Physical nexus is the tax connection your business creates when it has a tangible presence in a state, and for sales tax purposes it means you have to register with that state, collect sales tax from customers there, and send the money to the state on a regular filing schedule. The presence can be as substantial as a warehouse or as minor as a single remote employee, a sales rep passing through, or a pallet of your inventory sitting in someone else’s fulfillment center. Once that connection exists, the obligation exists, whether or not you knew about it and whether or not the state has contacted you.
What Creates Physical Nexus
The triggers fall into a few recognizable categories, and most businesses that get caught off guard were tripped by one of them.
People Working in the State
Employees are the most common trigger. A single employee working from a home office in another state creates nexus for the employer. The business never leased space in that state, never opened a location there, never intended to operate there. Doesn’t matter. The employee’s physical presence is the business’s physical presence.
Independent contractors count too when they perform services on your behalf. Installing equipment, providing on-site training, repairing products for customers: these activities tie your business to the state where the work happens. States draw fine distinctions about which contractor arrangements qualify, but any recurring in-person service activity carries risk.
Traveling sales representatives are a specific hazard. A rep who visits potential clients, demonstrates products, or negotiates contracts in a state is using that state’s marketplace to generate revenue. Soliciting business is often enough on its own, even when no deal closes during the visit. Companies with field sales teams need to know where their people go, how often, and for how long.
Property and Inventory
Owning or leasing tangible property in a state establishes nexus directly. Real estate, office equipment, machinery, company vehicles parked at a customer site: any of it qualifies. The property doesn’t have to be your main location. A rented storage unit for overflow inventory counts as much as a headquarters.
For online sellers, third-party fulfillment is where this gets messy. If you ship inventory to a fulfillment center run by someone else, that inventory creates physical nexus in the state where the warehouse sits. You don’t own the facility, you don’t manage it, and it doesn’t matter. Your goods are physically present and available for local distribution.
The sharper version of this problem hits sellers on large fulfillment networks that redistribute stock automatically. You send products to one intake location, and the platform spreads them across warehouses in ten or fifteen states without asking. Every one of those states now has a physical nexus argument against you. If you use a service like this, audit where your inventory actually lives.
Trade Shows and Short Visits
Permanence isn’t required. Attending trade shows, setting up temporary booths, or sending staff to industry conventions can create a taxable connection. Some states give a limited grace period for short-term activity, but the thresholds vary widely. A few allow a handful of days annually; others treat any commercial entry as a potential trigger.
What matters is whether you’re using the state’s marketplace to generate revenue. Displaying samples, taking orders, handing out promotional materials to prospective buyers: all of it signals commercial engagement. A single three-day conference with no closed sale can still be enough in jurisdictions that treat solicitation as the trigger.
Affiliates and Click-Through Referrals
About 25 states have affiliate nexus laws that reach out-of-state businesses through their relationships with in-state entities, typically when there’s common ownership, shared branding, or active help maintaining a market in the state. Roughly 15 states have click-through nexus laws targeting online referral arrangements, where in-state individuals or businesses generate sales through commissioned links. Both categories predate the shift to economic nexus and remain on the books in many states, and either can independently trigger obligations even if you haven’t crossed an economic threshold.
How Physical Nexus Differs From Economic Nexus
For decades, physical presence was the only way a state could require an out-of-state business to collect sales tax. The Supreme Court fixed that rule in Quill Corp. v. North Dakota (1992).1Cornell Law School. Quill Corp v North Dakota, 504 US 298 (1992) In 2018, the Court overruled Quill in South Dakota v. Wayfair, Inc., calling the physical presence requirement “unsound and incorrect” and upholding a South Dakota law that required remote sellers to collect once they exceeded $100,000 in sales or 200 separate transactions in the state.2Supreme Court of the United States. South Dakota v Wayfair Inc, 585 US 162 (2018)
Nearly every state with a sales tax now uses some version of an economic nexus threshold. The common benchmark is $100,000 in annual sales, though some states set it higher, and a handful still use transaction counts as an alternative trigger. A purely online business with no employees, no warehouse, and no travel can owe sales tax in a state based on revenue alone.
Physical nexus didn’t disappear after Wayfair. It operates as an independent trigger alongside the economic tests. One remote employee creates a sales tax obligation regardless of whether you hit the state’s revenue threshold. And physical nexus reaches further than sales tax: it’s the primary trigger for state income tax, franchise tax, and other business levies that economic nexus rules don’t always cover.
Physical Nexus and Income Tax: The P.L. 86-272 Shield
Physical presence for sales tax and physical presence for income tax aren’t treated identically. For sales tax, any physical connection generally means collection duty. For state income tax, there’s a federal protection worth knowing. Public Law 86-272 prohibits a state from imposing a net income tax on your business if your only in-state activity is soliciting orders for sales of tangible personal property, and those orders are approved and fulfilled from outside the state.3Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax
The shield is narrow. “Solicitation” covers speech or conduct that invites an order plus activities entirely ancillary to requesting orders, so a sales rep visiting customers, carrying samples, and handing out brochures stays inside the protected zone.4Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 Activities that break the protection include repairing or servicing products, collecting debts or checking credit, installing products, approving orders in-state, maintaining warehouse or office space, and running a display room at one location for more than 14 days in a year.
Two limits matter. The law doesn’t protect companies incorporated in the state where they’re claiming the exemption, and it only covers tangible personal property, not services or digital goods.3Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax If any unprotected activity happens at any point during the tax year, all income attributed to that state loses the shield for the entire year.4Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 It’s all or nothing, not a partial credit. And it doesn’t cover sales tax at all: physical nexus for sales tax purposes still applies even when P.L. 86-272 shields you from income tax.
What You Have to Do Once You Have Physical Nexus
Once physical nexus exists in a state, the first step is registering for a sales tax permit with that state’s tax authority. Most states handle registration online, and the fees are usually minimal. The important thing about timing: you owe tax from the moment nexus is created, not from the moment you register. Delaying registration doesn’t delay the obligation. It just piles up unpaid liability.
After registration, you’re responsible for charging the correct sales tax rate on every taxable transaction with a customer in that state. Rates vary by state, county, and city, so getting the rate right depends on the customer’s exact location. The tax you collect is trust fund money. It belongs to the state, not to your business. You hold it until your filing period ends and then remit it with a return. Filing frequency is usually monthly or quarterly depending on your sales volume in the state.
Exemption and Resale Certificates
Not every sale in a nexus state is taxable. Wholesale transactions, purchases for resale, and certain exempt buyers don’t require tax collection, but only if you have proper documentation. You must keep a completed exemption or resale certificate on file for every customer claiming an exemption.5Multistate Tax Commission. Uniform Sales and Use Tax Resale Certificate – Multijurisdiction The certificate needs the buyer’s name, address, business description, tax registration number, and a signature under penalty of perjury certifying the purchase is for resale.
If you accept a valid certificate and the buyer later misuses the product, that’s the buyer’s problem. If you never collected the certificate, or accepted one that was incomplete, the tax liability falls on you. Missing or defective certificates are one of the most common audit adjustments, and the assessment comes with interest and penalties.
Record-Keeping
Keep records of every taxable sale, the tax collected, the rate applied, and the jurisdiction. For exempt sales, keep the certificates. For inventory, document where your stock sits and when it moves. For employees and contractors, track which states they work in and how often. Most states can look back three to four years in an audit, and the paper trail is the defense.
Marketplace Facilitator Laws Don’t Erase the Obligation
If you sell through a large online marketplace, the platform may already be collecting and remitting sales tax for you. Nearly all sales tax states have adopted marketplace facilitator laws that shift the collection obligation to the platform for sales made through it.
This doesn’t eliminate your nexus. If you have physical nexus in a state through inventory, employees, or other triggers, you’re still responsible for collecting tax on sales made outside the platform. Sales through your own website, at a trade show, or from a physical storefront aren’t covered by the marketplace facilitator’s collection. You still register, file returns, and remit tax on those direct sales.
Penalties for Getting It Wrong
States enforce sales tax collection aggressively because the money was never yours. When you charge a customer sales tax and don’t remit it, states treat that as holding government funds. Penalties for late filing or failure to remit usually combine a percentage-based penalty on the unpaid tax with daily interest. Some states impose flat minimum penalties for filing late even when no tax is due.
The bigger risk is personal liability. In most states, sales tax is classified as a trust fund tax, so responsible individuals within the business (owners, officers, or anyone with authority over the company’s finances) can be held personally liable for unremitted amounts. Corporate protections don’t help. If the business can’t pay, the state can pursue you individually. Willful failure to collect or remit can bring criminal charges in some states, including fraud or theft of government funds.
Ignoring nexus doesn’t make it go away. States share information, participate in multistate audit programs, and use data analytics to find non-compliant businesses. When they find you, back taxes are assessed from the date nexus was created, not from the date they contacted you.
Cleaning Up Past Non-Compliance With a VDA
If your business has had physical nexus in states where it hasn’t been collecting, a voluntary disclosure agreement is usually the best path forward. A VDA is a negotiated settlement where you agree to register, file past-due returns, and pay back taxes in exchange for a penalty waiver and a limited look-back period.6Multistate Tax Commission. Multistate Voluntary Disclosure Program
The look-back period is where the real savings live. States typically require back taxes for only three to four years even when your actual exposure runs longer. A decade of unpaid liability can collapse to a few years’ worth under a VDA.
The Multistate Tax Commission runs a program that lets businesses negotiate VDAs with multiple states through a single application, with confidentiality preserved until you sign. To qualify, you can’t have already been contacted by the state about the tax in question, and estimated tax owed must be at least $500.6Multistate Tax Commission. Multistate Voluntary Disclosure Program Interest still applies during the look-back period, but the penalty waiver alone can save tens of thousands of dollars.
The window closes the moment a state contacts you. Once you receive an inquiry, audit notice, or questionnaire about a specific tax type, you’re disqualified from voluntary disclosure for that tax in that state. If you suspect undisclosed nexus obligations, moving first is worth far more than waiting.