Quick overview

Nexus determines when a state can require a business to collect sales tax, register for state tax accounts, or pay income/franchise taxes. For remote service providers — freelancers, consultants, SaaS vendors, and agencies delivering services across state lines — nexus is often fact-specific. Since the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018), economic activity in a state (not just physical presence) can create nexus for sales tax purposes South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

This article explains common nexus triggers for remote service providers, how to evaluate exposure, practical compliance steps, and strategies to reduce regulatory friction. It is educational and not a substitute for personalized tax advice.

Why the distinction matters: sales tax vs. income tax nexus

  • Sales tax nexus is typically state-administered and determines whether you must collect sales or use tax from customers in a state.
  • Income (or corporate/franchise) tax nexus decides whether a state can tax your business income.

The tests differ. Sales tax nexus laws changed rapidly after Wayfair; many states adopted economic thresholds measured by sales dollars or transaction counts. Income tax nexus, in many states, still relies on a mix of physical presence, payroll, sales, and apportionment rules. Treat them as separate compliance tracks.

Common nexus triggers for remote service providers

  1. Economic nexus (sales thresholds)
  • Many states set an annual sales threshold (often $100k–$500k) or a transaction-count test (e.g., 200 transactions). Exceeding the threshold in a state typically requires registration and tax collection for taxable services or digital products. Examples vary by state — always confirm with that state’s revenue department.
  1. Physical presence
  • Having employees, independent contractors, inventory, servers, or office space in a state creates physical nexus. Even short-term activity such as attending trade shows or providing on-site services can be enough in some jurisdictions.
  1. Employee or contractor presence
  • Remote staff or contractors working in a state on behalf of your business may create payroll withholding obligations and nexus for business tax purposes.
  1. Affiliate or click-through nexus
  • Some states use relationships with affiliates or referrals from in-state websites to create nexus.
  1. Marketplace facilitator rules
  • If you sell through marketplaces, the marketplace may collect and remit sales tax under state law, which affects how you comply.
  1. Digital products and SaaS
  • States vary on whether software-as-a-service (SaaS), digital subscriptions, or certain professional services are taxable. Classification matters for whether economic nexus triggers collection obligations.

How to determine if you have nexus — practical checklist

  1. Map your activities by state for the trailing 12 months: sales dollars, number of transactions, employees/contractors, property (including servers or leased space), and significant business trips.
  2. Review each state’s nexus rules and taxable services list. State tax departments publish guidance and registration thresholds.
  3. Identify taxable vs. nontaxable services. State classifications differ — what’s taxable in one state may be exempt in another.
  4. Run a sales-threshold calculation and transaction-count tally. Treat marketplace sales separately if marketplace-facilitator laws apply.
  5. Document the analysis and the dates when thresholds are met (this matters for voluntary disclosure or amnesty programs).

For a step-by-step checklist for employees and remote staff, see FinHelp’s State Nexus Checklist for Out-of-State Remote Employees.

Registration, collection, and filing

If nexus exists for sales tax, you typically must register for the state’s sales tax permit, collect tax on taxable transactions delivered to that state, file periodic returns, and remit the tax. For income tax nexus, you may need to register for corporate or withholding accounts and file state income returns.

States differ in effective dates and retroactivity rules. If you discover past periods with uncollected tax, states may offer voluntary disclosure agreements (VDAs) or have audit and penalty regimes. Seek professional help to negotiate look‑back periods and penalties.

Real-world examples (illustrative)

  • A California-based freelancer who sells digital templates to customers nationwide: If sales into State X exceed that state’s economic threshold and State X taxes digital goods, the freelancer must register and collect sales tax on those sales.

  • A consulting firm hires a remote analyst resident in Illinois: The firm may establish payroll and business nexus in Illinois, creating payroll withholding and potential income tax filing obligations.

  • A SaaS company uses a server cluster hosted in a state where it has few customers: Some states treat server location as physical presence — track hosting contracts carefully.

These examples are illustrative. Exact obligations depend on state statutes and administrative guidance.

Common mistakes and how to avoid them

  • Assuming no physical office means no nexus. After Wayfair, economic nexus often matters more than physical presence.
  • Failing to track remote workers or contractors by state. Modern firms can overlook payroll nexus or withholding obligations.
  • Treating all states the same. Nexus thresholds and taxable service lists vary widely; cookie-cutter policies create risk.
  • Ignoring marketplace-facilitator rules. If a marketplace collects tax, you may be relieved of collection but still need to report.

Avoid these errors by using automated nexus monitoring in your accounting system and by performing regular nexus reviews (quarterly or semiannually depending on sales velocity).

Practical strategies and professional tips

  • Run a regular nexus scan: Use accounting and tax compliance tools that flag states where you approach thresholds.
  • Preserve documentation: Keep logs of employee locations, server hosting, travel for conferences, and customer addresses.
  • Be proactive with registration: Register promptly when thresholds are met to reduce penalties and exposure.
  • Use clear contracts and billing practices: Specify billing addresses and delivery terms; work with legal counsel on nexus-sensitive language.
  • Consider voluntary disclosure: If you find historic exposure, a VDA can limit look-back and penalties in many states.
  • Consult a CPA or multistate tax specialist: In my practice advising service providers, early consultation usually reduces audit exposure and produces a clear compliance roadmap.

Penalties and audits

States can assess back taxes, interest, and penalties for uncollected sales taxes or unfiled returns. The amount and period of retroactive assessment vary. A professional review can identify safe harbor opportunities and VDA eligibility.

Where to find authoritative guidance

  • South Dakota v. Wayfair, Inc., Supreme Court opinion (2018): explains the constitutional basis for economic nexus for sales tax. (opinion)
  • State departments of revenue: each state posts nexus rules, taxable services guidance, and registration steps on their website.
  • IRS guidance: for federal income-tax treatment and some multistate matters see IRS resources at irs.gov.

For practical, FinHelp-focused resources see related articles: “Nexus for Digital Businesses: When States Can Tax Your Services” and “Establishing State Tax Nexus for Remote Service Providers.” These pages provide deeper, tactical checklists and examples for digital and consulting businesses.

Final takeaways

Nexus for remote service providers is fact-intensive and varies by state and by tax type (sales tax vs. income tax). After Wayfair, don’t assume physical absence alone protects you. Build a documented nexus-monitoring process, use automation where possible, and get targeted professional advice early — the cost of proactive compliance is usually far lower than the cost of a state audit.

Professional disclaimer: This article is educational and does not constitute tax advice. For advice tailored to your facts, consult a licensed CPA or state tax expert.

Authoritative sources

(Updated guidance is state specific — always confirm rules on the relevant state revenue department website.)