State Tax Nexus: Do You Owe State Taxes?

Quick overview

State tax nexus is the legal link that lets a state require businesses to register, collect, or pay state taxes. Nexus rules vary by tax type (sales tax vs. income tax vs. payroll) and by state. After the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., many states adopted economic thresholds that create nexus based on remote sales alone, not just physical presence (South Dakota v. Wayfair, 138 S. Ct. 2080 (2018)).

This article explains how nexus forms, who is affected, practical steps to determine whether you owe state taxes, and how to minimize surprises. In my practice advising small and medium businesses, nexus questions are among the top causes of unexpected audits—early detection and process automation prevent most problems.

How does state tax nexus arise?

States can assert nexus through several common triggers. Two broad categories are the most important:

• Physical nexus: traditional triggers like a brick‑and‑mortar store, warehouse, employees, independent contractors or agents working in the state, or property located there.
• Economic nexus: sales or transaction thresholds set by each state. After Wayfair, most states set a dollar amount and/or transaction count that, when exceeded, requires registration and collection.

Other nexus types you’ll see in guidance and audits include:

• Affiliate nexus: using related companies or affiliates to facilitate sales in a state (some states use affiliate relationships to attribute presence).
• Click‑through or cookie nexus: arrangements where in‑state entities refer customers to you and create taxable connections.
• Marketplace facilitator rules: many states now require online marketplaces (e.g., Amazon, Etsy) to collect tax on behalf of third‑party sellers, but that does not eliminate sellers’ responsibilities for other state taxes (see marketplace facilitator rules in your state).

Note: Nexus standards differ by tax. A business can have sales tax nexus in one state while not having corporate income tax nexus there, depending on the activity and state rules.

Important legal and policy milestones

• South Dakota v. Wayfair (2018): the Supreme Court allowed states to tax remote sellers based on economic presence rather than only physical presence. This decision is the key reason economic nexus rules now exist in almost every state (SCOTUS, 2018).
• State statute changes since 2018: most states enacted thresholds (commonly $100,000 in sales or 200 transactions; some states use $500,000). Thresholds and triggers are updated periodically—always check the current rule for each state.

Authoritative resources: IRS guidance on state and local taxes (IRS), the Tax Foundation’s Wayfair summaries, and state law trackers from the National Conference of State Legislatures (NCSL) provide current-state specifics.

Who is affected?

• E-commerce sellers and retailers who ship goods to customers in multiple states.
• Service businesses and SaaS providers that sell remotely, especially where states tax digital goods or services.
• Companies with remote employees, contractors, or stored inventory (third‑party logistics, FBA warehouses).
• Marketplaces and platform businesses (marketplace facilitator laws).

In my client work, I see two frequent scenarios: (1) small online sellers whose annual out‑of‑state revenue crosses a state’s economic threshold unexpectedly, and (2) businesses expanding to remote work without updating payroll and withholding registrations for employees who moved to other states.

Examples that matter

• An online seller headquartered in Texas begins shipping to California and later discovers total California sales exceeded California’s economic threshold. Once the threshold is crossed, the seller must register with the California Department of Tax and Fee Administration, collect sales tax on future taxable sales, and file returns. California’s threshold has been $500,000 for economic nexus for sales tax (verify current rules with the state).
• A business hires a remote contractor who works from New York. States can view contractor activity as creating a physical presence or payroll nexus for withholding and corporate income purposes; you may need to register for payroll withholding and potentially file income tax returns in New York.

How to determine whether you owe state taxes (practical steps)

1. Inventory activities by state. Make a spreadsheet showing employees, contractors, inventory locations, physical property, and sales by state (dollars and transactions).
2. Match activities to tax types. For each state, map whether those activities could trigger sales tax, corporate income tax, payroll withholding, or other taxes. Remember that the same activity can trigger multiple taxes.
3. Check state thresholds and rules. Use state revenue department websites or trackers like NCSL and Tax Foundation to confirm current thresholds and marketplace facilitator rules. Rules change—update this check at least quarterly.
4. Review contracts and third‑party logistics (3PL) arrangements. Stored inventory in a fulfillment center can create nexus. Also review affiliate or referral agreements that might create affiliate nexus.
5. Determine effective registration deadlines. Some states require retroactive collection dating back to the date nexus was established; others may limit retroactivity or offer voluntary disclosure programs for past liabilities.
6. Register and comply. If nexus exists, register with the state tax authority, institute collection and remittance processes, and file returns on schedule.
7. Document and monitor. Keep records supporting when nexus began and periodic reviews of sales and presence. Automation tools can flag when thresholds are near.

Registration, collection, and remittance: what to expect

• Sales tax: register for a sales tax permit with the state’s revenue department, begin charging tax on taxable sales, file periodic returns, and remit collected taxes.
• Income tax: if you have corporate income or franchise tax nexus, you may need to file a state income tax return and apportion income under state rules.
• Payroll: register for state withholding and unemployment insurance where employees work.

Many states enforce retroactive assessments. States can audit and assess tax plus interest and penalties for periods when you should have collected tax but did not. Consider voluntary disclosure agreements (VDAs) offered by some states to limit penalties for prior uncollected taxes.

Common misconceptions

• “Only physical presence matters.” False—economic nexus and marketplace rules mean remote activity often creates tax obligations.
• “Marketplaces take care of everything.” Marketplace facilitator rules help with sales tax collection, but sellers still need to evaluate income tax and other obligations.
• “If I made only a few out‑of‑state sales, I’m safe.” Transaction counts matter in many states; a small number of high‑value sales or many small transactions can each trigger nexus.

Compliance strategies and professional tips

• Run quarterly nexus reviews tied to your bookkeeping system to identify states nearing thresholds.
• Use a reputable sales tax automation provider to calculate, collect, and file sales tax accurately across jurisdictions.
• Keep careful records of employee and contractor locations; update payroll and withholding registrations promptly after hires or relocations.
• When you discover unreported nexus exposure, contact the state’s voluntary disclosure program if available—this often reduces penalties.
• Build nexus awareness into business decisions: where you store inventory, where you hire employees, and affiliate agreements can all create taxable connections.

Audit risk and recordkeeping

States use data analytics and marketplace data to find out‑of‑state sellers. Maintain:

• Sales ledgers and transaction detail by state.
• Shipping and fulfillment records showing where goods were stored or shipped from.
• Contracts with affiliates and marketplace platforms.
• Employee location and payroll records.

In audits, states often look back multiple years. Have evidence showing when you began activities that could establish nexus.

Links to related resources on FinHelp.io

• For online sellers, see our guide: State Sales Tax Nexus for Online Sellers: Establishing and Managing Obligations.
• For economic‑presence triggers and remote sales: Nexus and Economic Presence: Sales Tax Triggers for Remote Sellers.
• For remote employee considerations: Remote Worker Nexus: Complying with Multi-State Tax Rules.

Frequently asked questions

Q: How far back can a state assess uncollected sales tax?
A: It varies—many states look back three to four years, but some statutes of limitations can extend with fraud or failure to file. Voluntary disclosure programs commonly limit lookback periods.

Q: Do marketplaces like Amazon relieve me of all obligations?
A: Marketplace facilitator laws often shift sales tax collection to the marketplace, but you still must evaluate income tax nexus, registration requirements, and feeder obligations such as business licenses.

Q: What if I cross thresholds mid‑year?
A: Typically you must register and begin collecting from that point forward. Some states require retroactive collection; confirm with the specific state’s revenue department.

Final checklist

• Track sales and transaction counts by state monthly.
• Document employee and contractor locations.
• Review 3PL and inventory arrangements annually.
• Subscribe to state tax updates or work with a tax advisor.

Disclaimer

This article is educational and does not constitute tax, legal, or accounting advice. For guidance tailored to your situation, consult a qualified tax professional or state revenue office. Author has 15+ years advising businesses on multi‑state tax issues; this content reflects best practices and publicly available sources (U.S. Supreme Court, Tax Foundation, NCSL, IRS).

Authoritative sources and further reading

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
• Tax Foundation: summaries of Wayfair and state threshold rules (taxfoundation.org).
• National Conference of State Legislatures: state tax law trackers (ncsl.org).
• IRS: State and Local Taxes guidance and resources (irs.gov).