What is a sales tax nexus?

An e-commerce retailer doing a web search for sales tax nexus is like a sick person searching symptoms on WebMD. You’re likely searching because you think you might have a problem.

This article will explain what nexus is, lay out common scenarios in which your business might have a sales tax nexus in a state, and give you next steps to making sure your business is sales tax compliant.

Sales Tax Nexus, Defined

At its simplest, sales tax nexus is a “connection” to a state strong enough that that state can require you to collect sales tax from your buyers in that state.

In the US, forty-six states and Washington DC all have a sales tax. Each state is allowed to make their own rules and laws when it comes to sales tax, and because of that what constitutes nexus in each state is slightly different. (Need a refresher on sales tax? Check out our “Sales Tax Concepts, Explained” article.)

Here are some of the most common business activities that create a sales tax nexus:

• A location – this can be anything from you working from your kitchen table to a chain of stores and warehouses. If your business has physical presence in a state, then you’re generally required to collect sales tax from buyers in that state
• Personnel – Employees, contractors, salespeople, and other people who work in your business generally create sales tax nexus
• Inventory – Storing items in a warehouse in a state generally creates sales tax nexus
• Doing business temporarily – Many states consider brief periods making sales at trade shows, conferences or craft fairs to create sales tax nexus
• Economic nexus – Your business does a state-specified amount of business (either in dollars or number of transactions) in the state creates nexus

In a nutshell, if you have any physical presence in a state or significant sales in a state then your business likely has a sales tax nexus in that state.

What is economic nexus?

You’ll notice that all of the nexus-creating factors above have something in common: they rely on your business having some kind of physical presence in the state.

That’s all except economic nexus, which you could call the newest form of sales tax nexus. The 2018 South Dakota v. Wayfair Supreme Court case allowed states to require that businesses who do a certain amount of business in the state collect sales tax from buyers in that state.

The court ruling came in response to South Dakota’s claim that big out-of-state retailers who had no physical presence in the state were benefiting from not having to collect sales tax. The Supreme Court agreed, and every US state with a sales tax has now passed an “economic nexus law” requiring online retailers who surpass a certain threshold of transactions or sales collect sales tax from buyers in their state.

That threshold is generally $100,000 in sales per year and/or 200 transactions per year, but each state varies.

See the following articles for more information on economic nexus and a state-by-state chart of economic nexus thresholds: