Before You Start

This guide assumes you have a business that sells products or services across state lines and are looking to understand your multi-state sales tax obligations.

Overview

45 min
Estimated Time
Advanced
Difficulty
Ongoing
Monitoring

What You’ll Learn

  • How to define and identify physical nexus
  • Understanding economic nexus thresholds post-Wayfair
  • Strategies for managing multi-state sales tax compliance
  • When to register and remit sales tax in new states

1. What is Sales Tax Nexus?

Sales tax nexus is the legal presence a business has in a state, creating an obligation to collect and remit sales tax.

Key Nexus Triggers

  • Physical Presence (Offices, Employees, Warehouses)
  • Economic Presence (Sales Revenue, Transaction Volume)
  • Affiliate & Click-Through Nexus
  • Marketplace Facilitator Sales

Common Misconceptions

  • Nexus only applies to brick-and-mortar stores
  • Drop-shipping always avoids nexus
  • Selling below a certain dollar amount means no nexus

2. Physical Nexus: The Traditional Standard

This refers to a tangible business presence in a state.

Type A: Physical Presence Nexus

This is the long-standing rule for sales tax obligations.

Pros:
  • Clear historical precedent.
  • Easily understood for static businesses.
  • Less ambiguity for single location.
Cons:
  • Triggers easily with remote workers.
  • Inventory in third-party warehouses.
  • Complex for distributed businesses.

Type B: Economic Nexus: The Modern Standard

This applies to remote sellers based on sales volume or transaction count.

Expert Tip: The South Dakota v. Wayfair Supreme Court decision in 2018 significantly expanded sales tax nexus beyond physical presence, allowing states to enforce sales tax collection on remote sellers meeting certain economic thresholds. This is critical for e-commerce.

Here is a sample code block illustrating a state’s economic nexus thresholds.

{
  "state": "California",
  "economic_nexus_thresholds": {
    "annual_gross_receipts": 500000,
    "number_of_transactions": null,
    "effective_date": "2019-04-01"
  },
  "notes": "Remote sellers exceeding $500,000 in sales in the prior or current calendar year."
}

3. Determining Your Nexus Obligations

Here is the high-level workflow for assessing where you have nexus.

4. Steps to Assess Your Nexus

  1. 1

    Review Your Physical Presence

    Identify all states where your business has a physical location, employees, or inventory in third-party warehouses.

  2. 2

    Analyze Sales Data by State

    Track your total sales revenue and number of transactions for the current and prior calendar year for every state.

  3. 3

    Research State Economic Thresholds

    Consult official state tax websites or a tax professional to determine the specific economic nexus thresholds for each relevant state.

Common Error: Ignoring Small Sales Volume States

Even small sales in a state can trigger physical nexus if you have a remote employee or inventory there, regardless of economic thresholds. Always assess both types of nexus.

5. Compliance & Best Practices

Nexus Compliance Checklist

  • Register for sales tax permits in all nexus states
  • Configure tax calculation software for each state’s rules
  • Regularly monitor sales data for new nexus triggers
  • Stay updated on evolving state sales tax laws

Need Help?

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Having trouble understanding complex nexus rules or ensuring compliance? Our tax automation experts can help assess your specific situation and navigate multi-state sales tax obligations.

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