How To Choose the Best E-Commerce Warehouse Location: Key Tax and Logistics Considerations

Selecting the optimal state for your e-commerce warehouse or third-party logistics (3PL) facility involves more than just proximity to customers or major transportation hubs. While shipping speed and costs are critical to this decision, state taxes should also be considered, as they can vary widely across states and turn out to be either beneficial or unexpectedly expensive for businesses.

Why Warehouse Location Impacts More Than Logistics

Many businesses prioritize warehouse placement based on customer proximity, transportation access points, and labor availability to optimize efficient distribution. However, storing inventory in a state establishes a physical nexus, which could trigger various state filing obligations.

Corporate Income Tax

Apportionment

In states with a corporate income tax, the state tax liability is largely determined by apportionment, a percentage calculated based on up to three factors (sales, payroll, and property), depending on state law. Apportionment is supposed to represent the percentage of the business conducted in each state. However, depending on each state’s law, some states may use only sales as a source in their apportionment formula, while others may use all three factors. This offers a valuable opportunity that can be utilized with effective planning.

For example, if a business has a warehouse in a state with an apportionment formula that includes property and payroll, its apportionment factor for that state will likely be larger than that of a business located in a state with a single sales factor formula. Since the inventory, machinery, equipment, etc., inside the warehouse would be included in the property factor and the payroll of the warehouse workers would be included in the payroll factor, it is likely these two factors would increase the overall percentage once all factors are considered. As such, it may be more advantageous to place a warehouse in a state that uses a single sales factor apportionment formula.

More states are shifting their apportionment rules from using sales, property, and payroll to a single sales factor formula, particularly where sales are generated and value is realized in the marketplace.

Public Law 86-272

Additionally, Public Law 86-272 (P.L. 86-272) should also be considered by Companies selling tangible personal property. P.L. 86-272 is a federal law that limits states’ ability to impose net income taxes on out-of-state businesses engaged in interstate commerce. To receive this protection, the business’s activities within the state must be limited to soliciting orders for the sales of tangible personal property. It is vital to note that this protection does not apply to businesses that provide any services (i.e., design, maintenance, installation, SaaS, or any other services related to the sale of tangible personal property). PL. 86-272 applies only to taxes based on income, not gross receipts, franchise, net worth, or any other tax not based on income.

Under P.L. 86-272, a business would not be subject to income tax if all conditions are met, which can be advantageous if managed correctly in relation to warehouse placement, storage, or inventory, or by having non-sales employees located in the state. It should also be noted that recent developments by the Multistate Tax Commission and various states have intensified challenges to the traditional interpretation of P.L. 86-272, signaling a shift in nexus standards for businesses engaged in interstate commerce. If a business is keen on keeping this protection, this should be a major consideration in location planning and hiring strategy.

While PL 86-272 can be used advantageously, it is very important to ensure the business is not engaged in any non-protected activities. Additionally, it may be more advantageous not to claim PL 86-272 in some states for various reasons, such as throwback rules and state tax rate differences. Planning around these state tax topics can save big on taxes now and for years to come.

Throwback Sale Rules

Another topic to keep in mind regarding sourcing sales is the throwback rules. Some states impose a throwback rule that applies when tangible personal property is sold to a customer located in a state where the business is not taxable. If goods are shipped from a state with a throwback rule, those sales would be sourced to the origination state, even though the customer is out of state, a practice often referred to as “thrown back”. The rule attempts to ensure that 100% of corporate income is taxed by some state to prevent “nowhere sales”. A company is considered to be “taxable” in the destination state if it has nexus for income tax purposes. If the company files in those states, sales to those states may not be “thrown back” to the originating state.

In states where the business is claiming protection under P.L. 86-272, the business would not be considered taxable, and sales protected under this rule could be “thrown back” to the origination state if that state applies a throwback rule.

In deciding where to place a warehouse, it could be beneficial to avoid states with a throwback rule. Some of those states include, but are not limited to: Alaska, California, Illinois, Kansas, Massachusetts, New Hampshire, Oregon, and Wisconsin.

Low to No Corporate Income Tax Rates

Some states have low tax rates or no corporate income taxes at all, which is desirable from a state income tax perspective. For example, South Dakota and Wyoming do not have a corporate income tax, while other states without an income tax, like Nevada, Ohio, Texas, and Washington, assess taxes based on gross receipts or gross margin. Taxes based on gross receipts or gross margin are calculated very differently from income taxes, so it is important to estimate the tax before assuming the overall tax will be lower than in a state with an income tax.

While a low corporate income tax can be attractive when selecting a warehouse location, it may mean the state imposes other taxes on businesses, so it’s important to review all applicable state and local taxes a Company may be subject to.

State and Local Sales Tax

When operating across state lines, it’s essential to understand the concept of nexus, otherwise known as the threshold at which a business becomes legally obligated to collect and remit sales tax in a given state.

Sales tax nexus is the link between your business and a state that triggers the legal duty to collect and remit sales tax. Post the 2018 South Dakota v. Wayfair decision, U.S. states recognize two primary types of nexus:

Economic nexus, based on sales volume or transaction count.
Physical nexus, triggered by maintained presence in the state—such as property, inventory, or employees—even without economic thresholds being met.

Once a nexus exists, you must register with the state’s tax authority, collect sales tax on applicable transactions, and remit it per their filing schedule.

Marketplace facilitator laws may also play a role. Marketplace operators, such as Amazon or eBay, are responsible for collecting and remitting sales tax on behalf of their sellers; however, this does not eliminate the need for sellers to track and manage nexus, especially if an e-commerce company has physical operations in a state, such as a business-owned warehouse. Physical presence still obligates a business to register and comply with tax rules, irrespective of whether the marketplace provider handles the collection.

Generally, state tax authorities view storing inventory, whether in a business’s own facility or a third-party fulfillment center, as a physical presence obligation. Fulfillment services like FBA (Fulfillment by Amazon) may also create nexus when goods are stored in a state-based warehouse.

Failing to register and remit tax when required can result in back taxes, penalties, and interest. Having warehouses in multiple states can significantly expand tax obligations, which amplifies the importance of careful tracking and management. Choosing inventory locations impacts tax strategy. Choosing a centralized warehousing location may simplify supply chains but can result in increased multistate obligations.

Integrating physical presence concerns into your broader multistate tax strategy is essential to avoid liability and streamline compliance. Businesses should incorporate these considerations into their location strategy to avoid surprises and optimize tax efficiency.

Property and Inventory Taxes

Many states impose property taxes on business assets, including:

Inventory: Goods held for sale or distribution.
Equipment: Machinery, shelving, forklifts, and other warehouse essentials.

Property and inventory taxes are typically assessed annually based on the value of the property, adding recurring costs that can erode savings from favorable income tax rates.

States like Texas and Kentucky levy tangible personal property taxes on inventory and equipment, which can be substantial for businesses with large storage facilities. While other states, such as Indiana and South Carolina, offer abatements or exemptions for warehouse equipment, these programs can reduce upfront capital costs and improve ROI for businesses investing in distribution infrastructure.

Failing to account for inventory and equipment taxes during site selection can lead to unexpected expenses. For example, a state with no corporate income tax may still impose high property taxes on inventory, and incentives like abatements can tilt the scales in favor of certain states, even if their income tax rates are higher.

Inventory and equipment taxes are often overlooked but can significantly impact operating costs. States offering exemptions or abatements provide opportunities to reduce upfront expenses and improve profitability. Incorporating property and inventory tax considerations into location planning helps businesses avoid surprises and position themselves for long-term tax efficiency.

Balancing Taxes with Logistics and Infrastructure

While tax optimization is crucial, operational efficiency remains vital. Access to ports, interstate highways, rail networks, and major customer populations directly impacts shipping speed and costs. The ideal location achieves a balance between tax savings and logistical performance.