What Is a Nexus Study and Does Your Business Need One?

As businesses grow and expand across state lines—especially in the era of e-commerce—it’s easy to overlook new tax obligations that arise. One of the most important yet often misunderstood concepts in sales tax compliance is “nexus.” Understanding whether you have nexus in a state is crucial to determining if you’re required to collect sales tax, remit it, and stay compliant with state tax departments. That’s where a nexus study comes in.

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.

What is a nexus study?

A nexus study is a detailed analysis of your business operations to assess where you may have created sales tax nexus. In simple terms, nexus means a sufficient connection between your business and a particular state that obligates you to begin collecting sales tax from customers in that state.

There are several types of nexus that 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 are indirectly referring customers to your business.
  
• Affiliate nexus – Using related businesses, subsidiaries, or agents in a state that create nexus through shared activities or branding.

Because sales tax rules vary significantly by state—and states continue to update these rules—it’s essential to stay ahead of the curve. Conducting a nexus study ensures that your business doesn’t unknowingly violate any sales tax laws.

Why a nexus study matters more than ever

In the past, businesses only worried about sales tax in states where they had a store or warehouse. However, after the U.S. Supreme Court’s South Dakota v. Wayfair ruling in 2018, many states introduced economic nexus laws. Now, if your economic activity in a state surpasses a certain threshold (commonly $100,000 in sales or 200 transactions annually), you’re expected to collect and remit sales tax, even without a physical connection to that state.

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 provides clarity and helps reduce audit risks. Many businesses only discover their non-compliance after receiving a nexus questionnaire from a state authority—a situation best avoided.

Real-world triggers that create nexus

If you’re not sure whether your business is at risk, consider these common triggers:

• Storing inventory with third-party logistics (3PL) providers, such as Amazon FBA, which can cause 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, and once that happens, you’re required to collect and remit sales tax, regardless of whether you were aware of the obligation.

How does a nexus study work?

A sales tax expert 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 identifying where you currently have sales tax nexus, where you’re approaching 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 do 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 qualify for nexus often discover they do—especially if they sell tangible personal property, use fulfillment services, or have passive income from referrals.

Skipping a nexus study can be risky. It could result in fines, penalties, and interest on unpaid tax. Some states offer programs that encourage voluntary compliance, helping you avoid harsher consequences—but only if you act before they contact you.

How often should you conduct a nexus study?

It’s recommended to conduct a nexus study at least every five years, or more often if there are significant changes in your business operations or tax legislation. Regular evaluations allow you to stay compliant as your operations grow and tax obligations change across different regions.

Failing to timely update nexus studies can result in significant legal issues and financial penalties due to reliance on outdated data during the look-back period. Regular reviews ensure that you remain aware of your tax obligations and avoid potential compliance risks.

Summary

A nexus study is a critical tool for navigating today’s fragmented sales tax landscape. It helps you uncover potential tax obligations before they become a costly surprise and ensures that you’re fully sales tax compliant—especially in a world where economic nexus can be triggered by something as simple as online success.

If you’re unsure 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 responsibilities 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. 

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.