Sales Tax Nexus: A Complete Guide to Types, Laws, and Compliance

Tax policies are detailed and convoluted. Many guides try to pack in as much information as possible, which makes reading the guide almost as overwhelming as reading the original tax policy! So we’ve kept it simple. We’ve zeroed in on the most necessary information to grasp how sales tax nexus works in the USA.

As the title promises, here’s a brief-but-thorough guide to US sales tax nexus in the physical and digital realms.

What is sales tax nexus?

“Nexus” refers to a commercial connection in the state.

Traditionally, it has meant “sufficient physical presence,” and there are multiple ways to satisfy the requirement of a “sufficient physical presence.” It can be through a brick-and-mortar office, a single sales representative, a high-grossing affiliate business, or even using cookies on computers located in the area. (Cookies aren’t physical, but the computers are? Your guess is as good as ours. More on this later.)

A nexus is something you have. Your business either has nexus in a state, or it doesn’t have nexus in a state. When you do have nexus, that means you’re obligated to collect tax on your sales there.

The trick is to know your status. And that is tricky, indeed.

It’s tricky because nowadays there are several different kinds of nexus, and they vary from state to state. (We’ll explain those definitions in a minute!)

Plus, many states are changing their nexus definitions in order to capture tax from remote sellers. Who are remote sellers? According to Streamlined Sales Tax:

“Remote sellers are generally businesses that sell their products to customers in a state, using the Internet, mail order, or telephone, without having a physical presence in that state.”

So, other types of nexus have emerged that go beyond the physical to the distance-selling and digital realms. These are especially important to watch since the Supreme Court decision on Wayfair in June 2018, which knocked the “physical presence” precedent off its throne, setting off a wave of new tax policies that affect remote sellers.

Never fear. By the end of this article, you’ll have a much clearer idea of where your business stands and the steps you need to take to stay compliant with US tax law.

Types of sales tax nexus

Physical Presence Nexus

The original concept of business nexus was a physical presence in the state: a store, an office, a warehouse. This was pretty straightforward, as it referred to a permanent structure in a given location.

Over time, the concept of “physical presence” expanded to include a presence in the state, either temporary or permanent, that generates or helps fulfill sales.

So, you or a sales rep attending an event where you make sales, or even connect with potential customers who convert later — this would count as nexus. Certainly storing your inventory in a state would count as nexus, as well. (In today’s world of Amazon FBA and the like, some states tax the marketplace site, some tax the seller.)

There’s even the possibility of a “trailing nexus,” which means even after you’ve picked up and left a state, the physical presence nexus will still apply for a certain period of time. Only a few states have trailing nexus, which last anywhere from one month to a year.

Beyond traditional physical presence, some states have expanded their definition of nexus to include how you derive your sales, extending “physical presence” into areas like your marketing campaigns and online practices. To be clear, these forms of sales tax nexus apply to ALL businesses. They’re just the most important ones to know for online businesses, specifically.

Affiliate Nexus

You have an “affiliate nexus” if you’re affiliated with a business or individual in the state and sales are generated from this connection. Referrals are the most common revenue source associated with this nexus.

States that have some version of an affiliate nexus rule are Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Maine, Missouri, Minnesota, New York, North Carolina, Pennsylvania and Rhode Island. Many of these states have minimum sales thresholds, so the nexus (and tax obligations) only applies once you surpass a certain amount of gross sales.

Click-through Nexus

Similar to affiliate nexus, a click-through nexus exists when your business receives sales referred by another business located in the state. If you run ads or links on an in-state website, which channels potential customers and new business to you, this counts as the aptly-named click-through nexus.

States that have some form of click-through nexus on the books include Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington. Again, most states have a minimum sales threshold for this nexus, so the rule only kicks in once you surpass a certain amount of gross sales.

Web cookies

A few states consider software or web cookies on in-state devices as a business nexus. These include Massachusetts, Connecticut, Rhode Island, and Ohio. In all cases, the sales thresholds for this nexus are pretty high.

Economic Nexus

This one is broad, and will likely become THE nexus to rule them all, making obsolete all other tedious rules (i.e., those listed above).

The rule? Any kind of economic activity could trigger nexus, once it reaches a certain amount. Generally, states with this nexus have a threshold in place. The common threshold is $100,000 in annual sales, or 200 separate sales transactions, but exact numbers can vary by state. For further information on the development of these economic nexus policies, read our blog post on the U.S. Supreme Court decision of Wayfair vs. South Dakota.

Check out The Ultimate Guide to US Economic Nexus for more information!

How to determine sales tax nexus

Criteria for Physical Presence

• Owning or leasing real property in the state (e.g., office, store, warehouse)
• Having employees, agents, or representatives working in the state
• Storing inventory in the state, including in third-party fulfillment centers (like Amazon FBA)
• Delivering goods in company-owned or leased vehicles
• Attending trade shows, events, or performing services in the state
• Installing or assembling products in the state

These activities typically trigger an obligation to register for and collect sales tax in the relevant state, but check with each state for their specific requirements, as rules and enforcement can vary.

Economic Activity Thresholds

As mentioned above economic nexus, established under the Wayfair v. South Dakota ruling, states can require out-of-state businesses to collect and remit sales tax based solely on economic activity, even without any physical presence.

Most states have adopted economic activity thresholds that look like:

• $100,000 in sales OR
• 200 or more separate transactions
  ...in the state during the current or previous calendar year.

However, some states:

• Use only a dollar threshold (e.g., California, New York).
• Have higher or lower thresholds (e.g., Texas uses $500,000).
• Don’t have sales tax (e.g., Oregon, New Hampshire, Montana, Delaware).

Impact of Sales Tax Nexus on Businesses

Compliance Costs and Penalties

Sales tax nexus creates an obligation to register, collect, and remit taxes in each state where you have nexus. This adds administrative work and may require tax software or professional help. Failing to comply can lead to penalties, interest charges, and even back taxes, which can be costly over time.

Reputational and Operational Risks

Non-compliance can also damage your business’s reputation, especially if customers are charged incorrectly or audits become public. Additionally, handling audits or correcting errors can disrupt daily operations and take time away from running your business.

Steps to comply with sales tax nexus laws

Once you confirm that you have nexus in a state, here’s a quick rundown of the steps you should take.

1. Register for Sales Tax Permits

Register for a sales tax permit in that state. You must register for each state’s tax scheme individually. You should visit the state’s Department of Revenue website. Another option is to register for the 24 streamlined states all at once, using a simple (and free!) online application through the Streamlined Sales Tax Registration System (SSTRS).

2. Collect and Remit Tax Accurately

Charge sales tax to customers in that state. This includes the overall state tax, plus any county or district taxes that apply. Usually, the tax rate is based on where the customer is located, a destination-based tax. Only a few states have origin-based taxes, meaning you charge tax according to wherever your business is based.

File sales tax returns in that state. Again, you should visit the individual states’ official websites for information on how to file.

3. Monitor Nexus Thresholds Regularly

Nexus can change as your business grows or expands into new markets. Track your sales and activities in each state on a regular basis to ensure you know when you've crossed a new threshold. This helps you stay compliant and avoid penalties for failing to register or collect tax in time.

If you sell in a state where you do not collect taxes, you should double check the local policies there. Better safe than sorry!

How Quaderno Can Help

Quaderno simplifies and automates sales tax determination across the 50 states. Our database detects where your customer’s location uses origin- vs. destination-based sales tax rates. We apply the correct rate to every transaction, performing instant sales tax calculations at the point of purchase. If you want, we’ll send an automatic receipt, too!

In fact, Quaderno can do all of the following:

• Notify you when you’re about to exceed a threshold and hit economic nexus in any state.
• Calculate the right amount of tax to charge each customer, right on your checkout page.
• Collect and store the customer location evidence that you need to get from every sale.
• Create and send invoices in multiple languages and currencies.
• Send tax invoices automatically.
• Provide detailed, easy-to-read records and tax reports.
• Alert you when tax policies or tax rates change, so that you’re always in the loop.
• Register and file tax returns, if you want to add this do-it-for-you service!

And that’s only how Quaderno can help with US sales tax. When it comes to VAT, GST, and other sales taxes around the world, or simply everyday billing and accounting — Quaderno jumps through all the hoops for you and presents your business data in a way that’s easy to understand. Sign up for a free trial and see how Quaderno can give hours back to your week.