What you need to know about sales tax nexus

If you conduct business in a state(s) with a sales tax, you need to understand nexus and how it affects your sales tax obligations. This blog post will introduce you to the basics:

• What is tax nexus?
• What is sales tax nexus?
• What creates sales tax nexus?
• Why does sales tax nexus matter for small businesses?
• What should my business do about sales tax nexus?

The more you know about sales tax nexus, the better you can fulfill your sales tax obligations and maintain sales tax compliance across the United States. 

Nexus is simply another word for connection. Tax nexus is a connection that creates a tax obligation. 

Here’s how it works: If your business has nexus with California, your business is required to comply with all applicable California tax laws. If you don’t have nexus with California, you generally aren’t required to collect or remit California taxes. 

Nexus laws affect a variety of taxes, including business and occupation (B&O) tax, franchise tax, income tax, and sales and use tax. It’s possible for a business to have nexus with a state for one tax type but not another because nexus standards differ. For example, an online retailer based in Michigan could have sales tax nexus with Illinois but not have Illinois income tax nexus.

Sales tax nexus is a connection that creates a sales tax collection obligation. If your business has sales tax nexus with a state, you’re required to obtain a sales tax permit in that state; collect sales tax, remit sales tax, and file sales tax returns in the state; and comply with all other applicable sales and use tax requirements. 

In general, businesses aren’t required to register for sales tax, collect sales tax, remit sales tax, or file sales tax returns in states where they don’t have sales tax nexus.

For the most part, sales tax nexus laws in the United States are governed by states. However, in the handful of states that allow home rule, individual cities and/or counties may enforce local sales tax nexus and additional local sales tax obligations. For example, a remote business could be required to register with and remit sales tax to a local government in addition to a state department of revenue.

There are several ways for a business to create nexus with a state:

• Physical presence in a state (physical presence nexus)
• Economic activity in a state (economic nexus)
• Ties to affiliates in a state (affiliate nexus)
• Referrals from businesses or individuals in a state (click-through nexus)

Physical presence nexus 

Having a physical presence in a state virtually guarantees sales tax nexus. As the Washington State Department of Revenue explains, “Physical presence is a nexus standard that requires only more than the slightest presence.”

Physical presence nexus (or simply physical nexus) can be triggered in a number of ways, including but not limited to:

• Having employees working in the state (including remote employees)

• Having real or tangible property in the state (including inventory in an Amazon warehouse)

• Exhibiting at a trade show in the state

• Making deliveries in the state (other than by mail or common carrier)

Specific sales tax nexus requirements related to physical presence vary by state. For example, while having inventory in a marketplace warehouse generally doesn’t establish physical nexus in New York or Texas, inventory can create physical presence nexus in California and New Jersey.

As with all sales tax laws, it’s important to read the fine print on physical nexus requirements. As of July 1, 2016, out-of-state businesses can attend one trade show convention in Washington per year without establishing physical nexus with the state. However, the exception doesn’t apply to retailers that make or take orders for retail sales at trade shows if the products or services sold are received in Washington.

Economic nexus 

Economic presence in a state has become one of the most common ways to create nexus, though economic nexus legislation for sales tax is a relatively recent phenomenon.

On June 21, 2018, the Supreme Court of the United States overturned a long-standing rule that had prevented states from imposing a sales tax obligation on businesses with no physical presence in the state. The groundbreaking Supreme Court decision in South Dakota v. Wayfair, Inc. didn’t eliminate physical presence nexus. Instead, it freed states to impose sales tax obligations on out-of-state businesses with economic activity but no physical presence in the state.

It’s taken years for the dust from the Wayfair decision to settle, but all states with a general sales tax (plus the District of Columbia and Puerto Rico) now have economic nexus laws in effect; Missouri became the last to enforce an economic nexus standard on January 1, 2023.

The only states that don’t have economic nexus rules for sales tax are the states that have no statewide sales tax: Delaware, Montana, New Hampshire, and Oregon. Though there’s also no state sales tax in Alaska, many cities and boroughs in Alaska enforce economic nexus rules for local sales tax.

All economic nexus laws provide an exception for businesses with sales in the state that are beneath a certain economic threshold, but that doesn’t mean small businesses don’t need to worry about economic nexus. Small businesses can easily establish economic nexus with one or more states because the economic nexus threshold in many states is relatively low:

• About 20 states have economic thresholds of $100,000 in annual sales

• About 21 states (plus D.C. and Puerto Rico) have economic thresholds of $100,000 in annual sales or 200 transactions annually

Economic nexus thresholds may or may not include exempt transactions, services, or sales made through a marketplace facilitator. For state-specific nexus threshold information, see our state-by-state guide to economic nexus laws.

Please bear in mind that what establishes economic presence is subject to change. For instance, numerous states have dropped their 200-transactions threshold, most recently Indiana and Wyoming. 

Affiliate nexus

Roughly 30 states have affiliate nexus laws that impose a sales tax obligation on out-of-state businesses with ties to affiliates in the state. To trigger nexus, affiliates must somehow promote the remote retailer’s business, by selling a similar line of products under a similar name, for example, or by distributing advertising materials on behalf of the out-of-state business.

Affiliate nexus sales tax rules got a lot more attention before the U.S. Supreme Court overturned the physical presence rule in 2018. But, businesses can still be held liable for sales tax based on affiliate nexus, so it shouldn’t be overlooked.

As with economic nexus and physical presence nexus laws, affiliate nexus sales tax laws vary by state.

Click-through nexus

Approximately 15 states have click-through nexus laws requiring remote sellers to register for sales tax if they 1) receive referrals from residents of the state, and 2) make a certain amount of sales from such referrals.

As with other sales tax nexus rules, click-through nexus laws differ from state to state. A remote retailer would establish click-through nexus with Rhode Island if its cumulative gross receipts from Rhode Island referrals exceeded $5,000 during the preceding four quarterly sales tax periods. To create click-through nexus with Tennessee, the same seller would need more than $10,000 in cumulative gross receipts from Tennessee referrals during the preceding 12 months. 

Though affiliate and click-through nexus laws don’t make headlines the way economic nexus and physical presence nexus laws do, they also shouldn't be overlooked. After all, Illinois repealed its affiliate nexus and click-through nexus provisions after Wayfair then reinstated them. If a law is on the books, it can be enforced.

Sales tax nexus affects any business that sells taxable goods or services to consumers in states with a sales tax, even small businesses with all sales exempt from sales tax. Though your business may not need to collect and remit sales tax if you only make exempt sales, you can still be required to register for a sales tax permit, validate exempt transactions, and file sales tax returns.

The Wayfair decision was a game changer for businesses because it freed states to tax online sales by out-of-state sellers. The COVID-19 pandemic was also a game changer because it accelerated ecommerce adoption: At the height of the pandemic, according to McKinsey research, the ecommerce industry experienced 10 years’ growth in just 90 days.

More online sales can lead to more economic nexus obligations for small businesses that may have previously been selling under economic nexus thresholds. So while increased sales are exciting, remember that they can create new sales tax obligations and complicate sales tax compliance.

The first step is learning about nexus laws in the states where you make sales and figuring out where you're required to collect sales tax. States typically have a lot of good information on their department of revenue websites. Depending on your business and level of audit risk, it may be worth your while to consult with a professional tax advisor or undertake a sales tax nexus study.

If you discover you’ve crossed an economic nexus threshold, it’s in your best interest to register sooner rather than later. However, there are some things you’ll need to know before you register. For instance, it’s critical to determine when you first  established sales tax nexus. If it was years ago, unbeknownst to you, you could end up with a hefty bill for back taxes.

Once you have a sales tax permit, you’ll need to calculate and collect sales tax on taxable transactions, validate exempt transactions, and file returns and remit the tax due by the appropriate deadlines.

Sales tax nexus can impact your business regardless of its size. Check out our Know Your Nexus guide or sales tax nexus FAQ for more useful information.

This post has been updated; it was originally published January 13, 2023.