Key takeaways
- A nexus study reveals where your business has sales tax obligations, including through economic nexus thresholds.
- Activities like remote hiring, third-party fulfillment, or affiliate referrals can unknowingly create nexus in multiple states.
- Understanding and addressing nexus risks early helps you stay compliant and avoid audits or penalties.
In short: A nexus study is a review of your business operations that shows which US states you have sales tax nexus in. Nexus means you must collect and remit sales tax there. Physical presence, economic thresholds, affiliates, and referral partners can all create nexus. You likely need a nexus study if you sell in more than one state.
As businesses grow across state lines, especially through e-commerce, it’s easy to miss new tax obligations. One of the most important yet often misunderstood ideas in sales tax compliance is “nexus”. Knowing whether you have nexus in a state tells you if you must collect sales tax, remit it, and stay compliant with state tax departments. That’s where a nexus study comes in.
What is a nexus study?
A nexus study is a detailed analysis of your business operations that shows where you may have created sales tax nexus. In simple terms, nexus is a strong enough link between your business and a state. Once you have it, you must start collecting sales tax from customers in that state.
Several types of nexus can trigger this obligation:
- Physical nexus – Having a physical presence such as an office, warehouse, employee, or inventory stored in a state.
- Economic nexus – Crossing a certain economic threshold for sales or transactions in a state, even without physical presence.
- Click-through nexus – Partnering with in-state websites or affiliates who indirectly refer customers to your business.
- Affiliate nexus – Using related businesses, subsidiaries, or agents in a state that create nexus through shared activities or branding.
Sales tax rules vary widely by state, and states keep updating them. So it’s essential to stay ahead of the curve. A nexus study makes sure your business doesn’t break any sales tax laws without knowing it.
Why does a nexus study matter more than ever?
A nexus study matters more than ever because you can now owe sales tax in a state without any physical presence there. In the past, businesses only worried about sales tax in states where they had a store or warehouse.
That changed after the U.S. Supreme Court’s South Dakota v. Wayfair ruling in 2018. Many states then introduced economic nexus laws. Now, if your sales in a state pass a certain threshold, you must collect and remit sales tax there. That threshold is commonly $100,000 in annual sales. Some states also use a 200-transaction test, but many have dropped it. For a closer look, see 3 Surprising Nexus Triggers You May Not Be Aware Of.
A nexus study helps answer questions like:
- Do we exceed nexus thresholds in certain states due to online or out-of-state business?
- Are any employees, contractors, or inventory creating physical nexus?
- Are our marketing or referral programs establishing click-through nexus?
- Do we need to file a voluntary disclosure agreement to resolve past exposure?
- Are we unintentionally triggering other tax obligations?
This process gives you clarity and helps reduce audit risk. Many businesses only find out they are non-compliant after a state sends them a nexus questionnaire. That’s a situation best avoided.
What real-world activities create nexus?
Common activities that create nexus include storing inventory with third parties, hiring remote staff, and running affiliate programs. If you’re not sure whether your business is at risk, check these common triggers:
- Storing inventory with third-party logistics (3PL) providers, such as Amazon FBA, which can create physical presence in multiple states.
- Hiring remote workers or independent contractors in other states.
- Dropshipping where vendors send goods directly to your customers.
- Selling tangible personal property like physical goods across state lines.
- Launching affiliate programs or advertising partnerships that involve indirect referrals from residents in other states.
All of these activities can quietly create nexus. Once that happens, you must collect and remit sales tax, whether or not you knew about the obligation.
How does a nexus study work?
In a nexus study, a sales tax expert reviews your records and then reports where you have nexus. They will typically review:
- Sales records and transaction volumes by state
- Your marketing partnerships and affiliate programs
- Warehouse, shipping, and fulfillment arrangements
- Contracts with contractors or employees
- Any previous filings or voluntary compliance efforts
Based on this, they’ll produce a report. It shows where you have sales tax nexus now, where you’re close to nexus thresholds, and what actions you need to take.
From there, you can:
- Register with state tax departments
- Collect sales tax from customers as required
- Remit sales tax on time to the appropriate authorities
- Pursue a voluntary disclosure agreement for backdated compliance if needed
Do you need a nexus study?
You probably need a nexus study if:
- You sell in more than one state or operate online sales platforms
- You’ve hired staff or outsourced services in different regions
- You’ve surpassed $100,000 in annual sales in any state
- You store inventory in warehouses outside your home state
- You receive referrals from in-state affiliates
Even businesses that think they don’t have nexus often find out they do. This is especially true if they sell tangible personal property, use fulfillment services, or earn passive income from referrals.
Skipping a nexus study can be risky. It could lead to fines, penalties, and interest on unpaid tax. Some states offer programs that encourage voluntary compliance. These help you avoid harsher consequences, but only if you act before the state contacts you.
How often should you conduct a nexus study?
You should conduct a nexus study at least every five years. Do it more often if your business operations or tax laws change significantly. Regular reviews keep you compliant as your operations grow and tax obligations change across regions.
If you don’t update your nexus study on time, you may rely on outdated data during the look-back period. That can lead to serious legal issues and financial penalties. Regular reviews keep you aware of your tax obligations and help you avoid compliance risks.
Summary
A nexus study is a critical tool for today’s fragmented sales tax landscape. It helps you find tax obligations before they become a costly surprise. It also makes sure you’re fully sales tax compliant. That matters in a world where something as simple as online success can trigger economic nexus.
Not sure whether your business has sales tax nexus? Don’t wait for a nexus questionnaire to arrive in the mail. Be proactive. Work with a qualified sales tax expert to assess your exposure, protect your business, and meet your compliance duties with confidence.
Do you need help with your sales tax compliance? Book a free call with one of our sales tax experts to find bespoke solutions for your business, optimize your tax costs, and reach millions of new potential customers with our automated tax solutions.
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.
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Frequently asked questions
What is a nexus study?
A nexus study is an in-depth review of your business activities to determine where you have sales tax obligations due to physical, economic, or affiliate connections in various states.
What types of nexus can trigger sales tax obligations?
Common types include physical nexus (like offices or inventory), economic nexus (exceeding sales or transaction thresholds), click-through nexus (online referrals), and affiliate nexus (shared business activities).
Why is a nexus study important?
It helps you identify where you need to collect and remit sales tax, avoid penalties, and stay compliant with ever-changing state tax laws.
How do I know if my business needs a nexus study?
If you sell in multiple states, use third-party fulfillment (like Amazon FBA), hire remote workers, or exceed $100,000 in sales in any state, a nexus study is strongly recommended.
What happens after the study?
You'll receive a report detailing where you have nexus and what actions to take, such as registering with tax authorities, collecting and remitting tax, or filing for voluntary disclosure.
