What Are State Nexus Rules and Why Do They Matter for Online Businesses?

State nexus rules determine when a state has the legal authority to tax a business that sells there. Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., many states can require remote sellers and digital businesses to collect sales tax based on economic activity alone — not just physical presence (U.S. Supreme Court, South Dakota v. Wayfair, 2018). That change exposed online sellers and digital service providers to new filing, collection, and registration obligations across multiple states.

In my work advising online retailers and SaaS companies, I consistently see three practical consequences: (1) you have to track sales and customer locations constantly, (2) missing nexus triggers can lead to back taxes and penalties, and (3) marketplace platforms often change who is responsible for collection (marketplace facilitator laws).

Authoritative resources: the Wayfair decision; the Streamlined Sales Tax Governing Board and Multistate Tax Commission provide state-level resources and definitions (Streamlined Sales Tax Governing Board; Multistate Tax Commission).

How nexus is established: common triggers

Nexus can be established in several, sometimes overlapping, ways. States use a mix of tests; there’s no single national rule.

  • Physical presence nexus. Having offices, warehouses, inventory stored by a fulfillment partner (including third-party logistics providers like Amazon FBA), salespeople or even equipment in a state generally creates nexus.

  • Economic nexus. Most states now impose economic thresholds — commonly stated as a dollar-sales amount, a transactions count, or both — after which a seller must register and collect sales tax. Many states adopted thresholds similar to $100,000 in sales or 200 transactions, but amounts and transaction tests vary by state and change over time. Always check the state’s current statute or tax dept. guidance.

  • Marketplace facilitator rules. Most states require marketplaces (for example, Amazon, Etsy) to collect and remit sales tax on behalf of sellers using the platform. This shifts collection responsibility in many cases but does not eliminate the seller’s registration obligations for other tax types.

  • Affiliate and click-through nexus. Relationships with in-state affiliates, referral arrangements, or directed traffic from in-state websites/apps can create nexus under some states’ laws.

  • Employee/remote worker nexus. Having a remote employee, contractor, or salesperson working from a state can establish payroll, income, and sales tax nexus — particularly if the worker solicits sales or performs services there.

  • Income tax and payroll nexus. Nexus affects more than sales tax. States can impose corporate income tax, franchise tax, withholding, and unemployment insurance obligations when nexus exists for those tax bases.

Examples and how they commonly play out

  • E-commerce store with nationwide customers: If your online storefront sells $120,000 of goods to State X during a 12-month period and that state’s economic threshold is $100,000, you must generally register to collect State X sales tax from the point you meet the threshold. In many states the obligation starts the day the threshold is met.

  • Fulfillment via marketplace or 3PL: If you use a marketplace that collects tax as a facilitator, the marketplace will often remit tax for those orders. However, if you also hold inventory in a state at a third-party warehouse, that inventory may still create physical presence nexus for inventory/other tax obligations.

  • SaaS and digital goods providers: States diverge on whether SaaS, digital downloads, and in-app purchases are taxable. Economic nexus can trigger collection obligations in states that tax digital products.

For related background on triggers and practical steps, see our guides: “Nexus Basics for Remote Sellers and Service Providers” and “Nexus and Economic Presence: Sales Tax Triggers for Remote Sellers”.

Practical checklist: immediate actions when you suspect nexus

  1. Stop guessing — calculate. Pull gross sales and transaction counts by state for the last 12 months. Use your payment processor, shipping records, or accounting software to export state-by-state totals.
  2. Compare totals to each state’s threshold. Check the state’s revenue department website for current economic nexus rules and effective dates.
  3. Check physical triggers: inventory locations (including 3PLs), remote employees, trade show activity, or in-state contractors.
  4. Confirm marketplace facilitator coverage. If you sell through platforms, verify what the platform collects and what you still must collect or report.
  5. Register and begin collecting as required. Register immediately after you meet threshold conditions; some states require registration within a short window.
  6. File and remit timely. Even if you rely on a marketplace for collection, you may still have filing or reporting responsibilities, and income tax withholding obligations may still apply.
  7. Consider voluntary disclosure programs if you discover unfiled periods. Many states offer voluntary disclosure agreements (VDAs) that limit the look-back period and reduce penalties; the terms vary widely.
  8. Document everything. Keep exportable reports, correspondence with marketplaces and 3PLs, and state registration confirmations.

Managing complexity: systems and professional supports

  • Use tax automation. Sales-tax engines (Avalara, TaxJar, Sovos, Vertex) integrate with e-commerce platforms and calculate tax at checkout, maintain rate tables, and often provide nexus alerts.

  • Maintain a nexus register. Track the dates you met thresholds, registrations filed, and the scope of what was registered (sales tax vs. income tax vs. withholding).

  • Run periodic nexus reviews. Quarterly or semiannual reviews reduce risk of surprise exposures.

  • Engage a multistate tax advisor. Complex facts — like apportionment for income tax, allocation for digital goods, or affiliate nexus disputes — benefit from specialized counsel.

Common mistakes and how to avoid them

  • Relying on memory instead of data. Automate your reporting. Manual estimates lead to missed thresholds.

  • Assuming marketplace coverage is complete. Confirm what the marketplace remits and whether it covers state use tax reporting or only sales tax on marketplace transactions.

  • Overlooking non-sales taxes. Nexus triggers can create income tax, payroll withholding, unemployment insurance, and franchise tax obligations.

  • Ignoring remote employees. One remote salesperson or developer in a state can create multiple tax obligations.

Retroactivity and voluntary disclosure

States take different approaches to retroactive liability. After you identify a missed nexus trigger, two paths are common:

  • Register and begin collecting going forward — many states will allow prospective compliance only for sales tax, but

  • Enter a Voluntary Disclosure Agreement (VDA). VDAs can limit how many prior years a state can assess and may waive penalties. Terms and eligibility differ by state; seek advice and act quickly because statutes of limitations and enforcement practices vary.

Special topics: digital goods, SaaS, and subscription models

Tax treatment of digital products, streaming, and SaaS varies dramatically by state. Some states tax SaaS as tangible personal property or specified digital products; others exempt it. Economic nexus can require you to register in states that tax your product. A careful product classification review is essential.

Documentation and recordkeeping

Keep clear records for:

  • Gross receipts by state and by period
  • Shipping and billing addresses
  • Sales channel (direct vs. marketplace)
  • Contracts with affiliates and referral partners
  • Warehouse/3PL agreements showing inventory locations

Good documentation supports a voluntary disclosure, audit defense, and correct filings.

Final recommendations (practical, prioritized)

  1. Start with data: export 12 months of sales and transactions by state.
  2. Automate where feasible: sales tax engines and accounting integrations reduce manual errors.
  3. Create a nexus calendar: track when you cross thresholds and the filing dates for each state.
  4. Decide on a VDA strategy if you find historical noncompliance; consult a tax professional.
  5. Revisit your contracts with marketplaces and 3PLs annually to confirm who bears tax responsibilities.

This is a practical, action-oriented overview and not personalized tax or legal advice. For questions tied to a specific business structure, product classification, or state dispute, consult a qualified state tax advisor or attorney.

Sources and further reading

  • U.S. Supreme Court, South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
  • Streamlined Sales Tax Governing Board: https://www.streamlinedsalestax.org
  • Multistate Tax Commission (MTC): https://www.mtc.gov
  • State revenue departments (search the specific state’s official site for current thresholds and registration rules).

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Professional disclaimer: This entry is educational and reflects general practices as of 2025. It is not tax, accounting, or legal advice. Consult licensed professionals for guidance tailored to your facts and jurisdictions.