Mark,

Just incorporating in another state does not mean that is the only state where you would be subject to taxation. You have the correct term, nexus, which means physical connection. States are allowed to assess tax against a business when that business has nexus with the state. Nexus can be created by any number of factors, but typically it is because a business has physical assets, locations, operations or employees in the state. If you moved the entire business and no longer had an office or lived in Utah, then you would likely not be subject to tax there because you would have broken that physical connection, but living in and operating your business from a state maintains nexus there. Forming a legal entity also establishes nexus with one state, but does not remove it from another.

If you incorporate in one state and operate from another, you have nexus in both states and would then need to apportion your income for the business based on where you did business. Certainly with an internet based business, you could establish that the main office of the business is in Nevada and thus you are only subject to Utah tax to the extent that income is attributable to Utah operations, but if your entire operation is in Utah, then everything is now taxable in both Utah and Nevada. While Nevada does not have an individual or corporate income tax it does have sales tax.

You would not pay tax to other states unless you somehow established nexus in another state, such as by physically moving there. Simply selling items to customers in a state does not typically establish nexus with a state, but I can’t say that is absolute, because every state has its own laws. Some states, notably California, have recently passed or are considering laws which create a concept called “economic nexus”. In simple terms, the California law says that if you sell enough to California customers, then you have California nexus. I am not an attorney, but I can say there are prior federal court and even US Supreme Court rulings that would seem to contradict that part of the California law, but so far it has not been challenged.

I think the bottom line here is most small businesses are usually better off to simply establish an LLC in the home state where you actually live and operate your business.