What is Multi-State Sales Tax Nexus and How Does it Affect Remote Sellers?
Multi-State Sales Tax Nexus describes when a state has the legal authority to require a business to collect and remit sales tax on sales into that state. For remote sellers—online retailers, SaaS providers, and dropshippers—nexus is the single most important concept for sales tax compliance after the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. (138 S. Ct. 2080).
Below I explain how nexus is established today, how common thresholds work, practical compliance steps, and resources to reduce audit risk. In my practice advising small and mid-sized sellers, the clients who proactively track their state sales and inventory locations avoid most surprises.
Background and the Wayfair Turning Point
Before 2018 many states relied on the Quill physical‑presence rule to define nexus. The Supreme Court’s decision in South Dakota v. Wayfair overturned Quill and allowed states to impose sales tax collection duties based on economic presence, not just physical presence. The ruling gave states latitude to set economic nexus standards—typically a dollar‑sales threshold, a transaction count, or both. (See the decision: https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf)
States responded quickly and differently: some set $100,000 or 200 transactions as a threshold; others set higher dollar limits (for example, several large states use $500,000). Because rules vary, sellers must evaluate nexus state‑by‑state.
How Nexus Is Established (Practical Rules)
Nexus generally arises in two broad ways:
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Physical presence nexus: inventory stored in a state (including third‑party warehouses or fulfillment centers), employees or agents working in the state, a brick‑and‑mortar location, point‑of‑sale events, or even frequent returns/exchanges processed in a state.
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Economic nexus: reaching a state’s sales or transaction threshold during a lookback period (usually the previous or current calendar year). Common thresholds across states include $100,000 in sales or 200 transactions, but many states—especially high‑volume markets—use higher dollar thresholds.
Other nexus triggers: marketplace facilitator rules, click‑through nexus (referral affiliates), and marketplace seller thresholds. States also treat certain services and digital goods differently, so product classification matters.
Typical Business Activities That Create Nexus
- Using a third‑party warehouse (FBA, Shopify Fulfillment, third‑party logistics). Many states treat inventory stored in a state as physical presence.
- Having remote employees or contract sales representatives who call on local customers.
- Significant remote sales into the state that meet economic nexus thresholds.
- Marketplace sales: most marketplaces now collect and remit sales tax under facilitator laws, but sellers still need to monitor liability if the marketplace does not cover certain transactions.
In my experience, the most common surprise is inventory in a fulfillment center that creates nexus without a seller realizing it.
Example State Thresholds (Illustrative — verify before relying on them)
| State | Common Economic Nexus Rule (illustrative) | Notes |
|---|---|---|
| California | $500,000 in sales | California uses a dollar threshold; check CDTFA for details. |
| New York | $500,000 and >100 transactions | New York requires both conditions for remote sellers. |
| Texas | $500,000 in sales | Texas adopts a dollar threshold. |
| Florida | $100,000 in sales | Florida’s economic nexus is based on sales into the state. |
| South Dakota | $100,000 in sales or 200 transactions | South Dakota’s law was the basis of the Wayfair case and uses a low threshold. |
Note: State thresholds and rules change. Always confirm with the state revenue department or the state’s published guidance before registering. The table above is illustrative and not a substitute for state law.
Who Is Affected
- Small online retailers selling tangible goods.
- Digital sellers and SaaS providers (state treatment varies widely by product/service).
- Drop shippers who place inventory in other states.
- Sellers using marketplaces (check whether the marketplace is the collector).
If your annual sales or transaction volume into a state meets that state’s economic nexus threshold, or if you hold inventory or employees there, expect registration and collection duties.
Compliance Steps Remote Sellers Should Take
- Inventory and Activity Audit
- Map where you store inventory, where employees work, and where returns are processed. Include third‑party fulfillment centers.
- Sales Monitoring
- Track calendar‑year sales and transaction counts by state (many states use the previous or current calendar year as the lookback period).
- Registration
- Register for a sales tax permit in any state where you have nexus before you begin collecting sales tax. Late registration can create liability for tax, interest, and penalty.
- Collect and Remit
- Start collecting sales tax at the correct rate(s) and file returns on the required frequency. Use either the state’s rate lookup or a compliance tool to maintain accuracy.
- Maintain Records
- Keep invoice-level records, evidence of exemption certificates when applicable, and filings in case of an audit.
- Use Technology
- Consider automated sales tax software (Avalara, TaxJar, Vertex) to handle rate calculation, filing, and jurisdiction assignment.
- Consult Professionals
- When in doubt, consult a CPA or state tax attorney experienced in multistate sales tax. In my advisory work, early consultation usually reduces future penalties and audit exposure.
For practical walk‑throughs on registration and filing, see FinHelp’s guides on Multi‑State Sales Tax Registration and Sales Tax Compliance for Online Sellers: Registration, Filing, and Reporting.
Marketplace Facilitators and Who Collects the Tax
Most states now require marketplace facilitators (Amazon, eBay, Etsy, etc.) to collect and remit tax on behalf of marketplace sellers. That reduces the burden for many small sellers, but it is not universal and exceptions exist. Read the state notice or FinHelp’s overview of Marketplace Facilitator Rules for details.
Common Mistakes and Misconceptions
- Assuming no physical presence means no nexus. After Wayfair, economic nexus can create obligations even without any local footprint.
- Relying on past thresholds. State rules change—what was true last year may no longer apply.
- Overlooking third‑party inventory. Fulfillment centers often create nexus quickly.
- Confusing who remits tax for marketplace transactions. Don’t assume a marketplace covers every sale.
Practical Examples
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Example 1: An online retailer using Amazon FBA stored inventory in Ohio. Inventory created nexus; the retailer had to register and remit in Ohio for sales shipped from that fulfillment center.
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Example 2: A SaaS provider with $600,000 sales into California triggered California economic nexus and needed to register, collect tax where applicable, and determine product taxability because digital/saas rules vary.
These are representative scenarios I’ve encountered; your facts may differ.
Frequently Asked Questions
Q: What if I missed collecting sales tax for prior periods?
A: States handle voluntary disclosure and amnesty differently. Many offer voluntary disclosure agreements (VDAs) or limited lookback windows to encourage registration and limit penalties. Contact the state revenue department or a tax advisor before applying retroactive collection.
Q: Will Wayfair force me to collect sales tax everywhere?
A: Not automatically. Wayfair allows states to set standards; nexus still depends on meeting that state’s specific tests.
Q: How do I know if my digital products are taxable?
A: Product classification is state specific. States differ on taxation of software, streaming, and digital goods. Check state guidance or consult a specialist.
Professional Tips (from my practice)
- Automate tracking by state at the order level—manual spreadsheets fail once you surpass a few hundred transactions per month.
- Keep a rolling 12‑month dashboard for sales by state to spot nexus triggers early.
- If you use multiple marketplaces, reconcile marketplace‑collected tax vs. your tax collected to avoid duplicate remittances.
Professional Disclaimer
This article is educational only and does not constitute tax, accounting, or legal advice. State sales tax rules change frequently. For guidance tailored to your facts, consult a licensed CPA, tax attorney, or the state revenue department.
Authoritative Sources & Further Reading
- South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018): https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf
- Individual state revenue department websites (search “[state name] Department of Revenue economic nexus”)
- FinHelp guides: State Sales Tax Nexus: When Remote Sales Require Registration, Sales Tax Compliance for Online Sellers: Registration, Filing, and Reporting, Marketplace Facilitator Rules: Who Collects and Remits Sales Tax?
If you want, I can assemble a short state‑by‑state checklist for your top five sales states to help determine next steps for registration and compliance.
