Background: why this changed

Before 2018, many states relied on a physical‑presence rule to assert sales‑tax nexus. The Supreme Court’s decision in South Dakota v. Wayfair, Inc. (585 U.S. ___ (2018)) allowed states to require remote sellers to collect sales tax based on economic or virtual contacts with the state rather than physical presence. This spurred states to adopt economic‑nexus thresholds to capture out‑of‑state sellers.

Sources: South Dakota v. Wayfair, Inc. (2018); National Conference of State Legislatures (NCSL) — Sales Tax Nexus guidance (ncsl.org).

How the economic‑nexus test works

  • States set thresholds that create nexus when a remote seller exceeds them in a given period (usually the prior or current calendar year). Common triggers are total sales revenue into the state (e.g., $100k–$500k) or a number of transactions (e.g., 100–200 sales), but amounts vary by state. (Check each state’s tax website or NCSL for current thresholds.)
  • Once a seller meets nexus, the seller must register with the state’s tax authority, collect sales tax on taxable sales to customers in that state, file returns, and remit the tax.

Note: thresholds and effective dates differ by state; some states also have special rules for marketplaces, digital goods, and services.

Practical examples and impact

  • Example: Many states adopted a $100,000 in sales or 200‑transaction threshold; others, like California and Texas, set higher dollar thresholds (California currently uses a $500,000 sales threshold). New York requires sellers to meet both a dollar and transaction test in some cases. These specifics change, so verify the current rule for each state. (See NCSL for a state‑by‑state chart.)
  • In my work helping online retailers, small changes in online volume often create unexpected nexus in several states within a year. Sellers that miss this can face back taxes, penalties, and interest after audits.

Who is affected

  • Remote retailers of physical goods and many digital sellers and service providers. Marketplaces may have different rules: some states require the marketplace facilitator (e.g., a platform) to collect tax on behalf of third‑party sellers.
  • Small businesses that sell across state lines are most likely to cross thresholds as they grow.

For marketplace rules, see our guide: Sales Tax Collection Responsibilities for Online Marketplaces.

Compliance checklist (actionable steps)

  1. Track gross sales and transaction counts by state in real time.
  2. Review each state’s economic‑nexus thresholds and effective dates.
  3. Register for a sales‑tax permit once nexus is established.
  4. Configure checkout to collect the correct state and local rates.
  5. File returns and remit taxes on time; keep documentation of sourcing and exempt sales.

For a practical setup checklist, see: Sales Tax Compliance Checklist for Small Online Retailers.

Common mistakes to avoid

  • Assuming only physical presence matters. Wayfair expanded nexus to include economic presence.
  • Ignoring marketplace facilitator rules — platforms often collect for sellers, but not always.
  • Failing to track exempt sales and resale certificates properly.

Penalties and audits

States can assess back taxes, penalties, and interest if a seller should have collected tax. The size of exposure varies by state and how long the liability went uncollected. For this reason, many sellers negotiate voluntary disclosure agreements with states to limit penalties.

Quick FAQs

  • Are digital goods taxed the same way? Not uniformly — states differ on the taxability of digital products and SaaS. Check state guidance and our article on digital goods.
  • Do I owe taxes for years before Wayfair? States adopted rules at different times and often apply nexus only prospectively, but historic liabilities can exist where state law or audits reach back several years.

Professional tip

Start monitoring state sales by customer shipping address now and set automated alerts when you approach common nexus thresholds. In my practice, early registration and correct collection often cost far less than post‑audit liability.

Disclaimer

This article is educational and not tax advice. Rules vary by state and change over time; consult a licensed state tax adviser for decisions affecting your business.

Authoritative sources

  • South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018).
  • National Conference of State Legislatures, Sales Tax Nexus resources: https://www.ncsl.org.

Related reading: State Sales Tax Nexus: Practical Tests for Remote Sellers in 2025 and Sales Tax Collection Responsibilities for Online Marketplaces.