Quick Answer
State tax nexus determines whether your business must collect and remit taxes in a particular state. After the 2018 South Dakota v. Wayfair Supreme Court ruling, nexus is no longer limited to physical presence—economic activity such as sales volume or transaction count can also create nexus. Small businesses selling across state lines must understand these rules to avoid unexpected tax obligations and penalties.
What Is State Tax Nexus?
State tax nexus is the legal connection between a business and a state that gives the state the authority to impose tax obligations. Before 2018, the prevailing standard was physical presence: a business had to have an office, warehouse, employees, or other tangible assets in a state before that state could require it to collect sales tax.
The Supreme Court’s decision in South Dakota v. Wayfair, Inc. overturned that standard, allowing states to impose sales tax collection duties based on economic nexus—meaning that the volume of sales or number of transactions into a state can trigger tax obligations even if the business has no physical footprint there.
Physical Presence Nexus
Physical presence remains a straightforward nexus trigger. Common activities that create physical presence nexus include:
- Maintaining an office, warehouse, or retail store in the state
- Having employees or independent contractors working in the state
- Storing inventory in the state (including third-party fulfillment centers like Amazon FBA)
- Sending sales representatives or agents into the state on a regular basis
- Leasing equipment or property in the state
If your business has any of these connections, you almost certainly have nexus in that state and must comply with its tax filing and collection requirements. For guidance on managing these obligations alongside payroll, see our payroll compliance guide for small business.
Economic Nexus After Wayfair
Following Wayfair, most states adopted economic nexus thresholds. The most common standards are based on:
- Sales dollar threshold: Typically $100,000 in gross revenue from sales into the state during the current or prior calendar year
- Transaction count threshold: Often 200 or more separate transactions into the state during the same period
How Economic Nexus Thresholds Work
Most states use a “or” test: if you exceed either the dollar threshold or the transaction count, nexus is established. A few states use an “and” test, requiring both thresholds to be exceeded before nexus applies. The original South Dakota law used the $100,000/200-transaction “or” standard, which many states copied.
| State | Sales Threshold | Transaction Threshold | Test Type |
|---|---|---|---|
| California | $500,000 | N/A | Sales only |
| New York | $500,000 + 100 transactions | 100 | And |
| Texas | $500,000 | N/A | Sales only |
| Illinois | $100,000 | N/A | Sales only |
| Pennsylvania | $100,000 | N/A | Sales only |
These thresholds can and do change. Always verify the current rules with each state’s department of revenue or a qualified tax advisor.
Click-Through Nexus and Affiliate Nexus
Some states impose nexus through indirect connections:
- Click-through nexus: If your business receives referrals via links on in-state websites (affiliates) and those referrals generate more than a threshold amount of sales (often $10,000), you may have nexus even without direct physical presence.
- Affiliate nexus: If your business is related to another entity with physical presence in the state (such as a parent company or sister subsidiary), some states impute nexus from that related party.
State Income Tax Nexus vs. Sales Tax Nexus
While economic nexus primarily affects sales tax obligations, state income tax nexus follows somewhat different rules. Most states still use a physical presence or “factor-presence” test for income tax. Under factor-presence standards, income tax nexus is typically triggered when a business has at least a specified percentage (often 25%) of its total sales, payroll, or property in the state.
It is possible to have sales tax nexus in a state without having income tax nexus, and vice versa. Small businesses should evaluate both independently.
Steps to Determine Your Nexus Obligations
- Map where you have physical presence. Identify all states where you have offices, employees, inventory, or agents.
- Calculate your sales by state. Pull annual sales data and allocate revenue by ship-to state.
- Compare against economic thresholds. Check each state’s current dollar and transaction thresholds.
- Register and collect where required. Once nexus is established, register with the state’s taxing authority and begin collecting sales tax.
- Track changes. States frequently update their nexus rules. Set a calendar reminder to review thresholds annually.
Common Mistakes Small Businesses Make
- Ignoring FBA inventory: If you use Amazon FBA, your inventory may be stored in multiple states, creating physical nexus in each. This is one of the most commonly overlooked triggers.
- Confusing sales tax and income tax nexus: These are separate analyses. Registering for sales tax does not automatically mean you owe income tax.
- Waiting too long to register: Once nexus is established, the obligation begins. Late registration can result in back taxes, interest, and penalties.
- Not tracking transaction counts: Even businesses with modest revenue can hit the 200-transaction threshold by processing many small orders.
Recordkeeping Best Practices
Maintain detailed records to support your nexus analysis and tax filings:
- Sales by ship-to state, broken out by product category
- Transaction counts by state
- Dates when inventory was first placed in each fulfillment center
- Copies of all state tax registrations and filing confirmations
- Documentation of any nexus studies or analyses performed
Good recordkeeping also supports your estimated tax payment calculations and makes audits far less stressful.
When to Seek Professional Help
Nexus analysis can become complex quickly, especially for businesses selling into many states or using third-party fulfillment networks. Consider consulting a state and local tax (SALT) professional if:
- You sell into more than five states
- You use marketplace facilitators (Amazon, Etsy, Walmart Marketplace)
- You have recently expanded operations or launched new product lines
- You have been contacted by a state tax authority about unfiled returns
Key Takeaways
- Nexus is no longer limited to physical presence—economic activity can trigger obligations
- Most states use a $100,000 sales or 200-transaction threshold (or both)
- FBA inventory creates physical nexus in states where your products are stored
- Sales tax nexus and income tax nexus are separate analyses
- Register promptly once nexus is established to avoid penalties
