If your business has no nexus with a state, that state has no legal hook to make you collect its sales tax, file an income tax return, register with its revenue department, or run payroll withholding through it. Nexus is the minimum connection a state needs before its tax rules reach you, and without that connection you sit outside the state’s jurisdiction. The connection can be physical, like an office or an employee, or purely economic, like enough sales into the state. What “no nexus” means for your business is that you have tested yourself against every one of those triggers in a given state and come up clean on all of them.
The catch is that “no nexus” is not a single yes-or-no answer. It has to be checked state by state, tax by tax, and year by year. A business can have no sales tax nexus in a state and still owe income tax there. It can be clear this year and cross a threshold next year on the strength of one large contract.
What Creates Nexus
Two categories of activity create nexus for an out-of-state business: physical presence and economic activity. Either one is enough on its own.
Physical presence is the older and more straightforward trigger. An office, a warehouse, inventory sitting in a fulfillment center, or employees working inside a state’s borders almost always creates nexus for both income tax and sales tax. Brief or indirect contact usually does not. Shipping products in through the postal service or a common carrier like UPS, without more, does not establish a taxable presence. A short trade-show visit typically does not either, as long as your people are not closing sales or performing services on-site. The line runs between temporary, passive activity and ongoing, revenue-generating activity.
Remote Employees
This is where many businesses stumble. A single employee working from home in another state can create nexus for the employer, covering income tax, sales tax, and payroll withholding. There is no company-branded office required. Performing regular work duties from a home in that state is enough for most states to treat the employer as doing business there. Some states apply this from day one; others use a threshold around 30 days of activity. Since 2020 the trend has been toward broader assertion of nexus over employers with remote workforces, not narrower. If team members are scattered across several states, each of those states likely considers your business present.
Economic Nexus After Wayfair
The bigger shift came in 2018, when the Supreme Court decided South Dakota v. Wayfair, Inc. and overruled decades of precedent that had required physical presence for sales tax nexus. The Court upheld South Dakota’s law requiring out-of-state sellers to collect sales tax if they delivered more than $100,000 of goods or services into the state, or engaged in 200 or more separate transactions there, on an annual basis.1Supreme Court of the United States. South Dakota v. Wayfair, Inc. (No. 17-494) Every state with a sales tax, 45 states plus the District of Columbia, has since enacted its own economic nexus law.
Most states started with the same two-pronged test: $100,000 in sales or 200 transactions. The transaction prong has been falling away. As of mid-2025, roughly 15 states have eliminated it entirely, leaving only the dollar test. A business selling less than $100,000 into a state in a year probably has no economic nexus for sales tax there. A business selling more almost certainly does.
One trap: states do not all measure the same thing when they say “$100,000 in sales.” Some use gross sales, which counts everything including wholesale and tax-exempt sales. Some count only retail sales. A few use taxable sales, stripping out all exempt transactions. A wholesaler that assumes business-to-business sales do not count can blow past the threshold in a gross-sales state without ever making a retail sale there.
Income Tax Nexus Is a Separate Question
Sales tax nexus and income tax nexus are decided independently, and a business can have one without the other. While sales tax economic nexus usually turns on $100,000 in sales or a transaction count, income tax nexus often follows a “factor presence” standard. The Multistate Tax Commission’s model, used in some form by many states, triggers income tax nexus when a business exceeds $50,000 in property, $50,000 in payroll, or $50,000 in sales within the state, or when any of those factors represents more than 25 percent of the company’s total.2Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes Not every state follows the model exactly, but the pattern is the same: income tax thresholds are often lower than sales tax thresholds.
A business that comfortably clears the sales tax threshold, selling only $60,000 into a state, might still owe income tax if it also has $50,000 in payroll from a remote worker there. Treating “no nexus” as a single answer across all tax types is one of the most common mistakes.
Federal Protection Under P.L. 86-272
A separate layer of protection exists under federal law, but it is narrower than most businesses realize. Public Law 86-272 prohibits states 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 shipped from outside the state.3Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax A traveling salesperson visiting customers, handing out catalogs, and taking orders that get approved at headquarters back home sits squarely inside this safe harbor.
Three limits make the protection thinner than it sounds:
- Tangible personal property only. The statute was written in 1959 and has never been updated. It covers physical goods. It does not cover services, software licenses, SaaS subscriptions, or digital downloads. Sell anything intangible and P.L. 86-272 offers zero income tax protection.
- Income tax only. The statute blocks net income taxes. It does nothing about sales tax. A business can be shielded from income tax under P.L. 86-272 in a state while simultaneously owing sales tax there through economic nexus.
- Solicitation only. The moment your people do anything beyond asking for orders, the shield drops. Making repairs, collecting payments, investigating credit, handling complaints, providing technical assistance, installing products, or approving orders on-site can each void it.
Internet activity is now a live problem for this safe harbor. The Multistate Tax Commission issued a revised statement in 2021, adopted in reasoning by many states, that treats common online business practices as going beyond solicitation even when a company has no employees in the state. Cookies that gather data for product development or inventory planning, post-sale technical support through live chat or email, and branded credit card applications on the seller’s website all cross the line under this interpretation.4Multistate Tax Commission. Statement on P.L. 86-272 Cookies that only remember a shopping cart or a login are still treated as ancillary to solicitation. The gap is narrow, and most modern e-commerce sites cross it. Businesses relying on P.L. 86-272 should audit their websites.
Marketplace Sales May Not Count Against You
Sales through platforms like Amazon, Etsy, or Walmart Marketplace can carry fewer obligations than sellers assume. Nearly every state with a sales tax now requires the marketplace facilitator itself to collect and remit sales tax on transactions it processes for third-party sellers. The platform handles calculation, collection, and filing.
In many states, sales made through a collecting marketplace do not count toward your individual economic nexus threshold. If all your sales into a state flow through Amazon, and Amazon is collecting and remitting the tax, you may not need to register with that state at all. Things get complicated when you sell through both a marketplace and your own website. The marketplace handles its portion; you are responsible for direct sales, and you need to track whether those direct sales alone push you past the threshold.
What No Nexus Actually Gets You
When a business genuinely has no nexus with a state (no physical presence, no economic activity above the threshold, no remote employees, and nothing that breaks P.L. 86-272 for income tax), the practical effects are clean. You do not register with that state’s department of revenue. You do not collect sales tax from customers there. You do not file an income tax return there. You do not set up payroll withholding for that jurisdiction. For a business that would otherwise touch dozens of states, each with its own filing schedules, rates, and rules, the administrative savings add up quickly.
One caveat matters. The absence of nexus on your side does not erase the buyer’s obligation. When an out-of-state seller does not collect sales tax, the customer in most states technically owes “use tax” at the same rate, paid directly to the state. Individual compliance is notoriously low, but the legal duty exists. For business-to-business transactions, buyer-side use tax liability is real and is regularly enforced through audits of the purchasing company.
The Cost of Getting It Wrong
Claiming no nexus when you actually have it is not a free bet. States have become significantly more aggressive about identifying non-compliant remote sellers since Wayfair. If a state decides you should have been collecting sales tax and were not, the liability includes uncollected tax, penalties, and interest running from the original due date, which can be years in the past.
Penalty structures vary. Failure-to-file penalties commonly run 5 to 10 percent of the tax due per month, often capped at 25 to 35 percent. Failure-to-pay penalties stack on top. In some states, combined exposure reaches 30 percent or more of the original tax, plus interest. Criminal penalties exist in most states for willful failures but are rarely used against businesses that simply misjudged their nexus status.
Data-sharing agreements between states, marketplace reporting, and third-party data services give revenue departments the tools to find sellers who likely have nexus but are not collecting. The assumption that a state cannot reach you because you never registered is a dangerous one. The state may just not have gotten around to you yet.
Voluntary Disclosure Agreements
If you discover that your business should have been collecting or filing in a state for the past several years, a voluntary disclosure agreement is usually the smartest way in. A VDA is a negotiated arrangement where you come forward, agree to file returns and pay back taxes for a limited lookback period, and in exchange the state waives penalties and agrees not to assess liability for years before the lookback window.5Multistate Tax Commission. FAQ – Multistate Voluntary Disclosure
The lookback period is typically three to four years. You file and pay for those years, and anything before that is forgiven. Interest on the lookback-period liability usually still applies, but the penalty waiver alone can save tens of thousands of dollars. One exception: sales tax you actually collected from customers but never remitted must be surrendered in full regardless of the lookback period. States treat collected-but-unremitted tax as trust fund money that was never yours to keep.
The Multistate Tax Commission runs a centralized program letting you file VDA applications with multiple states through a single point of contact rather than negotiating separately with each one. Your identity stays confidential until the agreement is finalized, which removes the risk of a state opening an audit while you are trying to come into compliance. A business that waits until a state contacts it first loses access to VDA benefits entirely. The whole point is that you come forward before the state comes looking.
Keep Checking
Nexus is not a determination you make once and shelve. A business with no nexus in a state last year can trip the threshold this year through one large contract, a new remote hire, or steady online growth. The reverse also happens: scale back or drop below the threshold and you may be able to stop collecting, though most states require you to keep filing through the end of the current reporting period.
Review your state-by-state exposure at least once a year. Track sales by destination state, know where your employees and contractors are physically located, and understand whether what you sell is tangible property, a service, or a digital good, because the answer decides which protections apply. Businesses that treat nexus as a recurring review, not a one-time project, are the ones that avoid both unnecessary compliance in the wrong states and expensive surprises in the right ones.