How the IRS and States View Taxable Nexus

Taxable nexus is primarily a state concept—states decide when they have authority to tax a business or require tax collection. The U.S. Supreme Court’s 2018 ruling in South Dakota v. Wayfair, Inc. removed the strict physical-presence standard for sales tax and clarified that economic presence can establish nexus for state taxes. (See the Wayfair decision: https://www.supremecourt.gov/opinions/17pdf/17-494_k4ko.pdf.) The IRS provides federal guidance for income tax matters but does not set state sales-tax nexus rules; for federal questions see the IRS Small Business and Self-Employed Tax Center (https://www.irs.gov/businesses/small-businesses-self-employed).

In my practice advising remote-first companies for over 15 years, I’ve seen dozens of cases where assuming “no nexus” led to surprise audits and back taxes. In short: don’t assume remote work eliminates state tax obligations.

Why nexus matters now

Remote work, cloud services, and e-commerce have blurred the line between “where” a business operates and “where” it earns revenue. States reacted by adopting economic nexus statutes (often triggered by sales volume or number of transactions) and stricter rules for employees and contractors working in-state. Failing to recognize nexus can lead to:

  • Sales-tax registration and collection obligations
  • State income tax filing and withholding requirements
  • Penalties, interest, and multi-year audits

Because rules vary by state and type of tax (sales, income, withholding, franchise tax), you must evaluate nexus separately for each tax and each state where you have customers or workers.

Common ways taxable nexus is created

  • Physical presence: having an office, retail location, warehouse, or inventory in a state; business travel or a company employee working from home in the state can create nexus.

  • Employee/agent presence: employees, sales reps, or agents who work in-state on behalf of the company can establish nexus, even if the company has no formal office.

  • Economic nexus: reaching a sales-dollar threshold or transaction-count threshold set by state law (post-Wayfair). Thresholds and tests differ by state.

  • Affiliate/Click-through nexus: relationships with in-state affiliates, referrals, or related entities that generate sales can trigger nexus in some jurisdictions.

  • Marketplace nexus: marketplaces that facilitate sales can create different collection responsibilities for the marketplace operator and the seller.

Note: Nexus tests for sales tax differ from state income tax or payroll withholding tests. Each tax uses its own factors.

How nexus commonly applies to remote workers (practical scenarios)

  • A remote employee living in State A works for an employer based in State B. State A may require the employer to withhold state income tax for wages earned while the employee performs work in State A. The employer may also establish a presence that affects State A payroll and income tax filings.

  • A freelancer or independent contractor working remotely from their home state sells services to clients nationwide. The contractor may create sales or use tax obligations in client states depending on the service and state rules; they also owe income taxes to their resident state.

  • A company with no physical storefront hires multiple remote employees across states. Those employees’ locations can create multiple state filing obligations for the employer (withholding, unemployment insurance, state income/franchise tax considerations).

For employer-focused guidance about withholding and remote employees, see our related article: Managing Multistate Withholding When Employees Move Across Borders (https://finhelp.io/glossary/managing-multistate-withholding-when-employees-move-across-borders/).

How to determine whether you have nexus (step-by-step)

  1. Identify the tax type. Does the question relate to sales/use tax, corporate or personal income tax, payroll withholding, or franchise tax? Treat each separately.

  2. Map your activity by state. List where you have employees, independent contractors, property, inventory, customers, or referrals.

  3. Check state nexus rules. Search the relevant state revenue department pages for economic nexus thresholds, employee presence rules, and affiliate nexus provisions.

  4. Compare activity to state thresholds. For sales tax, states commonly use a sales-dollar threshold (often between $100,000 and $500,000) and/or a transaction-count test. These numbers change, so verify current thresholds on state sites.

  5. Document and revisit. Keep records of days worked, sales to in-state customers, inventory locations, and contracts that mention referrals or affiliates. Reassess annually or when business activity grows.

A helpful deep dive on remote-work nexus is our Multistate Nexus: When Remote Work Creates State Tax Obligations page (https://finhelp.io/glossary/multistate-nexus-when-remote-work-creates-state-tax-obligations/).

Practical steps for businesses and remote workers

  • For employers: Implement a centralized location-tracking and payroll setup. Require employees to report state of work and keep signed acknowledgements. Consult payroll providers that support multistate withholding.

  • For remote workers employed W-2: Understand your resident state filing obligations first. If you perform work in another state, learn whether that state requires employer withholding or nonresident filing.

  • For freelancers/1099 contractors: Track where services are performed and where clients are located. Some states tax services differently; sales tax may not apply to many professional services, but rules vary.

  • For sellers of goods/digital products: Monitor sales volumes by state. Register and start collecting sales tax when you surpass a state’s economic nexus threshold, or when you hold inventory in that state.

  • Consult professionals early: Multistate filings and voluntary disclosures are common. If you find unreported nexus exposure, a voluntary disclosure agreement (VDA) with a state can limit penalties in many jurisdictions.

Recordkeeping checklist

  • Employee location logs and remote-work agreements
  • Sales reports by state (monthly/quarterly)
  • Contracts showing affiliate or referral relationships
  • Inventory and fulfillment center addresses
  • Documentation of voluntary registrations or VDAs

Strong documentation reduces audit risk and supports positions taken during negotiations with state tax authorities.

Common mistakes and misconceptions

  • Assuming physical absence equals no nexus. Post-Wayfair, economic activity often matters.

  • Treating sales tax and income tax rules as identical. They are separate tests and may result in different nexus outcomes.

  • Ignoring contractors. In some states, long-term contractors or exclusive agents can create nexus for the hiring business.

  • Forgetting payroll withholding when employees relocate temporarily across state lines. Short-term assignments can still create withholding requirements depending on state reciprocity rules.

Example (simplified)

A SaaS firm headquartered in State X has a remote customer-success team with three employees working from State Y. The firm didn’t register in State Y and later received a notice for unpaid withholding and unemployment taxes after an audit. Because the employees performed work in State Y, the state determined the firm had an employment presence and assessed back taxes. This is a common scenario I’ve handled while helping clients set up multistate payroll correctly.

State differences and where to verify information

Because nexus is state-specific, always verify by checking the state revenue department website for the state in question. For sales-tax thresholds and post-Wayfair implementation details, many analysts use the Tax Foundation and state revenue sites as primary references, while the Wayfair decision itself provides the constitutional framework.

Authoritative references:

For practical state-focused guidance on sales-tax nexus and remote seller rules, consult your state’s department of revenue. You can also read more about sales-tax nexus for remote sellers on our site: Multi-State Sales Tax Nexus: Rules for Remote Sellers (https://finhelp.io/glossary/multi-state-sales-tax-nexus-rules-for-remote-sellers/).

Quick compliance checklist

  • Identify and list all states where you (or your employees) do business.
  • Review each state’s nexus rules for sales, income, and payroll taxes.
  • Register voluntarily before you get audited when exposure is identified.
  • Set up multistate payroll and withholding or use a payroll vendor.
  • Keep detailed location and sales records for each reporting period.

Final notes and professional disclaimer

This article explains how states generally establish taxable nexus for remote workers and businesses and offers practical steps to assess exposure. It does not replace personalized tax advice. In my practice advising employers and remote-first startups, early documentation and proactive registration typically reduce audit risk and long-term costs.

Consult a licensed tax advisor or state revenue department for advice specific to your situation. This content is educational and should not be considered legal or tax advice.