the move away from physical presence as the sole determinant of tax liability. Many states have adopted “factor-based” nexus standards, meaning  a business can be required to file and pay corporate income tax if it exceeds certain thresholds in property, payroll, or sales— even without a physical office or employees in the state.

For architecture firms, this is particularly relevant when providing services to clients in other states. Exceeding any one of these thresholds can create nexus*, triggering a filing requirement. These thresholds vary significantly by state, as shown in the table below:

Once nexus is established, states use apportionment formulas to determine the portion of your firm’s income that is subject to tax. Many states now use a single-factor sales formula, meaning only the sales made to customers in the state are used to apportion income.

For architecture and engineering firms, the key is how states source service revenue. Most states use a “market-based” sourcing rule, attributing revenue to the state where the customer receives the benefit of the service. This can be complex for architectural services, as the benefit may be received where the project is located, where the client is located, or where the plans are used.

For most small to mid-sized architecture firms, you should assume corporate income tax nexus exists once your project fees from a single state exceed $100,000 in a calendar year. While some states have higher thresholds, this conservative benchmark helps you avoid the costly mistake of missing a filing requirement.

Before accepting any out-of-state engagement, ask your prospective client 3 critical questions:

• Where is the project physically located?

• Where is your company headquartered?

• Where will the plans be primarily used or implemented?

The answers determine which state(s) may claim the right to tax your income.

For example, if you're working on a $500,000 project from California for a New York-based client developing a Colorado property, you could potentially trigger nexus in all 3 states depending on how each sources service revenue. As a practical matter, firms should plan to file a corporate income tax return in any state where the project is physically located once annual fees exceed $100,000, and consult with a multi-state tax advisor (like us) before accepting projects that will push you over this threshold in a new state.

The cost of proactive planning is minimal compared to the penalties, interest, and back taxes from non-compliance.

*Nexus: Nexus is the legal threshold that determines whether a state has the right to tax your firm's income. Once established, nexus creates an obligation to register, file tax returns, and potentially pay taxes in that state—regardless of whether your firm has a physical office there..

Sales and Use Tax: Economic Nexus and Tangible Goods

In the wake of the Supreme Court’s decision in South Dakota v. Wayfair, states have adopted economic nexus rules for sales tax. These rules generally require remote sellers to collect and remit sales tax if they exceed a certain sales threshold (often $100,000) or a certain number of transactions (often 200) in the state.

For architecture firms, this is most relevant if they sell tangible goods to customers in other states. While most states do not tax professional services like architecture, some states do tax certain design or consulting services, or the sale of tangible deliverables such as:

• Printed plans and blueprints

• Physical models

• Software or digital files delivered on tangible media

• Commissioned furnitures

It is crucial to review each state’s sales tax rules to determine if any of your firm’s deliverables or services are subject to sales tax. Failing to collect and remit sales tax can result in the firm being liable for the tax, plus penalties and interest.

Individual Income Tax: The Employee Travel Tax Trap

Perhaps the most significant compliance burden for architecture firms with out-of-state projects is nonresident individual income tax. Many states require nonresidents to file an income tax return if they earn any income from work performed in the state, even for a single day. This means a single site visit, client meeting, or project inspection can trigger a filing requirement for your employees.

These “day one” states create a significant administrative challenge, requiring firms to track employee travel and activities with precision. Some states have adopted more generous safe harbor thresholds, but these vary widely:

• 30 Days: Illinois, Indiana, and Montana require filing only after 30 days of work in the state.

• $5,000 or 5% of Wages: Georgia requires filing if more than $5,000 or 5% of total wages are earned in the state.

• Combination: Connecticut and Maine require both a minimum number of days and a minimum amount of income before filing is required.

Employers may also be required to withhold state income tax for nonresident employees working in the state, often starting on day one. To avoid double taxation, states generally allow residents to claim a credit for taxes paid to other states on the same income. However, a few states, such as New York, Pennsylvania, and Connecticut, have “convenience of the employer” rules, which can result in double taxation for remote employees.

Special Considerations for Washington State

Washington presents a unique set of tax challenges for out-of-state architecture firms. The state does not have a corporate income tax but imposes a Business & Occupation (B&O) tax on gross receipts. Out-of-state firms with more than $100,000 in sales allocated to Washington must register and pay B&O tax. Unlike income tax, B&O tax is based on gross receipts, not net income, meaning you pay tax even if you operate at a loss.

Washington also has a Real Estate Excise Tax (REET) that can be triggered by the sale of a controlling interest (50% or more) in an entity that owns real estate in the state. This means if your firm owns property in Washington and you sell a majority stake in your firm, you could owe REET on the value of the Washington property, even if the sale occurs entirely out of state.

California Corporate Income Tax: Low Thresholds and Market-Based Sourcing

California has the lowest corporate income tax nexus threshold in the country at $735,019 in sales, making it particularly easy for architecture firms to trigger filing requirements with a single large project. The state uses single-sales-factor apportionment combined with market-based sourcing rules, meaning revenue is attributed to the state where the project is located rather than where the firm is headquartered. The California Franchise Tax Board conducts regular audit sweeps of professional services firms and is known for aggressive enforcement of these nexus standards.

California's corporate tax rate is 8.84% on net income. The state also requires withholding for nonresident employees starting on day one of work performed in California, and those employees must file California nonresident returns if they earn any California-source income

As an example, consider a Houston-based architecture firm organized as an S-Corporation that secures a $900,000 contract to design a mixed-use development in San Diego. The firm has no California office, employees, or property—just this single project. The firm exceeds California's $735,019 sales threshold, triggering nexus. Under market-based sourcing rules, the entire $900,000 in revenue is sourced to California because that is where the project is located and where the client receives the benefit of the services.

If the project generates $180,000 in net income (a 20% margin), California apportions 100% of that income to California. At the 8.84% corporate rate, the firm owes approximately $15,900 in California corporate income tax. Additionally, if a senior architect from the Houston officemakes 8 site visits to California totaling 12 days of work, that architect must file a California nonresident tax return. If those 12 days represent $8,000 in wages, California income tax on that amount would be approximately $744 at the applicable bracket, and the firm should have been withholding California tax from day one.

Failing to register and file creates substantial penalties. The firm would owe the $15,900 in tax plus a 25% penalty ($3,975) plus interest compounding at 5% annually. After 2-3 years when discovered during an audit, this turns a $15,900 liability into more than $21,000.

New York Corporate Income Tax: Convenience of Employer Rule and New York City Complications

New York establishes corporate income tax nexus at a higher threshold of $1,283,000 in sales, using only a sales factor with no property or payroll thresholds. However, New York creates unique compliance challenges through its "convenience of the employer" rule and New York City's separate taxation of businesses operating within the city limits.

The convenience rule provides that if a New York resident employee works remotely for their own convenience rather than the employer's business necessity, New York taxes 100% of their wages as New York-source income even if the employee physically performs the work in another state. This can create double taxation when combined with other states' sourcing rules.

New York's corporate tax rate is 6.5% at the state level. New York City imposes an additional 8.85% corporate tax for C-Corporations doing business in the city, or a 4% Unincorporated Business Tax (UBT) on partnerships and LLCs taxed as partnerships for income allocated to the city.

Consider a Dallas-based architecture firm organized as an LLC taxed as a partnership that wins a $1.5 million contract to design a residential tower in Manhattan. The firm has no New York office or employees, but the project exceeds New York's $1,283,000 sales threshold, triggering nexus. Under New York's market-based sourcing rules, the entire $1.5 million in revenue is sourced to New York because the project is located there and that is where the client receives the benefit of the architectural services.

If the project generates $300,000 in net income (profit), New York apportions 100% of that income to New York. As a partnership, the firm itself does not pay New York corporate income tax—instead, that income flows through to the partners. The firm must file a New York partnership return and issue K-1s showing each partner's share of New York-source income. With three equal partners, each receives a K-1 showing $100,000 of New York-source income.

Each Texas-resident partner must file a New York nonresident income tax return and pay New York tax on their $100,000 share at rates up to 10.9%, resulting in approximately $10,900 per partner in New York tax liability. The partners would typically claim a credit on their home state tax return for taxes paid to New York, but since Texas has no income tax, this credit provides no value. The partners effectively pay the full New York tax with no offset.

Additionally, because the project is located in New York City, the firm must register for the New York City Unincorporated Business Tax and pay 4% UBT on the $300,000 allocated to the city, resulting in $12,000 in NYC tax. This UBT is imposed on the firm itself and is separate from the state income tax the partners pay on their individual returns.

The total tax impact on this project is $32,700 in partner-level New York income tax plus $12,000 in NYC Unincorporated Business Tax, totaling $44,700 in New York taxes on $300,000 of project income; an effective combined rate of nearly 15%. If the firm sends architects to New York for site visits, those employees must file New York nonresident returns for any wages earned during those days, and the firm must withhold New York tax starting on day one.

Software Solutions for Multi-State Tax Tracking: Automating Compliance for Architecture Firms

Manual tracking for multi-state tax compliance consumes 20-40 hours annually for firms with modest out-of-state activity. The right software configuration eliminates most of this burden by capturing compliance data as part of your normal workflow

Time Tracking Software with State-Level Location Tagging

Most architecture firms use time tracking software like Deltek, BQE Core, or Unaflow, but few configure it for multi-state compliance. The critical setup requires two location fields for every time entry:

(1) where the employee physically performed the work, and

(2) which state the project is located in.

This dual-tagging automatically generates data needed for both nonresident income tax calculations and revenue sourcing.

Without this configuration, you're reconstructing employee travel from credit card statements during tax season—a process prone to errors. With proper setup, year-end reports show exactly how many days each employee worked in each state and which states your revenue should be sourced to.

Accounting System Revenue Classification by State

QuickBooks, Xero, and other accounting platforms allow custom fields that most firms underutilize. Create a mandatory "Project State" field that tags every invoice to a specific state. This allows reports showing total revenue by state at any point, making it clear when you're approaching nexus thresholds.

For firms using practice management software with integrated billing, state classification should flow automatically from project setup to invoices; capturing data once at project creation rather than manually categorizing hundreds of transactions at year-end.

Payroll Systems with Multi-State Wage Tracking

If employees travel to out-of-state projects, your payroll system (Gusto, ADP, Paychex) must track wages earned by state for each employee. Most providers offer this functionality, but it requires submitting travel information regularly through uploaded timesheets with state codes or integrated data from your time tracking system.

Failing to track this creates two problems:

(1) you don't know when employees trigger nonresident income tax filing requirements, and

(2) you may be under-withholding, leaving employees withsurprise tax billsand your firm potentially liable for penalties.

Client Intake Documentation for Tax Compliance

Modify your client intake form or CRM to capture three mandatory tax fields: project physical location (state and city), client's principal place of business, and where the final work product will be primarily used. Make these fields required; preventing the common scenario where this information is never documented and must be reconstructed months later when preparing tax returns.

The Implementation Reality

Configuring these systems requires 4-8 hours upfront but delivers substantial annual time savings. More importantly, automated tracking dramatically reduces the risk of missed filing obligations that can result in penalties far exceeding the cost of professional tax advice.

Conclusion

Multi-state tax compliance for architecture and engineering firms is a complex and ever-changing landscape. Proactive planning, meticulous tracking, and thorough documentation are essential to manage risk and avoid costly surprises. By understanding the nuances of nexus, apportionment, and nonresident income tax, your firm can confidently expand its operations and seize new opportunities without running afoul of state tax authorities.

References

[1] 26 U.S. Code § 861 - Income from sources within the United States. https://www.law.cornell.edu/uscode/text/26/861
[2] 26 U.S. Code § 862 - Income from sources without the United States. https://www.law.cornell.edu/uscode/text/26/862
[3] WAC 458-20-194 - Doing business inside and outside the state. https://app.leg.wa.gov/wac/default.aspx?cite=458-20-194

Sunbridge Advisory
Your dedicated finance and tax team

_{DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this e-mail/newsletter. As a result, we are required to advise you that any Federal tax advice rendered in this e-mail is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us}