Key takeaways
- Nexus defines where you owe sales tax: Physical presence (offices, warehouses, or employees) and economic activity (sales or transaction thresholds) are the main triggers.
- Post-Wayfair rules add complexity: Nearly all states now enforce economic nexus, requiring many remote sellers to register, collect, and remit tax in multiple jurisdictions.
- Automation helps avoid penalties: With thousands of changing tax rules, using compliance tools or expert advisory services is key to staying compliant.
In short: Sales tax nexus is the minimum connection a business must have with a state before it has to collect and remit sales tax there. Physical presence and economic thresholds are the most common triggers, and a business can have both. Since economic nexus arrived in 2018, businesses must register, collect, and remit tax in far more places.
Hundreds of blog posts focus on sales tax nexus and economic nexus. Sadly, most of them are either too complex or too vague.
The main goal of this post is to give short, clear answers to common sales tax and economic nexus questions. It can be a great resource for your CPA firm as you explain these ideas to your clients.
Below, we'll explain how nexus works and when it applies. We'll also cover what reaching a nexus threshold can mean for a business.
Here’s how we’re going to break it down:
- Key definitions to help you understand what the heck we're talking about
- Legislative details to help you grasp when, why, and how nexus is triggered
- Real-world examples to help you understand practical nexus application
This post covers general sales tax nexus, physical presence nexus, economic nexus, trailing nexus, and marketplace nexus. We'll also look at nexus triggers that are now (mostly) obsolete. These include affiliate nexus, click-through nexus, and 'cookie' nexus. Read more in our guide: What Is a Nexus Study and Does Your Business Need One?.
In each section, we'll share tips on how to manage, simplify, and streamline SUT compliance. Last but not least, we'll answer some common questions we get from our clients.
Let’s start with the most basic concept: sales tax nexus.
What is sales tax nexus?
Sales tax nexus - often called 'nexus' - is the minimum connection a business must have with a state before it must collect and remit sales tax in that state. You can also read Manage Sales Tax Nexus for Shopify Marketplaces.
Many things can create nexus between a business and a state. But physical presence and economic thresholds are the most common triggers - so we'll start there.
What is physical presence nexus?
Physical presence nexus is triggered when a business has a direct connection to a state. This connection lets the state impose sales tax obligations on the business.
In many cases, it's triggered when a business runs a brick-and-mortar location in a state. That case is very simple. But there are also more subtle physical presence triggers, which we explain below.
What triggers physical presence nexus under the law?
Here's a list of all the scenarios that can trigger physical presence nexus.
Property-Based Triggers
1. Having a physical location or brick and mortar business. For example, owning a boutique shop in Manhattan.
2. Owning or leasing a business office in another state. For example, having a store in one state and an office headquarters in another state.
3. Owning or leasing a business warehouse in another state. For example, leasing a central warehouse to store inventory before it goes out to brick and mortar locations.
Non-Property-Based Physical Presence Nexus Triggers:
1. Sending employees or agents to another state. For example, sending traveling sales reps to other states to find new business.
2. Storing property in a facility in another state. For example, Fulfillment by Amazon sellers who store inventory in Amazon warehouses. This involves property, but not property the business owner owns or leases.
What does physical presence nexus look like in the real world?
Now that you've got the definitions down, let's look at physical presence nexus in action.
The Cafe Owner
Say you open a cafe in Gilbert, Arizona. Buying or leasing a brick and mortar building creates a direct physical connection to the state. This triggers physical presence nexus. That means you must collect and remit sales tax to the state of Arizona.
This example shows what's called 'home state nexus'. The term describes state tax obligations based on where your main or flagship brick and mortar business is.
Now let's say your flagship location is in Arizona, but you have more locations in Kansas, California, and Texas. Each leased or owned building triggers physical presence nexus. So you have sales tax obligations in all four states.
The Amazon Seller
If you're a fulfillment by Amazon (FBA) seller, Amazon chooses where to store your inventory based on your product sales history. Laws can vary, but you're likely to have nexus in states where your inventory is stored.
Today, all 45 states with a statewide sales tax, plus Washington, D.C., have marketplace facilitator laws. This includes details on whether they treat inventory storage as an activity that creates nexus.
Products can move often, so keep a close eye on where your inventory is stored. Managing nexus compliance is your job.
To find out where your inventory is, log into your Amazon seller account. Then go to Reports > Fulfillment > select ‘more’ under the Inventory header > Inventory Event Detail. Download and open the report to see a list of all the fulfillment centers where your inventory is stored.
Sadly, Amazon uses city-based fulfillment center codes. So you have to do a little legwork to work out which states you have physical presence nexus in. You can use this fulfillment center code list to translate your report.
Once you know where you have nexus, you need to log into Seller Central to report these states to Amazon. You'll need your state seller registration ID to set this up.
Once that's done, Amazon will collect state sales tax on your behalf. But you are still responsible for filing and remitting tax in all states where you have physical or economic nexus.
The Remote Employee
Say your company has a home base in California, and you have employees in Arizona and Montana. Do those employees trigger sales tax nexus? We have to look at state law for this one, because the answer varies from state to state.
In Arizona, the answer is yes - if your employee spends two or more days per year in the state. In Montana, however, having a remote employee does not trigger physical presence nexus. That's because Montana is one of five US states that doesn't have sales tax.
Remote employees have triggered physical presence nexus for many more businesses since the start of the pandemic. That's when hundreds of thousands of employees started working from home.
Did your company have people move from a physical office to a home office? If you haven't checked how that shift affects your tax obligations, consider this your nudge to take a closer look.
The Traveling Salesmen
Let's say you have a territory sales manager who works from his home in North Carolina. His role involves a lot of travel. He regularly visits clients across his territory, which includes North Carolina, South Carolina, Tennessee, Kentucky, and Virginia.
Nexus varies from state to state. But in general, a salesman's regular presence in a state is likely to create physical presence nexus. This is even more likely if he's working to bring on new clients (and so making sales into the state).
Other traveling roles, like installers and implementation specialists, can also create nexus in states they visit. It depends on how state law defines an 'in-state employee.'
What is economic nexus?
Economic nexus is an inter-state sales tax based on sales volume.
Unlike physical presence nexus, economic nexus requires businesses based in one state to pay taxes into other states. This happens if they meet or exceed a state's economic nexus threshold(s). Economic nexus applies to brick and mortar retailers and to online retailers and resellers alike.
Which states have economic nexus laws?
When we first wrote this guide in 2019, 30 states had passed economic nexus laws. Today, all but five states have passed laws that let them collect sales tax from businesses that meet set economic thresholds.
So which states don't have economic nexus? Delaware, Montana, New Hampshire, and Oregon don't have sales tax at all. So they don't have nexus laws. Of the states that collect sales tax, Missouri was the last holdout. But it committed to a law effective January 1, 2023.
Alaska is also a unique exception. There's no state tax, but local jurisdictions collect sales and use tax from businesses that meet their economic threshold.
The Alaska Remote Seller Sales Tax Commission website explains who must register with ARSSTC. It covers "Remote Sellers and Market Place Facilitators who meet the statewide threshold of $100,000 gross sales or 200 individual transactions annually into Alaska". This applies "either last year or this year, regardless of destination or taxability status of end buyer."
The website adds: "The seller is expected to collect and file the applicable sales tax for remote sales into the member jurisdictions". It also has a great visual flow chart to help businesses decide whether they need to register.
States with economic nexus laws are each free to set their own threshold definitions. But economic nexus triggers are similar in many states.
Common Attributes
1. Revenue-based economic nexus threshold. For example, gross revenue from sales is greater than or equal to $X - typically $10,000 to $500,000.
2. Transaction-based economic nexus threshold. For example, a business does X transactions or more per year - typically 100 to 200.
Be Mindful of And vs. Or
Some states need only one of these two thresholds to be met to trigger nexus. Others need both. Watch the wording of the law closely for the words and and or to make sure you fully understand what triggers economic nexus.
Threshold Timelines
Some states base nexus on last year's sales; others base it on the current year.
Retroactive Application
Some laws make punishment greater than the law in place at the time of the transaction. Applying such a law retroactively violates the ex-post-facto provision of the US Constitution.
That means you only have to register, collect, and remit sales tax for transactions made once you pass a state’s threshold ($ or #). This assumes the state law’s effective date has already passed.
A Word of Warning
Ever since economic nexus arrived in 2018, it's dominated every sales tax conversation. With so much focus on economic nexus, many businesses don't realize that physical presence nexus still matters in states that collect sales tax from businesses.
On top of that, businesses often don't realize that physical presence nexus and economic nexus can both apply. In fact, it's not only possible but probable for businesses with large annual revenues to have both physical and economic nexus. Sometimes they have both in several states.
How does economic nexus work in practice?
In 99% of cases, it's up to business owners (or their accountants) to manage sales tax compliance.
As a seller, you must:
- evaluate economic thresholds in states where you do business
- determine where thresholds were met or will be met
- register as a seller in each state where you have economic nexus
- accurately collect state and local taxes
- file and remit sales tax in those states
In most cases, working out nexus is a fairly simple process. Review a state's economic threshold criteria and compare it to your sales. If you meet or exceed the threshold, you have nexus.
What is trailing nexus?
Nexus can last even after the direct connection that first triggered it has ended. This is called trailing nexus.
Example
Say you have a remote employee in Texas, but they leave the company. The state requires you to keep collecting and remitting for the rest of the calendar year.
Trailing nexus laws vary from state to state and are quite vague in some areas. Take California's trailing nexus law. It covers the time after a retailer stops the activities that made it a "retailer engaged in business" in the state.
The law says "the lingering effects of the retailer's physical presence in this state may continue to generate sales for the retailer for a reasonable period thereafter". As long as those lingering effects keep generating sales, the retailer "is considered to be engaged in business in this state."
Without end-to-end analytics, it can be very hard to prove where a sale came from, so do with that what you will.
What is marketplace nexus?
Marketplace facilitators are online marketplaces (a la Amazon, Walmart, and eBay). They list, collect payment for, and fulfill orders on behalf of a third-party seller.
Some states see the burden tax compliance puts on small businesses and independent internet sellers. So they now require marketplace facilitators with high annual sales revenues to register, collect and remit tax. These facilitators also handle reporting on behalf of their individual sellers.
Generally, affected marketplace facilitators must operate in a state. They must also provide the ecommerce sales platform, customer service, payment processing, and marketing. This is a big win for small ecommerce sellers. Many have faced a massive tax burden since economic nexus was deemed constitutional.
Example
In California, a marketplace facilitator "is generally responsible for collecting, reporting, and paying the tax on retail sales made through their marketplace for delivery to California customers". This has applied since October 1, 2019. For a closer look, see Understanding PL 86-272 and What it Means to Your Clients.
The rules go on: "Additionally, starting January 1, 2022, a marketplace facilitator may be required to collect, report, and pay applicable fees on retail sales of certain items. A marketplace includes a physical or online place where marketplace sellers sell or offer for sale tangible merchandise for delivery in California. A marketplace facilitator is generally the operator of the marketplace."
Questions about how this law affects your business? Check out this detailed guide, created by the state of California, that answers common questions.
Which nexus triggers are now (mostly) obsolete?
Let's look at some sales tax nexus laws that made their way into a handful of state legislatures across the US. Most states have since repealed them.
What are affiliate and click-through nexus?
As states first rushed to put economic nexus laws in place, many included affiliate and click-through nexus triggers.
Affiliate nexus was triggered when a company hired or contracted a third party based in another state to help manage or grow its business in some way.
Click-through nexus is triggered when a seller uses in-state services that send customers to a business or online store. Examples include affiliate links, banner ads, and similar tools.
In many states, these two trigger types have been abandoned in favor of a simpler approach to nexus.
What was cookie nexus?
Another creative trigger was known as 'cookie' nexus. It set a threshold based on storing and sending data from one state to another.
This clever but controversial idea came from the state of Massachusetts. It was repealed on October 1, 2019. It was recently challenged in court by a company said to owe large unpaid taxes.
The judge ruled for the business. This gave even more proof that trying to build a physical presence based solely on cookie storage was bound to fail.
What other things can trigger nexus?
You can't cover every possible nexus trigger in one list, because each state's laws have their own fine print. But it's good to know that advertising, drop shipping, and referrals from in-state businesses can all trigger nexus in some cases.
What should you consider for sales tax compliance?
Sales tax compliance means following sales tax laws. It has several parts. These include collecting the right tax, finding and registering in nexus states, and filing accurate state returns on time.
Since economic nexus arrived, businesses must register, collect, and remit tax in far more jurisdictions. This is one of the biggest pain points for online and interstate retailers. As a result, small and mid-sized businesses are overwhelmed, and rightly so.
Here are a few (of many) reasons why sales tax compliance is challenging to manage:
- There are 10,000+ tax jurisdictions in the US.
- There's an immense amount of manual work required to identify where your business has nexus.
- Nexus policies change frequently and it's a lot to keep track of.
- Each state's filing deadlines, tax schedules, and grace periods are different.
- Online businesses can establish physical presence nexus due to inventory storage.
- States require businesses to register for a seller's license to collect and remit tax.
- The first round of post-Wayfair audits is set to take place in 2022.
With all this in play, non-compliant businesses face a growing risk of fees and penalties. As a result, many business owners are turning to sales tax experts for help.
We strongly encourage you to take advantage of expert sales and use tax advisory services to ensure your business stays compliant. While compliance can be expensive, non-compliance is even more expensive, especially now that states are cracking down on businesses.
How Taxually handles this
Taxually’s LumaTax runs a nexus analysis on your sales, helps you register in the states where you must collect, and prepares and files multi-state sales tax returns, including Canadian GST/HST. LumaTax is currently available to enterprises and accounting firms. For the full workflow, read how to automate US sales tax filing in every state.
Related guides
Frequently asked questions
What is sales tax compliance?
It means identifying where your business has nexus, registering in those states, collecting the correct tax, and filing and remitting on time.
Can a business have both physical and economic nexus?
Yes. Many companies trigger both — for example, by having inventory in one state and exceeding sales thresholds in another.
When should businesses start collecting sales tax?
Typically, collection begins as soon as nexus is established. With physical nexus, it’s clear-cut; with economic nexus, businesses must anticipate when thresholds will be met.
What is the Streamlined Sales and Use Tax Agreement (SSUTA)?
It’s an initiative to simplify sales tax compliance through shared definitions and forms, though states still retain some flexibility.
How can small businesses reduce their compliance burden?
Economic thresholds protect smaller sellers, while marketplace facilitator laws require large platforms to handle tax collection for their third-party sellers.
