Key takeaways
- Economic nexus is determined by the amount of business activity, such as sales, within a state, and not the physical presence of a business.
- Non-compliance with economic nexus laws can result in severe financial and legal consequences, including liability for unpaid sales tax, fines, interest, and possible criminal penalties for tax evasion.
- Businesses can leverage tools such as tax automation software to manage compliance with various state-specific economic nexus thresholds and requirements.
In short: Economic nexus is the sales tax link between a business and a U.S. state, based on sales into that state rather than physical presence. Once your sales pass a state’s economic nexus threshold, you must register, collect and remit sales tax there. Most states set the threshold at $100,000 in sales.
Are you handling multistate sales tax? Economic nexus now affects how and where you pay. It ties your tax obligations to your sales volume, not just your business’s location. This guide covers the key parts of economic nexus, from what triggers it to how you handle state-specific sales tax rules.
What is economic nexus?
Economic nexus is the connection between a business and a taxing jurisdiction, such as a state, created by the business’s sales in that state. It depends on sales volume, not on whether the business has a physical presence there.
If you sell across many states, you have likely seen the term. Once your sales pass a set economic threshold in a state, you may have to collect sales tax on those sales under that state’s rules. This matters a lot for online and remote sellers. They can owe state tax even with no physical presence in the state. We cover this in more detail in How to File a Sales Tax Return: A State-by-State Guide.
What is the difference between physical and economic nexus?
Physical nexus comes from a tangible presence in a state, while economic nexus comes from meeting a state’s sales or transaction thresholds. Before online commerce took off, physical presence nexus was the main test. A business created it by owning property or employing people in a state.
A business can have both physical and economic nexus in the same state. This can add to its state tax obligations.
How did economic nexus evolve?
Economic nexus grew alongside ecommerce and its effect on trade between states. As online sales became a big part of the economy, states looked for ways to tap this revenue. That led to changes in sales tax compliance. Read more in our guide: US States Move Towards Simplified Sales Tax Compliance.
The turning point was the Supreme Court’s ruling in South Dakota v. Wayfair. The ruling overturned the ‘physical presence’ requirement. States could now make remote sellers collect sales tax using economic thresholds, such as the number of sales transactions. The Wayfair decision greatly widened economic nexus and began a new era in sales tax law.
What was the Wayfair decision?
What did the Supreme Court rule?
In South Dakota v. Wayfair, the Supreme Court ruled that states can require out-of-state sellers to collect and remit sales tax based on economic nexus. This applies even if the seller has no physical presence in the state. The case began when South Dakota tried to improve how it collected sales tax on ecommerce and remote sales. You can also read When Do Businesses Charge Out-of-State Sales Tax?.
What does the Wayfair decision mean for businesses?
The Wayfair decision has had far-reaching effects on businesses, especially those that sell online into many states. The ruling has led to:
- Widespread adoption of economic nexus laws.
- More complexity, because economic nexus thresholds are not uniform.
- The introduction of marketplace facilitator rules.
In response, businesses have had to register with the right jurisdictions. They also track sales thresholds in each state where they operate.
What are the economic nexus thresholds in each state?
Economic nexus thresholds for sales tax vary from state to state, but most states use $100,000 in sales. Here are the current thresholds for each state. Delaware, New Hampshire, Oregon and Montana do not impose sales taxes, so they have no economic nexus:
Alabama: $250,000 in sales.
Alaska: $100,000 in sales.
Arizona: $100,000 in sales.
Arkansas: $100,000 in sales or 200 transactions.
California: $500,000 in sales.
Colorado: $100,000 in sales.
Connecticut: $100,000 in sales and 200 transactions.
Florida: $100,000 in sales.
Georgia: $100,000 in sales or 200 transactions.
Hawaii: $100,000 in sales or 200 transactions.
Idaho: $100,000 in sales.
Illinois: $100,000 in sales.
Indiana: $100,000 in sales.
Iowa: $100,000 in sales.
Kansas: $100,000 in sales.
Kentucky: $100,000 in sales.
Louisiana: $100,000 in sales.
Maine: $100,000 in sales.
Maryland: $100,000 in sales or 200 transactions.
Massachusetts: $100,000 in sales.
Michigan: $100,000 in sales or 200 transactions.
Minnesota: $100,000 in sales or 200 transactions.
Mississippi: $250,000 in sales.
Missouri: $100,000 in sales.
Nebraska: $100,000 in sales or 200 transactions.
Nevada: $100,000 in sales or 200 transactions.
New Jersey: $100,000 in sales or 200 transactions.
New Mexico: $100,000 in sales.
New York: $500,000 in sales and 100 transactions.
North Carolina: $100,000 in sales.
North Dakota: $100,000 in sales.
Ohio: $100,000 in sales or 200 transactions.
Oklahoma: $100,000 in sales.
Pennsylvania: $100,000 in sales.
Rhode Island: $100,000 in sales or 200 transactions.
South Carolina: $100,000 in sales.
South Dakota: $100,000 in sales.
Tennessee: $100,000 in sales.
Texas: $500,000 in sales.
Utah: $100,000 in sales.
Vermont: $100,000 in sales or 200 transactions.
Virginia: $100,000 in sales or 200 transactions.
Washington: $100,000 in sales.
West Virginia: $100,000 in sales or 200 transactions.
Wisconsin: $100,000 in sales.
Wyoming: $100,000 in sales.
District of Columbia: $100,000 in sales or 200 transactions.
How do you comply with economic nexus laws?
To comply with economic nexus laws, you register, charge the right rate, and collect and remit sales tax in each state where you have nexus. In practice, you must:
- Register for sales tax permits in each state where the business has economic nexus.
- Apply the right sales tax rate for the customer’s location and the type of product sold.
- Collect and remit sales tax from customers in any state where the business reaches the economic nexus threshold.
You must also keep full records of your transactions, including the taxes you collect. This helps you report sales tax accurately.
How do you register for a sales tax permit?
You register for a sales tax permit through each state’s Department of Revenue website. Getting a permit is a vital step toward complying with economic nexus laws. You must:
- Gather key details such as your Employer Identification Number (EIN) and other business identifying details.
- Go to the state’s Department of Revenue website.
- Find the ‘Sales and Use Tax’ section.
- Follow the instructions to finish registering.
Registration is usually free, though some states charge a small fee, usually less than $20. In most states, the process takes 2 to 6 weeks from the date you submit.
How do you collect and remit sales tax?
Once you are registered, you collect sales tax at the rate for your customer’s location and remit it to the state. Tax rates usually depend on the customer’s 5-digit US zip code. The product type also affects the tax, since each state’s laws decide which products are taxable and which are exempt.
To stay accurate and compliant, keep detailed records of all property or service purchases. Keep these records for as long as needed to back up the income or deductions on a tax return.
What records do you need to keep?
You need detailed records of your transactions and the taxes you collect to comply with economic nexus laws. These records help you prepare accurate, complete sales tax returns. You also need to track sales thresholds in each state where you operate. Watch for changes in sales volume so you know when new obligations start.
Tax automation tools can help multi-state businesses manage and track taxable income.
What happens if you don’t comply with economic nexus laws?
If you don’t comply with economic nexus laws, you can face back taxes, interest, penalties, audits and other costs. The main consequences are:
Back taxes and interest: You may owe the taxes you should have collected during the period of non-compliance, plus interest. This can add up to a large sum, especially over a long period.
Penalties and fines: States may impose penalties and fines for failing to comply with economic nexus laws. These can be a fixed amount or a percentage of the unpaid tax. They can grow the longer non-compliance lasts.
Audit and legal costs: Non-compliance can lead to audits by state tax authorities. Audits can be slow, disruptive and expensive, especially if you need legal help.
Reputation damage: Being found non-compliant can hurt a business's reputation, especially if it becomes public. Customers and partners may see the business as unreliable or untrustworthy.
Licensing issues: Some states link tax compliance to the right to hold certain business licenses or permits. Breaking tax laws can put these licenses at risk.
So it pays to understand the rules in each state where you have economic nexus, and to comply. Legal advice and help from tax professionals are often needed to handle these complexities well.
How can tax automation software help with economic nexus?
Tax automation software helps you track economic nexus thresholds and stay compliant across many states. Following economic nexus laws can be hard, especially if you sell into several states.
Tax automation software is a tool that simplifies and automates tax tasks. It can help you manage economic nexus by:
- Monitoring economic nexus thresholds.
- Identifying when a business passes these thresholds in any state.
- Ensuring compliance through automated tax calculation and collection.
LumaTax offers tax automation software for economic nexus management. It calculates tax rates, prepares returns and manages documents. It also tracks changes in sales tax laws and rates, and applies tax exemptions when needed.
Conclusion
Economic nexus can be hard to navigate, especially for small businesses and those new to ecommerce. But you can manage your tax obligations and avoid costly penalties. Learn the basics, monitor your sales regularly and get professional advice. As the digital economy keeps changing, staying informed and compliant matters more than ever.
Do you need help understanding your physical and economic nexus exposure? Contact LumaTax and let us get your sales tax compliance on track with our automated data analysis and expert review.
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 economic nexus?
Economic nexus is a tax connection between a business and a state based on sales or transaction volume, rather than physical presence.
How is economic nexus triggered?
It’s triggered when a business exceeds a state’s sales or transaction threshold, which varies by state.
How is economic nexus different from physical nexus?
Physical nexus is based on having a tangible presence (e.g., office, employees) in a state, while economic nexus depends on sales activity.
Do all states have economic nexus laws?
Nearly all states with a sales tax have adopted economic nexus rules, but thresholds and requirements differ.
What happens if I don’t comply?
Non-compliance can lead to back taxes, interest, fines, audits, legal costs, and reputational damage.
How can businesses manage multi-state compliance?
Using tax automation software helps track thresholds, calculate taxes, file returns, and stay compliant with changing rules.
