Physical nexus and economic nexus are the two main ways a business becomes obligated to collect and remit a state’s sales tax. Physical nexus exists when your business has a tangible presence in the state, such as an office, an employee, or inventory stored there. Economic nexus exists when you have no physical footprint in the state but your sales into it cross a dollar threshold, most commonly $100,000 per year. Both types work independently, so a single business can have physical nexus in some states and economic nexus in others at the same time. Five states impose no general statewide sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon.
What Creates Physical Nexus
For decades the rule was straightforward. If your business had no physical presence in a state, that state could not force you to collect its sales tax. The Supreme Court cemented this in Quill Corp. v. North Dakota, holding that a seller whose only connection to a state was mail or common carrier lacked the “substantial nexus” the Commerce Clause requires before a state can impose a collection duty.1Justia. Quill Corp v North Dakota That physical presence test still applies today, alongside the newer economic rules.
Any of the following can create physical nexus:
- Owning or leasing an office, retail location, warehouse, or production facility. Inventory sitting in a third-party fulfillment center counts too, which catches many sellers using Amazon’s fulfillment network without realizing their stock is spread across multiple states.
- Employees, sales representatives, or agents working in the state, including part-time workers and independent contractors soliciting sales on your behalf.
- Temporary activities such as a trade show, convention, or pop-up event. Some states treat a single day of trade show activity as enough to establish nexus for the rest of the calendar year or longer.
The Remote Employee Trap
This is where most businesses get caught off guard. Hiring even one remote employee who works from home in another state generally creates physical nexus there. It does not matter that your headquarters is elsewhere or that the employee never visits a company office. The person is physically present in the state performing work for you, and most states treat that as sufficient. The spread of remote work since 2020 has made this one of the most common ways companies accidentally establish nexus in states they have never set foot in. Before a remote hire’s start date, check that state’s sales tax rules.
What Creates Economic Nexus
In 2018, South Dakota v. Wayfair upended the physical-presence-only framework. The Court called the Quill standard “unsound and incorrect” and allowed states to require sales tax collection from out-of-state sellers based purely on the volume of sales into the state.2Cornell Law Institute. South Dakota v Wayfair Inc Every state that imposes a sales tax has since adopted an economic nexus law.
The South Dakota statute at the center of the case set the template most states copied: $100,000 in annual sales or 200 separate transactions delivered into the state.2Cornell Law Institute. South Dakota v Wayfair Inc Some states set higher dollar thresholds, using $250,000 or $500,000 instead.
Transaction Counts Are Disappearing
When states first rolled out economic nexus after Wayfair, most included both a dollar threshold and a transaction-count alternative, typically 200 transactions, with either trigger creating nexus. The transaction count has been widely criticized because it sweeps in very small sellers. A business making 200 sales of $5 items generates only $1,000 in revenue but technically has nexus. As of mid-2025, roughly half the states with a transaction-count threshold have eliminated it, leaving only the dollar amount, and the trend is continuing into 2026. If you have been monitoring transaction counts, confirm whether they still exist in each state where you sell.
How the $100,000 Threshold Is Measured
Not all $100,000 thresholds are calculated the same way, and the difference matters more than most sellers realize. States use one of three measurement standards:
- Gross sales: all revenue from sales into the state, including exempt sales, nontaxable sales, and sales for resale. This is the broadest measure, and a majority of states use it.
- Retail sales: sales to end consumers only, with sales for resale excluded when the buyer provides a resale certificate. About a dozen states use this standard.
- Taxable sales: only sales actually subject to the state’s sales tax after exemptions. This is the narrowest measure and is used by a smaller group of states.
The distinction is significant for businesses that sell both taxable and exempt products, or that make substantial wholesale sales. Under a gross-sales standard, you can cross $100,000 entirely on exempt or wholesale transactions and still owe a registration. Under a taxable-sales standard, those same transactions would not count. Assuming every state works the same way is one of the fastest paths to a compliance surprise.
Most states evaluate the threshold on a rolling or calendar-year basis, looking at either the current or previous year. Crossing it in either period triggers the obligation, so a strong Q4 holiday season can create nexus in several new states at once.
Marketplace Sales Still Count Toward Your Threshold
Every state with a sales tax now has a marketplace facilitator law requiring platforms like Amazon, eBay, Etsy, and Walmart Marketplace to collect and remit sales tax on behalf of their third-party sellers. If you sell exclusively through a collecting marketplace, the platform handles the tax on those transactions.
The catch is that marketplace sales still count toward your own economic nexus threshold in most states. Sell $80,000 through Amazon and $25,000 through your own site into the same state, and your total is $105,000, which is over the line. The marketplace collected on the $80,000, but you now have an independent obligation to collect on your direct sales. Sellers who assume the marketplace handles everything and stop tracking their state-by-state totals are the ones who get audit letters. You also remain responsible for tax on anything sold outside a collecting marketplace, including your own website, trade shows, or a physical storefront.
Click-Through and Affiliate Nexus
Physical and economic nexus get the most attention, but two older varieties still apply in some states. Click-through nexus arises when an out-of-state retailer pays a commission to an in-state website or influencer who refers customers through a trackable link, on the theory that the referrer functions as a sales agent. Roughly 15 states have click-through nexus laws.
Affiliate nexus works similarly but focuses on corporate relationships. If an out-of-state seller has a related company, subsidiary, or franchisee operating in a state, approximately 25 states treat that relationship as enough to create nexus. Common triggers include shared trademarks, common ownership, or an in-state entity that helps establish or maintain the seller’s market. Many sellers cross the economic nexus threshold before these provisions become relevant, but they still matter for businesses with low volume in states where they happen to have affiliate relationships or referral partners.
Registering Once You Have Nexus
After determining you have nexus, you need a sales tax permit before you start collecting. Charging sales tax without a valid permit is illegal in most states. Registration usually runs through the state’s department of revenue website. You will need your federal Employer Identification Number, the legal name of your business as registered with the secretary of state, the names and Social Security numbers of owners or officers, and the date you first established nexus.3Internal Revenue Service. Get an Employer Identification Number
Most states issue permits for free, though a few charge a small fee. Processing takes anywhere from a few days for electronic applications to several weeks for paper. If you have nexus in multiple states, the Streamlined Sales Tax Registration System lets you register in up to 24 member states through a single application.4Streamlined Sales Tax. State Detail
Once registered, the state assigns you a filing frequency of monthly, quarterly, or annually based on your expected or actual liability. The obligation to file exists even in periods when you collect zero tax. Skipping a zero-dollar return is treated the same as failing to file, and most states assess late-filing penalties starting at 5% of the tax due per month. Seasonal sellers get burned by this most often. If you only sell during Q4 but have a monthly frequency, you still owe eleven zero returns per year.
Penalties and Voluntary Disclosure
States have grown more aggressive about auditing remote sellers since Wayfair. If an audit shows you should have been collecting and were not, you typically owe the uncollected tax, interest dating back to when collection should have started, and a penalty. Penalties vary, but many states charge 5% to 10% of the unpaid tax as a flat penalty with interest accruing on top. Across several years of uncollected tax, the combined bill can be substantial.
If you discover the problem before the state does, a voluntary disclosure agreement is almost always the smarter path. Through a VDA, you contact the state, or apply through the Multistate Tax Commission, which coordinates VDAs with most states, disclose the liability, and negotiate terms. In return, the state typically limits its review to a defined lookback period of prior tax years and waives some or all penalties.5Multistate Tax Commission. Nexus FAQ You still owe the back tax and usually interest, but capping the lookback and dropping penalties can cut the total significantly. One common exception: if you actually collected sales tax from customers but never remitted it, most states will not limit the lookback and may not waive penalties.