We all know that the U.S. tax system is built on a simple yet complex idea. I’ve seen countless business owners blindsided by sales tax nexus obligations they never knew existed. If you’re selling products or services across state lines, EX, selling online, running a remote business, or operating across multiple states, chances are you have a sales tax nexus that requires you to register, collect, and remit tax.
But what triggers nexus? And how do you stay compliant without losing your mind? This guide will arm you with everything you need to know about sales tax nexus.
What Is Sales Tax Nexus?
Sales tax nexus represents the legal connection between your business and a state that requires you to collect and remit sales tax. Think of it as a tripwire— once you cross it, you’re on the hook for tax collection.
The concept of tax nexus dates back to the 1800s, but it wasn’t until the landmark 1992 Supreme Court case, Quill Corp. v. North Dakota, that modern rules were established. This case ruled that a business must have a physical presence in a state before being required to collect sales tax.
But everything changed in 2018 with South Dakota v. Wayfair, Inc. (oral argument; here). The Supreme Court overturned the Quill decision, allowing states to impose tax collection duties on businesses based on economic activity alone even if they had no physical presence. This ruling redefined nexus and led to a wave of new laws across the country.
What Triggers Tax Nexus? Understand the Source Types
Each state defines tax nexus differently, but here are the main types:
1. Physical Nexus: If your business has a physical presence in a state, you have physical nexus and must register. This includes: A warehouse or storage facility, an office space (even a home office), Employees or independent contractors, and Inventory stored in fulfillment centers (yes, Amazon FBA counts!)
2. Economic Nexus: Even without a physical presence, your business may trigger economic nexus if your sales exceed a state’s threshold. Thanks to the Wayfair ruling, states can now enforce tax collection based on sales revenue or transaction volume. The most common threshold is $100,000 in sales or 200 transactions annually (but some states have lower or higher limits).
Examples: California: $500,000 in sales, Texas: $500,000 in sales, Florida: $100,000 in sales/200 transactions.
3. Click-Through Nexus: If your business earns revenue through online referrals, some states consider this a tax obligation. For example, if an in-state website links to your store and generates sales, you may owe tax there.
4. Affiliate Nexus: If you work with third-party affiliates or partners in a state, that might trigger nexus. States argue that these affiliates are effectively acting as your sales force even if they’re independent contractors.
5. Marketplace Nexus: If you sell on Amazon, Etsy, Walmart, or eBay, marketplace facilitator laws require the platform to collect and remit sales tax on your behalf. However, this doesn’t mean you’re off the hook, as some states still require you to register for a permit.
6. Payroll Nexus: If you hire employees or contractors in a state, you may owe employment taxes and state income taxes. Having a remote workforce can create unexpected tax obligations.
7. Franchise & Business Taxes: Even if you don’t collect sales tax, some states charge franchise or gross receipts taxes based on revenue, profit, or business presence. Texas and Delaware, for example, impose franchise taxes even if you have no employees or inventory in the state.
What Do the States Say About Nexus?
State tax agencies actively monitor businesses to ensure compliance with tax laws, often using sophisticated data analysis tools to detect unregistered businesses. Ignoring tax nexus can lead to audits, penalties, and even legal consequences that can cripple a business financially.
From a legal standpoint, nexus determination is primarily controlled by the U.S. Constitution. The Due Process Clause requires a business to have a “definite link” or “minimal connection” with a state before being taxed. Meanwhile, the Commerce Clause demands a “substantial presence,” meaning states cannot impose tax obligations on businesses without a meaningful connection. These constitutional protections have shaped decades of tax law and led to landmark rulings like Quill Corp. v. North Dakota (1992) and South Dakota v. Wayfair, Inc. (2018).
Here are some key points emphasized by tax authorities:
- Each state establishes its own nexus rules: there is no federal standard, meaning businesses must navigate a complex web of state-by-state regulations.
- Failing to collect the appropriate taxes may result in retroactive penalties, back taxes, and interest charges that accumulate over time.
- Many states offer voluntary disclosure programs; if you register before an audit occurs, you may be able to avoid penalties and negotiate lower back-tax payments.
Some businesses have faced six-figure fines and even criminal investigations for ignoring nexus laws. In extreme cases, state tax agencies have seized business assets and bank accounts to recover unpaid taxes.
Tip: Always check a state’s official tax website or consult a tax expert to confirm your obligations, and follow sales tax updates to stay compliant. Some states aggressively audit businesses in industries like e-commerce, software services, and consulting.
How to Register for Sales Tax
If you have nexus in a state, you’ll need to register for a sales tax permit. The process typically includes:
- Determining which states you need to register in.
- Applying online through the state’s tax department website.
- Collecting and remitting sales tax on time.
For a detailed step-by-step guide, check out our Sales Tax Registration Guide (link to sales tax registration blog).
Know Your Nexus, Protect Your Business
Tax nexus isn’t something you can afford to ignore. The rules are complex, and each state enforces them differently. If your business has any level of presence or sales activity in a state, you need to pay attention.
Need help? Tax automation tools like Avalara can streamline the process, or work with a tax consultant for expert guidance.
We can guide you with our nexus determination service and stay compliant! Book a call now.
FAQs
1. How often do I need to review my nexus status?
Monthly monitoring is strongly recommended. Sales patterns can change quickly, especially during seasonal peaks, and you don’t want to discover you’ve exceeded thresholds months after the fact. Set calendar reminders to check your state-by-state sales totals regularly.
2. What’s the difference between sales tax nexus and income tax nexus?
While related, they’re separate obligations. Sales tax nexus requires you to collect and remit sales tax on transactions, while income tax nexus may require you to file state income tax returns and pay tax on apportioned business income. Unfortunately, registering for sales tax in a state often puts you on the radar for income tax compliance as well.
3. If I use Amazon FBA, Etsy, or other marketplaces, do I still need to worry about economic nexus?
Absolutely. While marketplace facilitator laws require these platforms to collect and remit sales tax on your behalf in most states, you may still need to register and file returns. Additionally, having inventory stored in Amazon fulfillment centers creates a physical nexus regardless of your sales volume.
4. What are the different types of nexus?
The most common type is economic nexus, where businesses must collect sales tax if they exceed a state’s sales or transaction threshold (e.g., $100,000 in sales or 200 transactions). Other types include physical nexus (having a store, warehouse, or employees in a state), click-through and affiliate nexus (sales generated through in-state marketers), marketplace nexus (selling through platforms like Amazon or Etsy), inventory nexus (storing goods in third-party warehouses), trade show nexus (temporary sales at events), and incentive nexus (accepting tax benefits from a state). Businesses should monitor their sales, inventory, and partnerships to stay compliant and avoid costly penalties.
5. What does financial nexus mean?
Financial nexus refers to a business’s tax obligation in a state based on its financial activity, even if it lacks a physical presence. Some states establish nexus when a company meets a certain level of gross receipts, payroll, or property within the state. This concept is commonly used in corporate income tax laws rather than sales tax. For example, a business with over $500,000 in sales in a state might be subject to corporate income tax, even without offices or employees there. Financial nexus rules vary by state, so businesses must track revenue thresholds and ensure compliance to avoid unexpected tax liabilities.
