Key takeaways
- Remote work can create unexpected nexus: Employees working or relocating out of state may trigger new physical presence obligations, even if the company has no office there.
- Exempt sales may still count toward thresholds: Some states include exempt or SaaS-related sales in nexus calculations, making it crucial to review each state’s definition of “gross” vs. “retail” sales.
- Local tax rules add complexity: Home rule states like Colorado, Louisiana, and Missouri allow cities and counties to set their own tax rates and filing rules, requiring extra diligence from accountants.
In short: Some nexus triggers are easy to miss. Remote workers can create physical presence nexus. Exempt sales can count toward economic nexus thresholds in some states. And in some states, local governments set their own tax rules. Review each client's situation state by state.
At its simplest, sales tax nexus is the link between a taxing jurisdiction, such as a state, and an entity, such as a business. Nexus is triggered when a set condition is met that creates this link. For sales and use tax, triggering nexus means the business must collect, remit, and pay tax to the state.
Many things can trigger nexus. These include reaching a set economic or transaction volume threshold, having a physical presence, or providing services in a state.
Sadly, the full list of nexus criteria varies widely. And a few often-missed triggers can also create tax obligations for your clients. Below, we discuss three common examples. We explain what they are, how they work, and when they apply.
Can remote workers trigger new nexus obligations?
The shift to remote work exploded in 2020 as companies reacted to lockdowns. Today, many have chosen to keep supporting a spread-out workforce. Here’s a breakdown.
Remote employees made up about 15% of the global workforce before the pandemic. In September 2020, that number shot up to 74%, then settled at 31% in March 2021. Data shows that 4.3 million Americans are working remotely today
This trend affected companies of all sizes, including giants like Amazon, Google, and Facebook. It also led to some really interesting tax effects.
Here are a few situations where remote employees can trigger physical nexus:
1. A prior commuter who crossed state lines becomes remote:
Some employees previously crossed state lines to get to work. When they become remote workers, their state of residence becomes their work state. This shift is common in large metro areas, and it may trigger physical presence nexus.
2. An out-of-state move triggers physical presence nexus:
Remote employees who move out of state may trigger physical presence nexus in their new home state. Read more in our guide: 2022 Sales Tax Nexus and Economic Nexus: Everything You Need to Know.
So check exactly what triggers nexus in each state where your client’s employees live (ex; being engaged in sales activities). This helps make sure they’re up to date with all your tax obligations. For a closer look, see Practice Development: Sales Tax Economic Nexus Under Wayfair.
3. Dual residency 'technically' results in dual taxation:
This is a complex one, so read to the end before you make any assumptions. In some cases, remote employees worked from another state for a while. They stayed long enough to become a resident there under statutory residency rules. This may create dual residency and, potentially, dual tax obligations.
However, a 2018 Supreme Court ruling established that two states may not tax the same income. This means the employee has to determine where taxes are owed to make sure they’re not breaking tax law.
This can also confuse employers. So it is critical that you understand all the details of this situation and can advise your clients well.
4. An employee who travels frequently triggers physical presence nexus:
Employees who travel to do business tasks may trigger physical nexus. This is most likely when the travel helps establish or maintain a market in that state. Review each state’s physical presence nexus threshold guidelines, as they vary quite a lot.
For example, in Washington, any of the following can trigger physical nexus:
- Engaging in activities significantly associated with establishing or maintaining a market in the state.
- Soliciting sales in Washington through employees or other representatives.
- Installing or assembling goods in Washington, either by employees or other representatives.
- Employees providing services, such as accepting returns, and performing product training.
- Using an exhibit at a trade show to maintain or establish a market.
The key takeaway here is simple. Do any of your clients own businesses that recently moved to partly or fully remote work? If so, it might be a good idea to review their nexus obligations more closely.
Many possible physical presence triggers come into play with a remote workforce. Clients may have nexus in places they aren’t aware of. Use the scenarios above to make sure you ask the right questions as you do a full analysis of their tax obligations.
Can exempt sales trigger nexus in certain states?
Before we get into the details, you need to understand the key economic nexus triggers:
- economic nexus threshold met based on retail sales
- economic threshold met based on gross sales.
- economic threshold met based on taxable sales (4 states)
Most states also have a transaction count as part of their nexus threshold, though a handful don’t. In some states, the transaction count threshold is an “and” trigger. In others, it’s an “or” trigger - e.g., $500,000 in gross sales and/or 400 transactions into the state this calendar year.
A company may sell enough product into a state to meet its economic nexus threshold, based on the volume of sales or number of transactions. Any time this happens, the company has to do three things:
- Register with the state.
- Collect sales tax on all future transactions into the state.
- Remit tax to the department of revenue in that state.
States that set nexus based on retail sales often leave exempt sales out of nexus threshold totals. States that base thresholds on gross sales usually include exempt sales. As always, these criteria vary a great deal from state to state.
So how do you know if a state counts exempt sales toward the nexus threshold? Look for the keywords “gross” or “retail”, which usually appear right before the word “sales”. If you don’t see either one, watch for the word “exempt” in each state’s nexus threshold definition.
What do these rules look like in practice?
South Dakota: Nexus threshold is more than $100,000 in gross sales in the state in the current or previous calendar year. South Dakota dropped its 200-transaction test on July 1, 2023.
Taxable and exempt sales count toward economic and transaction totals. Tangible personal property, electronically delivered products, and services are all included in the threshold count.
California: Nexus threshold is more than $500,000 in retail (taxable) sales in the current or prior calendar year.
There is no transaction count in the nexus threshold criteria. Only retail sales are counted. But some of these count toward the economic total even if they are exempt. This covers retail sales of TPP that the retailer or its affiliates deliver to the state - including exempt TPP sales and TPP sales for resale. Services (taxable or exempt) do not count toward the threshold.
New York: Nexus threshold is $500,000 in sales of tangible personal property and more than 100 separate transactions made into New York in the last four quarters.
Exempt TPP (including software as a service, a.k.a. SaaS) counts toward the threshold. Marketplace sales also count toward thresholds for individual sellers.
As you can see, each state is a little different. So it’s very important to read the rules carefully. Make sure you clearly understand the threshold triggers that apply to your clients.
CPAs: don’t want to do the manual work to figure it out? Let us do it for you!
Do local governments also impose nexus in some states?
A handful of states let certain cities, counties, and jurisdictions set their own tax rates and rules. These include Alabama, Alaska, Arizona, Colorado, Idaho, Louisiana, and Missouri. These local rules apply on top of the rules set by the state.
This gets complex for businesses. In some cases, the state will not treat a good or service as taxable, but a local jurisdiction will.
For example, in Alaska, there is no state sales tax. However, each municipality can set its own tax rates. So can transportation, school, and special purpose districts. Some of them require businesses to remit directly to the local jurisdiction rather than to the state.
Colorado, Louisiana, Idaho, and Missouri are considered “home rule” states. In a home rule state, local jurisdictions can run and set their own sales tax rates and rules. These include cities, counties, and other local governments. Some cities and jurisdictions also have their own filing schedule.
Alabama isn’t formally a home rule state. But certain city and county governments can still collect local taxes. In Arizona, the state manages all local jurisdictions, but tribe governments set their own tax rates and rules.
With all that complexity, surely there’s one document that lists all the home rules in these states, right? Sadly, no. In fact, in most cases, businesses have to look beyond state tax sites. They must go directly to the local tax jurisdiction to find out what they owe in these areas.
We hope this post sheds some light on tricky nexus triggers you may not have known about. Sales tax nexus is complex and always changing, and tax experts need to stay on top of changes.
Businesses turn to CPA firms for solutions, and they expect advisors to be ready to answer their questions. To be effective, your team needs to keep up with changing nexus laws and stay informed on unique state tax laws.
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 nexus?
Sales tax nexus is the legal connection between a business and a taxing jurisdiction (such as a state) that requires the business to collect, remit, and pay sales tax. Nexus can be triggered by physical presence, economic activity, or other qualifying business activities in a state.
How can remote employees create nexus?
When employees work from home in another state or travel for business, they can trigger physical presence nexus in that location. Even temporary or dual residency situations can create new tax obligations for both the employer and employee.
Do exempt sales count toward economic nexus thresholds?
It depends on the state. States that base nexus on gross sales usually include exempt sales, while those based on retail sales typically exclude them. Always check each state’s definition of “gross” or “retail” sales to determine the correct approach.
What are home rule states, and why do they matter?
Home rule states—such as Colorado, Louisiana, and Missouri—allow local cities and counties to set their own tax rates and rules, independent of the state. This creates extra layers of compliance for businesses that sell across multiple jurisdictions.
How can businesses stay compliant with evolving nexus rules?
Regularly review where employees, customers, and transactions occur. Conduct periodic nexus studies, monitor legislative changes, and use tax automation tools to stay on top of multi-state obligations.
