Quick overview

Nexus and economic presence are the legal links states use to decide whether a seller must collect and remit sales tax. Since the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018), many states moved from a strict physical-presence standard to rules based on economic activity — typically sales dollars or transaction counts. These rules affect manufacturers, retailers, marketplaces, SaaS providers, and small online sellers.

(I’ve worked with clients across e-commerce, subscription software, and handmade goods businesses for more than 15 years. In my practice, failing to monitor multi-state sales is one of the most common and costly compliance gaps.)

Why this matters now

States rely on nexus rules to apply sales tax to out-of-state sellers. After Wayfair, states began adopting “economic nexus” laws that trigger obligations when a seller reaches a state-defined threshold. For remote sellers, that can mean registering for a seller’s permit, collecting sales tax from customers in that state, filing returns, and remitting collected tax. Failure to comply can lead to back taxes, penalties, and interest.

Authoritative sources: South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018); National Conference of State Legislatures (NCSL) on economic nexus (https://www.ncsl.org/research/fiscal-policy/economic-nexus.aspx); IRS guidance on sales and use tax (https://www.irs.gov/businesses/sales-and-use-tax).

How economic nexus typically works

  • Trigger: A state sets a numeric threshold that creates nexus for remote sellers. Common triggers are a dollar amount of in-state sales and/or a number of transactions over a lookback period (often 12 months).
  • Timing: Once you exceed a state’s threshold, you’re generally required to register for a sales tax permit, begin collecting state and local sales taxes, and file according to the state’s schedule.
  • Variation: Each state defines thresholds, lookback periods, effective dates, and sourcing rules differently. Some states also impose marketplace facilitator rules that shift collection responsibility to platforms like Amazon, eBay, or Etsy.

Because rules vary, treat each state as its own compliance obligation and verify details on the state’s department of revenue website or consolidated summaries such as NCSL’s page.

Examples and common state approaches

  • Example A: A small online shop sells $110,000 in taxable goods to customers in State X during a 12-month period. If State X’s economic threshold is $100,000, the seller now has nexus and must register.
  • Example B: Subscription (SaaS) provider that works with customers across multiple states — even if no physical offices exist in those states, the provider may have economic nexus depending on sales, transactions, and whether the state taxes digital goods or services.

Marketplaces often complicate this picture. Most states now have marketplace facilitator laws requiring the marketplace to collect and remit tax on seller transactions. Sellers still need to know their obligations, because liability and exemptions can differ by state and by whether the marketplace collects tax.

For more on registration and the steps to comply, see our guide: Sales Tax Registration for Online Sellers: Where to Start and the practical checklist: State Sales Tax Nexus: When Remote Sales Require Registration.

Sourcing rules and why they change the outcome

States use sourcing rules to determine which jurisdiction gets the tax. Two common approaches:

  • Destination-based sourcing: Tax is collected based on the buyer’s location (used by most states).
  • Origin-based sourcing: Tax is based on the seller’s location (fewer states use this for remote sales).

Sourcing impacts how you calculate taxable sales in each state and can change whether you cross a threshold. Always confirm the state’s sourcing rules before you calculate nexus exposure.

Practical steps to determine and manage nexus

  1. Maintain state-by-state sales records: Track gross sales and transaction counts by state on a rolling 12-month basis. Use exportable reports from your e-commerce platform or accounting system.
  2. Run cadence checks: Review sales by state monthly or quarterly to flag threshold crossings early.
  3. Confirm taxability: Not all sales are taxable (exemptions for resale, certain services, medical devices, etc.). Where sales are exempt, nexus may still be triggered by gross receipts.
  4. Register promptly: Once a threshold is reached, register for a sales tax permit with the state. Registering voluntarily often reduces penalties compared with waiting for a state audit.
  5. Collect and remit: Begin collection as required by the state (some states allow prospective collection dates; others require retroactive collection). File returns on the schedule the state assigns.
  6. Use automation: Sales tax automation tools can calculate taxes, collect simplified returns mapping, and help manage filings.

If you want practical compliance workflows, our article on nationwide compliance covers implementation and automation: How to Maintain Sales Tax Compliance When Selling Online Nationwide.

Common pitfalls and audit triggers

  • Ignoring small-state sales: Many sellers assume small volumes don’t matter. A steady stream of smaller sales can accumulate and trigger nexus.
  • Misreading marketplace rules: If a marketplace collects tax, sellers may mistakenly assume they have no obligations; however, sellers still need to manage exemptions and reporting requirements.
  • Poor recordkeeping: Missing invoices, inconsistent sourcing of sales, and incomplete resale certificates are common audit findings.
  • Retroactive exposure: If you didn’t collect tax and later a state requires retroactive remittance, the bill can include taxes, interest, and penalties.

States commonly flag sellers through marketplace data, audit referrals, or information-sharing agreements with other states.

What to do if you’re notified by a state

  • Don’t ignore notices. Respond early and gather the requested records.
  • Reconstruct sales: Pull transaction histories by state and identify tax collected or not collected.
  • Consider voluntary disclosure agreements (VDAs): Many states offer VDAs that cap lookback periods and reduce penalties for sellers who voluntarily come forward. Terms vary by state; consult a tax professional.

Recordkeeping and documentation

  • Keep sales invoices, shipping records, exemption certificates, and marketplace reports for at least the period states can audit (often 3–6 years; longer in some states).
  • Maintain reseller certificates in a central, auditable system. States often ask for them during audits.

Professional tips (what I recommend in practice)

  • Set automated alerts in your accounting system when state sales approach your most common thresholds (e.g., $50–75k) so you can plan registration and pricing.
  • Use a combination of a reliable sales tax engine and periodic manual reviews — automation helps scale but a human review catches edge cases.
  • Engage a state tax specialist before signing VDA or audit settlement offers. VDAs can be valuable but require careful negotiation.

Exemptions, resellers, and product classification

Taxability depends on the product or service and the buyer’s use. Digital goods, software, and certain services are taxable in some states and exempt in others. Correctly classifying products reduces compliance risk and prevents under- or over-collection.

Marketplace facilitators and your responsibilities

Marketplace facilitator laws place collection duties on platforms for sales facilitated through them. Sellers using marketplaces should:

  • Verify if the marketplace collects and remits in the buyer’s state.
  • Understand whether the marketplace provides exemption handling and reporting for your records.
  • Keep supporting documentation showing that tax was collected by a facilitator to avoid duplicate collection or audit exposure.

Resources and authoritative references

Final checklist: immediate actions for remote sellers

  • Export and segment 12-month sales by state.
  • Confirm taxability for your products or services in each state.
  • Check whether marketplaces you use collect tax and obtain their reports.
  • Register in states where you exceed thresholds and begin collecting going forward.
  • Build retention and exemption certificate workflows.
  • Schedule quarterly nexus reviews and annual tax policy reviews.

Disclaimer

This article is educational and does not constitute legal or tax advice. Rules vary by state and can change. For specific guidance tailored to your business, consult a CPA or state tax advisor.

If you’d like, I can prepare a state-by-state checklist for your business using your sales data (month-by-month exports), or a one-page VDA readiness summary—tell me which you’d prefer and I’ll outline the next steps.