Sales tax nexus 101

Sales tax nexus refers to the connection a business has with a state that creates an obligation to collect and remit sales tax.

There are many ways to create nexus, such as hitting a certain sales or transaction threshold, having employees in a state, storing inventory in a warehouse, selling at a trade show or festival, and more.

We recommend researching the nexus triggers for each state in which you do business, or where you have employees, contractors, affiliates, or goods.

Relative to sales tax, Wayfair refers to the United States Supreme Court case South Dakota v. Wayfair, Inc.

On June 21, 2018, the Supreme Court ruled in favor of the state, overturning a longstanding physical presence rule and paving the way for states to require out-of-state sellers to collect and remit sales tax.

There are several types of nexus that may create an obligation for you to register, then collect and remit sales or use tax, in a given state:

• Affiliate nexus is having ties to affiliates, partners, or other businesses in a state

• Click-through nexus is getting referrals from in-state entities through links on a website

• Economic nexus is having a certain amount of sales or number of transactions in a state

• Physical presence is having employees, inventory, kiosks, offices, stores, trade show attendance, warehouses, or other physical ties

Nearly all states have at least one form of nexus. The exceptions are Delaware, Montana, New Hampshire, and Oregon, which don’t have sales tax.

Alaska doesn’t have a state sales tax, but some municipalities have local sales tax and enforce economic nexus.

Our state-by-state guide can help you understand which states have which types of nexus and how they’re triggered.

You can create nexus by doing business and establishing relationships with customers or partners in a state, depending on the types of nexus that apply in each tax jurisdiction. 

All states with a sales tax have physical presence nexus. Details vary by state but can include setting up a store front, storing inventory, hiring employees, or making sales at events within their borders.

All states with a sales tax also have economic nexus laws that apply to any business with a certain amount of sales or number of transactions to resident customers. 

In addition to physical presence and economic activity triggers, states can also have click-through nexus or affiliate nexus.

We offer a free ebook that explains the different types of nexus and how to determine which may apply to your business.

It can. Physical presence nexus generally applies to all businesses, regardless of company size or sales activity. Other forms of nexus can be triggered by meeting certain sales or business criteria, which rarely have to do with the size of your business.

This is where things can get tricky. It’s important to track your sales and be aware of which out-of-state activities can trigger an obligation to register and to collect and remit tax to a state.

You can work with a tax professional or hire an accountant who can monitor your activities. Some tax software, ecommerce platforms, and sales systems also track this kind of information.

No. Each state sets its own rules for which types of nexus they enforce as well as the thresholds or rules that trigger nexus. Each state can also determine how long nexus obligations stay in effect after the triggering event.

Because the types of nexus and rules around them vary from state to state, it’s important to know what the obligations are in each state where you do business or where you have employees, partners, or inventory.

No. When you no longer meet the requirements for nexus, you may not have to continue collecting and remitting taxes. 

However, each state has its own rules about what’s called trailing nexus, which is how long you’re still on the hook to file after you cease to have nexus. Be sure to check the requirements for each state you do (or did) business in.