What Is Sales Tax Nexus?

The Two Types of Nexus

Physical Nexus

Physical nexus has existed since the earliest days of sales tax. If your business has a physical presence in a state: an office, warehouse, store, employees, or even a sales rep working from home. You have nexus there. This is the traditional standard and it still applies.

Common physical nexus triggers include: owning or leasing real property, having employees or contractors in the state, storing inventory in a warehouse (including Amazon FBA fulfillment centers), attending trade shows or conducting sales calls, and having delivery vehicles regularly operating in the state.

Economic Nexus: The Post-Wayfair World

In 2018, the U.S. Supreme Court's decision in South Dakota v. Wayfair fundamentally changed the nexus landscape. States can now require out of state sellers to collect sales tax based purely on economic activity, with no physical presence required.

Within months of the ruling, nearly every state with a sales tax enacted economic nexus laws. Most use a threshold of $100,000 in sales or 200 transactions in the state per year. Once you cross that threshold, you have nexus and are required to register, collect, and remit.

Other Nexus Types to Know

• Marketplace Nexus
  If you sell through Amazon, Etsy, or another marketplace facilitator, the platform collects tax on your behalf in most states. But your own direct sales may still create nexus separately.
• Affiliate Nexus
  Having a business affiliate, referral partner, or related entity operating in a state can create nexus, even without direct physical presence.
• Click-Through Nexus
  Some states (notably New York) have historically imposed nexus on businesses with in state referral arrangements, such as website affiliate programs. Many of these rules have been superseded by economic nexus post Wayfair.
• Agency Nexus
  Independent contractors, sales agents, or representatives working in a state on your behalf can establish nexus, even if they are not W-2 employees.

Nexus in Audits: A High-Stakes Issue

Nexus is frequently the central issue in sales tax audits for remote and multistate sellers. A state auditor claiming you had nexus in prior years before you registered can assess tax going back three to four years, or longer if the statute of limitations is tolled due to non-filing. The resulting liability can be substantial.

If you believe you have a nexus dispute, either because you believe you did not have nexus in the periods audited, or because you have nexus exposure you have not yet addressed, the right move is to consult a sales tax attorney before the state reaches out to you.