Multi-State Tax Rules for Telehealth Physicians

Since 2020, a large share of practicing physicians in Idaho and Utah have added a telehealth line to their calendar. Patients in the next state over now show up on the schedule alongside patients across town. From a clinical and licensure standpoint, most physicians already know they need a license in the patient’s state to see them.

The tax question is separate, and it is one most practice owners have not worked through. State medical licensure and state income tax filing answer two different questions, and a physician can be perfectly legal on the clinical side and still owe an unfiled return in a neighboring state. Here is how the tax side works when patients cross state lines.

How States Source Physician Income

Every state that has an income tax has its own rule for where a service is “sourced.” For a physician, the two live options are provider location (where the doctor sat when the encounter happened) and patient location (where the care was received). Most states default to provider location, which is why in-person medicine has always been simple: the visit happens in your office, and the income belongs to that state.

Telehealth pulls the two apart. A physician sitting in Idaho Falls treating a patient in Wyoming raises the question again. Some states have adopted patient-location sourcing for telehealth explicitly. Others still lean on provider location. A few have not answered the question at all and rely on the general “market-based” sourcing rule that applies to services generally. Because the rules are not uniform, a telehealth practice that treats patients in five states can end up with five different sourcing outcomes for the same encounter type.

Idaho, Utah, and Neighboring States: What to Watch

Idaho generally sources service income to where the service is performed, meaning provider location for most encounters. Utah has moved toward market-based sourcing for many services, which raises questions for a Utah-based physician seeing patients in Idaho, Wyoming, Nevada, or Colorado. Wyoming has no state income tax, which simplifies one direction. Montana, Oregon, and California all have their own rules and are worth checking before adding a patient panel in any of them.

These rules change. Before you add a new state to your telehealth panel, confirm the current sourcing rule with that state’s Department of Revenue guidance, not last year’s summary.

Nexus for the Practice Entity, Not Just the Individual

A physician earning income in another state is one issue. The practice entity itself, whether a PC, PLLC, or S corporation, is a separate taxpayer with its own nexus question. Once a practice entity has enough activity in a state to trigger nexus (economic nexus thresholds are common, and physical presence is not required), the entity may need to register to do business, file a state return, and in some cases collect a state franchise or gross receipts tax.

The entity-level filing is often overlooked because the physician-owner’s personal return is the one they see every April. A practice can accumulate an entity-level filing obligation in three or four states without the physician ever noticing.

Resident and Nonresident Credit Math

The physician does not pay double tax on the same income. If Idaho and Utah both claim the right to tax a piece of income, the physician’s resident state generally allows a credit for income tax paid to the nonresident state, capped at the resident-state rate on that same income. The math is not always in the physician’s favor. If the nonresident state has a higher rate, the credit only covers the resident-state portion, and the incremental cost belongs to the nonresident state.

The mechanics work only if returns get filed in the correct states in the correct order. Missing a nonresident filing does not just mean owing that state; it also means the resident credit for that tax is unavailable.

When to File a New State Return

Three signals should prompt a serious look at a new state filing:

• Repeat telehealth encounters with patients in that state throughout the year
• Any in-person presence in the state, even occasional consulting or continuing education
• The practice entity billing an insurance carrier in that state

Any one of these can be enough to trigger a filing obligation. All three together almost certainly do.

Telehealth is a real growth path for rural Idaho and Utah practices, and the tax rules should not be a reason to avoid it. They are a reason to look at the states you actually see patients in and get the filings right the first time. Cooper Norman’s healthcare accounting team works with physicians across Idaho and Utah on multi-state sourcing questions, and our tax planning team can run the resident-credit math before you add a new state to the panel. This overview is general information, not tax advice for your specific practice. Talk with a Cooper Norman advisor about how these rules apply to yours.