Quick overview
State nexus rules are the tests states use to decide when a business has enough presence in the state to require registration, tax collection, withholding, or filings. The U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair allowed states to impose sales-tax obligations based on economic activity rather than only physical presence, and most states now use a mix of physical- and economic-based nexus rules (SCOTUS, Wayfair, 2018). For current, state-specific thresholds and rules, consult the state department of revenue and comparative resources such as the Tax Foundation (see links below).
How nexus is commonly created (and why each matters)
- Physical presence: Offices, retail stores, employees, contractors, or inventory (including third‑party warehouses and fulfillment centers — e.g., FBA warehouses) located inside a state typically create nexus for sales tax and often for payroll withholding and income/franchise tax purposes.
- Economic presence: Many states set sales- or transaction-based thresholds (for example, a dollar-sales threshold or a number-of-transactions threshold) that create nexus when crossed. These thresholds differ by state and can change, so check each state’s revenue site.
- Affiliate, click‑through, and referral nexus: Relationships with in‑state affiliates, agents, or referrers who generate sales may create nexus under some state laws.
- Marketplace facilitator rules: Large marketplaces (Amazon, Etsy, Shopify Markets) often collect and remit sales tax for third‑party sellers; however, marketplace rules don’t eliminate other nexus triggers such as inventory in state warehouses.
- Employees and remote workers: Having employees — including remote staff — working from a state may create payroll withholding obligations and can also establish nexus for income/franchise taxes.
These different nexus triggers matter because they determine which taxes apply (sales tax, income or franchise tax, payroll withholding, gross receipts tax) and the steps your business must take (register, collect/withhold, file returns).
Practical steps to assess and manage nexus (an actionable checklist)
- Map your footprint
- Inventory physical locations (offices, retail, pop-ups, warehouses, fulfillment centers) and contractor/employee locations.
- Identify where you store inventory, including third‑party logistics (3PL) and FBA warehouses.
- Track and segment sales by state
- Monitor gross sales and transactions by state on a rolling 12‑month basis; many states use a rolling lookback period for economic nexus.
- Review contracts and marketing arrangements
- Assess affiliate relationships, click‑through arrangements, and referral partners that could be considered in‑state agents.
- Confirm marketplace responsibilities
- If you sell on marketplaces, determine whether the marketplace collects tax on your behalf and whether you still have independent nexus triggers (inventory, sellers’ permits, local registration).
- Register and comply promptly
- If you determine you have nexus in a state, register for a sales tax permit or other required tax accounts and begin collecting or withholding effective the date the state requires.
- Consider voluntary disclosure programs (VDAs)
- If you discover unregistered nexus with back periods of uncollected tax, many states offer VDAs that limit lookback periods and reduce penalties. These programs vary by state (state DORe websites).
- Document your analysis
- Keep contemporaneous records of sales, contracts, employee locations, and the logical basis you used to conclude whether or when nexus was created.
- Review annually (or when business changes)
- Reassess when you change business models, expand into new channels, add remote employees, or use different fulfillment arrangements.
In my practice advising small-to-medium businesses, adding a routine ‘‘nexus review’’ to quarterly operations has prevented costly retroactive examinations and allowed timely registration in newly implicated states.
Real-world examples (short, practical scenarios)
- E-commerce retailer and FBA: A small retailer selling through Amazon discovers inventory stored in a third‑party fulfillment center inside State X. Even though the seller has no office or employees there, the inventory creates physical presence nexus for that state, triggering registration and sales tax collection.
- SaaS vendor and economic nexus: A software vendor with no physical footprint had large subscription revenue from State Y. After crossing State Y’s economic threshold, the vendor had to register and begin collecting sales tax on certain taxable subscriptions (taxability varies by state for digital goods and services).
- Remote employees: A company headquartered in State A hires an employee working from State B. That employee can create nexus for payroll withholding and may subject the company to business income or franchise taxes in State B.
Common pitfalls and how to avoid them
- Relying on home‑state assumptions: Operating solely online does not automatically avoid nexus. Wayfair changed that presumption for many states (SCOTUS, 2018).
- Ignoring marketplace and third‑party inventory: Marketplaces may remit tax, but inventory in state warehouses commonly creates nexus. Confirm whether the marketplace or you, the seller, is responsible for registration in each state.
- Not documenting nexus analyses: During audits, states expect contemporaneous analysis and records. Documentation reduces exposure and supports voluntary disclosures.
- Treating thresholds as permanent: States occasionally change economic nexus thresholds; use a monitoring process and subscribe to state DORe updates.
Nexus and different tax types: brief guide
- Sales and use tax: Most often associated with Wayfair‑style rules; can be triggered by physical or economic nexus.
- Income and franchise tax: Nexus for business income often depends on apportionment rules and may be influenced by payroll and property presence.
- Payroll withholding: Hiring or paying employees or contractors in a state typically triggers payroll withholding and reporting obligations.
- Gross receipts or excise taxes: Some states impose business activity taxes that have independent nexus definitions (e.g., Ohio CAT, Texas franchise tax characteristics).
When you might need professional help
Engage a tax professional when:
- Your business crosses multiple state sales or transaction thresholds.
- You discover unregistered activity and potential back taxes.
- You use multiple sales channels, marketplaces, or fulfillment networks (3PL/FBA).
- You employ remote workers across several states.
A specialist can help with registration, voluntary disclosure negotiations, apportionment calculations for income tax, and setting up compliance workflows.
Resources and authoritative guidance
- South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) — U.S. Supreme Court decision enabling economic‑nexus rules.
- State departments of revenue — definitive authority for thresholds, filing instructions, and voluntary disclosure programs (search each state’s revenue site).
- Tax Foundation — ongoing summaries and comparisons of state economic nexus thresholds and marketplace rules (taxfoundation.org).
- FinHelp.io related guides: Understanding nexus for SaaS and digital services (https://finhelp.io/glossary/understanding-nexus-for-saas-and-digital-services/), Wayfair Nexus (https://finhelp.io/glossary/wayfair-nexus/), and Multi‑State Sales Tax Registration (https://finhelp.io/glossary/multi-state-sales-tax-registration-when-you-need-to-register/).
What to do next (action plan for business owners)
- Run a 12‑month sales and transaction report by state from your accounting system or e‑commerce platform.
- Inventory physical footprint and third‑party storage locations.
- If you suspect nexus in any state, contact the state’s department of revenue or a qualified tax advisor before an audit or enforcement action arises.
- Consider a voluntary disclosure if there is past noncompliance — VDAs can substantially limit liability in many states.
Final notes and professional disclaimer
This article explains general state nexus concepts and practical steps. It is educational and not individualized tax advice. For decisions specific to your business — such as registration timing, voluntary disclosure strategy, or apportionment methodology — consult a qualified CPA, tax attorney, or state revenue specialist. In my practice I frequently recommend keeping thorough, contemporaneous records and scheduling an annual nexus review, especially for businesses using marketplaces or third‑party fulfillment.
Sources: South Dakota v. Wayfair, Inc. (2018); Tax Foundation summaries of state nexus rules; state departments of revenue (individual state guidance); U.S. Supreme Court opinion text and state DORe pages for current thresholds. Additional FinHelp resources: “Understanding Nexus for SaaS and Digital Services” and “Multi‑State Sales Tax Registration: When You Need to Register.”