Which state should I choose for incorporation for a new online sales business?

I know that internet taxation laws have changed for states in the past year. Is there a state that is more internet commerce friendly that I should choose for incorporation?

I am currently living/working in Massachusetts, but I also have an office in Chicago.

My advice is to incorporate in the state where you reside and work. In your case that would be MA, or possibly IL.

Interstate commerce laws haven't yet caught up to the internet age, and as a result there is little taxation involved with online businesses. Some exceptions may be:

• If you sell tangibles, you need to collect sales tax on any items you sell to an individual living in the same state your company does business in.
• Some states also impose sales tax on software. However, the above rule still applies in this case. See When shipping software where and when do you need to charge tax? for a bit more on this, but keep in mind that states change their laws all the time, so don't take what is in that thread as gospel.

If you incorporate in a state other than the state where your company has a physical presence, you will still have to register your company as a foreign entity in the state where you do have a physical presence. This means that you will have to pay yearly incorporation taxes in two states instead of one. Depending on your business, registering as a foreign entity in your home state (in addition to registering in another tax friendlier state) may wipe out any tax benefits you may get from another state. IMHO, this isn't usually worth it for startups. You can always do this later on when your business takes off.

This other question may also help you.