Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business's legal form. In most states corporations are subject to a corporate income tax, while income from pass-through entities such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state's tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. Personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, six states – Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming – do not have a corporate income tax. However, four of those states – Nevada, Ohio, Texas, and Washington – do have some form of gross receipts tax on corporations. Moreover, five of those states – Nevada, South Dakota, Texas, Washington, and Wyoming – as well as Alaska and Florida currently have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a franchise tax or privilege tax. This is frequently justified as a tax simply for the privilege of doing business in the state. As with state taxes on business income, the specifics of a state's franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business's net worth.
As just mentioned, South Dakota is one of four states that have neither a corporate income tax nor a personal income tax. In fact, South Dakota is arguably the most income tax-friendly state in the country. Even state likes Nevada and Washington—which, like South Dakota, do not tax corporate or personal income—still have other important business taxes (in Nevada, there are taxes based on wages paid to employees and on businesses involved in gaming; in Washington, there's a gross receipts tax on most businesses).
The one important exception to the general absence of major business taxes in South Dakota is the state's bank franchise tax, which applies to various financial institutions. The tax is based on the institution's net income, and is assessed at a series of progressively lower marginal rates ranging from 6% on income of $400 million or less down to 0.25% on income over $1.2 billion. There is a minimum tax of $200 per business location.
Our primary focus here is on businesses operating solely in South Dakota. However, if you're doing business in several states, you should be aware that your business may be considered to have nexus with those states, and therefore may be obligated to pay taxes in those states. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated; if you run such a business, you should consult with a tax professional.
For further guidance on South Dakota's business taxes—such as they are—check the South Dakota Department of Revenue. For information on business-related taxes in other states, check Nolo's 50-State Guide to Business Income Tax. And, if you're looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Federick Daily (Nolo).
Updated: June 13, 2018