Substantial nexus rules for state business taxes set the minimum connection a company must have with a state before that state can require it to collect sales tax, file income tax returns, or pay a gross receipts tax. The standard traces to Complete Auto Transit, Inc. v. Brady (1977), which held that a state tax on interstate commerce is valid only when the taxed activity has a substantial nexus with the state, the tax is fairly apportioned, it does not discriminate against interstate commerce, and it bears a fair relationship to the services the state provides.1Constitution Annotated. Apportionment Prong of Complete Auto Test for Taxes on Interstate Commerce Nexus is the prong that catches most businesses off guard, because the ways to trigger it have multiplied and the thresholds have dropped.
Physical Presence Still Triggers Nexus
A physical footprint in a state is the oldest way to establish nexus, and it still works the same way it always did. Owning or leasing real property does it, whether that property is a store, an office, or a warehouse.2Cornell Law School. Quill Corp v North Dakota So does a temporary setup like a trade show booth. Employees working in a state almost always create nexus for their employer, and that includes remote workers and telecommuters running a laptop from a home office. Independent contractors performing services on the company’s behalf, such as repair technicians or traveling sales reps, produce the same result.
Inventory is the sleeper. Storing products in a third-party fulfillment center creates a physical tie to the state where those goods sit. Businesses that use multi-warehouse logistics networks or Amazon’s Fulfillment by Amazon program frequently discover they have nexus in states they never deliberately entered, because the fulfillment service scattered their inventory across the country.
Economic Nexus After Wayfair
In 2018, the Supreme Court decided South Dakota v. Wayfair, Inc., holding that the physical presence rule was “unsound and incorrect” and that states could require a remote seller to collect sales tax based on economic activity alone.3Supreme Court of the United States. South Dakota v Wayfair Inc Every state that imposes a sales tax has since enacted an economic nexus law. If you sell into a state, cross its threshold, and are not sheltered by a marketplace facilitator law, you have to register and collect.
Sales and Transaction Thresholds
The most common threshold is $100,000 in annual sales delivered into a state. A handful of states set the bar at $500,000. Some states also trigger nexus at 200 separate transactions in a year, regardless of dollar amount, though the transaction threshold has been falling out of favor because it can ensnare very small sellers whose in-state revenue is negligible. More than a dozen states have dropped their transaction thresholds since 2019, including South Dakota itself.
What Counts Toward the Threshold
Whether your tax-exempt sales, wholesale transactions, and marketplace sales count depends on how a given state defines its trigger. A state measuring “gross sales” counts everything, including sales for resale and sales to exempt buyers. A state measuring “retail sales” excludes resale transactions but still counts sales to exempt entities. A state measuring “taxable sales” counts only transactions that are actually subject to tax.4Streamlined Sales Tax Governing Board. Remote Seller Thresholds Terms The same dollar figure can cross the line months earlier in a gross-sales state than in a taxable-sales state.
When Collection Starts
Once you cross a threshold, the clock starts, and it ticks at different speeds in different states. Some require collection on the very next transaction. Others give you a grace period, commonly 30 to 60 days. A few delay the effective date to the first day of the following calendar year. A business that crosses thresholds in multiple states during the same quarter can face a cascade of overlapping registration deadlines.
Penalties for Ignoring It
A state that finds unregistered nexus can assess back taxes on all sales made since the threshold was crossed, plus interest. Civil penalties for failure to file or pay typically accrue monthly, with most states charging around 5% of the unpaid tax per month and capping the total penalty at 25%. Interest runs on top and usually is not capped.
When the Marketplace Collects for You
If you sell through a platform like Amazon, Etsy, or Walmart Marketplace, the platform itself may already be handling your sales tax collection. Nearly every sales-tax state has enacted a marketplace facilitator law that shifts the collection and remittance obligation from the individual seller to the platform. The platform generally must collect once its total facilitated sales into a state exceed the same economic threshold that applies to remote sellers, typically $100,000. A facilitator with a physical presence in the state must register and collect no matter the dollar volume.5Streamlined Sales Tax Governing Board. Marketplace Facilitator State Guidance
Two limits are worth knowing. Some states still require the underlying seller to register and file returns even when the marketplace collects the tax. And sales made through your own website or direct channels are never covered by a marketplace facilitator law.
Affiliate and Click-Through Nexus
Even before Wayfair, states reached remote sellers through their in-state business relationships, and those theories still apply alongside economic nexus. They can create an obligation even when a seller falls below the economic threshold.
Click-through nexus targets online referral arrangements. If an out-of-state seller pays a commission to an in-state resident for sending customers through a web link, and the resulting sales exceed a set amount (commonly $10,000 in a year), the seller is presumed to have nexus. New York pioneered this approach, and roughly two dozen states have adopted similar rules.
Affiliate nexus attributes the physical presence of a related entity to the remote seller. When a parent company sells online while its subsidiary operates a brick-and-mortar store in the same state, taxing authorities treat the subsidiary’s local presence as the parent’s. They look for shared branding, overlapping management, and whether local stores accept returns or exchanges for online purchases. Some states repealed their affiliate nexus laws after Wayfair, but many kept them, so the theory still bites businesses operating through related entities.
Income Tax Nexus Works Differently
State corporate income tax nexus runs on a different framework than sales tax. Many states use a factor presence test based on how much property, payroll, and sales a company has in the state. The Multistate Tax Commission’s model standard creates nexus when any single factor exceeds a threshold: $50,000 of property, $50,000 of payroll, or $500,000 of sales within the state during the tax period. Nexus also arises when 25% or more of any factor is located there.6Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes
The sales factor counts more than product sales. Licensing trademarks, patents, or software to an in-state user generates income that counts toward the threshold. So do services performed for customers located in the state, because market-based sourcing rules assign the revenue to wherever the customer receives the benefit, not wherever the work happens.6Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes A consulting firm with no office in a state could still owe income tax there if enough of its clients are located there.
Throwback and Throwout Rules
About 20 states and the District of Columbia use throwback rules. When a company makes a sale into a state where it has no nexus and therefore cannot be taxed, the sale gets thrown back to the state where it originated. The originating state ends up taxing revenue that would otherwise escape taxation entirely. For businesses headquartered in throwback-rule states, this can inflate state income tax bills, because the apportionment formula assigns a larger share of income to the home state. A smaller number of states use a throwout rule, which excludes those untaxable sales from the total-sales denominator instead, producing a similar result through different math.
Gross Receipts Taxes
Several states impose gross receipts taxes instead of or alongside a traditional corporate income tax. These taxes apply to total revenue rather than net profit, so they hit even in years when a business loses money. States using this model include Ohio, Texas, Washington, Nevada, Oregon, Tennessee, and Delaware, each with its own rate structure and exemptions.
The Shrinking Shelter of P.L. 86-272
A federal law, Public Law 86-272 (15 U.S.C. ยง 381), bars a state from imposing a net income tax on a business whose only in-state activity is soliciting orders for tangible personal property, provided the orders are sent outside the state for approval and are filled by shipment from outside the state. The protection extends to independent contractors selling on the company’s behalf.7Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax
The shelter is narrow. It covers only tangible personal property, so sellers of services, software subscriptions, and digital content get nothing from it. It applies only to net income taxes, so it does not block gross receipts taxes. It does not apply to companies incorporated in the taxing state or to individuals domiciled there.7Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax And “solicitation” has a strict meaning. The Multistate Tax Commission has identified common internet-based activities that push a business beyond mere solicitation and destroy the protection:8Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272
- Placing cookies that track browsing behavior to adjust inventory, develop new products, or target marketing.
- Providing post-sale customer assistance through live chat or email initiated from the website.
- Transmitting code or instructions to repair or upgrade a product the customer already owns.
- Offering or selling extended warranty plans through the website.
- Accepting applications for non-sales positions through the site.
- Soliciting and receiving applications for a store-branded credit card online.
A purely static website that displays product information, posts a FAQ page, or uses cookies only for basic shopping-cart functionality stays within the protection.8Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272 Most e-commerce sites do at least one thing on the list above, which means the law protects fewer businesses every year.
The Extra Layer in Home Rule States
In roughly seven states, local governments set and administer their own sales taxes independently from the state. These home rule jurisdictions require businesses to register and file with local tax authorities separately, which can mean dozens of additional registrations for a company selling into cities and counties across a single state. Some states offer a centralized filing option; in others, each municipality runs its own tax office. Registering with a state does not automatically cover its localities.
Fixing Unregistered Nexus Through a Voluntary Disclosure Agreement
A business that discovers it has been operating with unregistered nexus has a way to come into compliance without the full weight of penalties. Through the Multistate Tax Commission’s National Nexus Program, a company can negotiate a voluntary disclosure agreement with participating states through a single coordinated process.9Multistate Tax Commission. Frequently Asked Questions – Multistate Voluntary Disclosure Program
The business agrees to file returns and pay back taxes plus interest for a limited lookback period, typically three to five years depending on the state.10Multistate Tax Commission. Lookback Periods for States Participating in National Nexus Program The state waives penalties and agrees not to assess tax for periods before the lookback window. The company’s identity stays hidden from the state until the agreement is finalized, which eliminates the risk of triggering an audit by self-reporting.9Multistate Tax Commission. Frequently Asked Questions – Multistate Voluntary Disclosure Program
Eligibility has hard limits. The business cannot have previously filed returns with the state, cannot be under audit, and cannot have already been contacted by the state about a tax obligation. It must also estimate at least $500 in back tax liability for the lookback period.9Multistate Tax Commission. Frequently Asked Questions – Multistate Voluntary Disclosure Program One important exception: sales tax that was collected from customers but never remitted cannot be waived. States treat that as trust-fund money, and the full amount plus penalties may be non-negotiable. For a business with exposure in multiple states, a voluntary disclosure agreement is almost always cheaper and less disruptive than waiting for a state to find the problem first.