The Ultimate Guide to Sales Tax Nexus: What Every Business Needs to Know

Sales tax can be one of the most challenging aspects of running a business. With varying rules across different states and constant regulatory changes, it’s easy to feel overwhelmed. One of the most critical factors in determining your sales tax obligations is sales tax nexus. If your business has nexus in a state, you’re required to collect and remit sales tax there. But what exactly is nexus? How do you know if you’ve triggered it? And how do recent changes impact your obligations? In this ultimate guide, we’ll cover everything you need to know about sales tax nexus—from its different types to practical steps you can take to ensure compliance.

What is Sales Tax Nexus?

At its core, sales tax nexus is the connection between a business and a state that creates a legal obligation to collect and remit sales tax in that state. The term “nexus” comes from the Latin word meaning “to bind” or “tie,” and it signifies that your business has enough of a connection to be bound by that state’s tax laws.

Sales tax nexus can be established in various ways. Historically, having a physical presence in a state was the primary determinant. However, as e-commerce grew, states began adopting broader definitions, including economic activity thresholds, to ensure they could collect taxes on online sales. Understanding the types of nexus is crucial for ensuring your business complies with state regulations.

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Types of Sales Tax Nexus

1. Physical Nexus

Physical nexus is the most straightforward type. If your business has a physical presence in a state, you have nexus there and must collect and remit sales tax. Examples of physical presence include:

• Owning or leasing an office, warehouse, or retail location.

• Having employees, contractors, or sales representatives in the state.

• Storing inventory in a third-party warehouse, such as an Amazon fulfillment center.

• Attending trade shows or conducting in-person sales activities.

If any of these apply to your business, you have a physical nexus obligation in that state.

2. Economic Nexus

Economic nexus is triggered when your business reaches a certain level of economic activity in a state, regardless of physical presence. This concept became mainstream after the 2018 South Dakota v. Wayfair, Inc. Supreme Court decision. The ruling allowed states to require businesses to collect sales tax based on sales volume or transaction count within their borders.

Common economic nexus thresholds include:

• $100,000 in sales within a state over a 12-month period.

• 200 separate transactions within the state.

Thresholds vary by state, so it’s essential to check the rules in each jurisdiction where you make sales. For example, some states, like California, have a higher threshold of $500,000 in sales, while others stick to the $100,000 standard.

3. Marketplace Nexus

If you sell products through a marketplace facilitator like Amazon, eBay, or Etsy, you may be subject to marketplace nexus rules. These rules require the marketplace platform to collect and remit sales tax on your behalf for sales made through their platform. However, it’s still your responsibility to ensure compliance and understand where your marketplace sales contribute to nexus.

While the marketplace collects sales tax on your behalf, you may still have to report those sales and ensure you’re complying with any additional state requirements.

4. Click-Through Nexus

Click-through nexus applies when businesses establish a connection with a state through affiliate marketing relationships. If an affiliate in another state refers customers to your website, and you pay the affiliate a commission, this can create nexus.

For example, if an affiliate in New York promotes your product and drives sales to your business, you may be required to collect and remit sales tax in New York. Click-through nexus thresholds often depend on the volume of sales generated through these referrals.

5. Inventory Nexus

Storing inventory in another state—even if you have no other connection there—can create nexus. This is particularly relevant for businesses that use third-party fulfillment services like Amazon FBA (Fulfilled by Amazon). When your inventory is housed in an Amazon warehouse located in a state where you otherwise wouldn’t have nexus, the physical presence of your inventory establishes a sales tax obligation. It’s essential to know where your inventory is stored and understand the nexus implications.

How to Determine if You Have Nexus

Given the complexity of sales tax laws, determining where you have nexus requires careful analysis. Here are some practical steps you can take:

Conduct a Nexus Review: Identify all the states where you have physical presence, employees, inventory, or sales activity. Check each state’s economic nexus thresholds and compare them to your sales figures.

‍Track Your Sales Activity: Regularly review your sales data to see if you meet economic nexus thresholds in any new states. Keep an eye on the number of transactions as well as total revenue.

Monitor Business Changes: Expanding into new states, hiring remote employees, or working with affiliates can create nexus. Stay proactive about how changes in your business may impact your nexus obligations.

Use Automation Tools: Sales tax automation software can help you track nexus triggers, monitor thresholds, and stay compliant with state regulations.

Consult a Professional: If your nexus situation is complex, consider consulting a sales tax expert who can provide personalized advice and guidance.

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What to Do After Establishing Nexus

Once you determine that you have nexus in a state, here’s what you need to do to stay compliant:

1. Register for a Sales Tax Permit

Before collecting sales tax, you must register for a sales tax permit in each state where you have nexus. Most states allow you to register online through their Department of Revenue website. Collecting sales tax without a permit is illegal and can lead to penalties.

2. Collect Sales Tax on Transactions

After obtaining a permit, you’re legally required to collect sales tax on applicable transactions. Ensure your point-of-sale system, e-commerce platform, or invoicing software is set up to calculate the correct tax rate based on the customer’s location.

3. File and Remit Sales Tax Returns

Each state has its own filing frequency—monthly, quarterly, or annually—based on your sales volume. Missing deadlines can result in fines and interest charges. Set reminders or use automation software to stay on track.

4. Maintain Accurate Records

Keep detailed records of your sales, tax collected, exemption certificates, and filings. Most states require you to retain these records for 3-7 years in case of an audit.

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Common Challenges in Managing Sales Tax Nexus

Managing sales tax nexus comes with challenges that many businesses face:

1. Staying Updated on Laws: Sales tax laws frequently change, making it hard to stay current with nexus rules.

2. Multi-State Compliance: If you have nexus in multiple states, the complexity of managing different tax rates and filing requirements increases.

3. Exemption Certificate Management: For tax-exempt sales, you must collect and store valid exemption certificates, which can be difficult to track manually.

4. Audits and Penalties: Failing to comply with nexus rules can trigger audits and costly penalties.

Leveraging technology and professional expertise can help overcome these challenges and ensure smoother compliance.

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Conclusion

Sales tax nexus is a critical concept that every business must understand to stay compliant. Whether you have a physical presence, meet economic thresholds, or store inventory in different states, your nexus obligations can impact your bottom line. As sales tax laws continue to evolve, it’s more important than ever to stay informed, track your activities carefully, and use the right tools to simplify compliance.

By regularly reviewing your nexus status, registering in the appropriate states, and maintaining accurate records, you can avoid penalties and keep your business running smoothly. If navigating nexus feels overwhelming, consider working with a tax professional or investing in sales tax automation software.

Sales tax compliance may be complicated, but with the right knowledge and strategy, you can manage it confidently and effectively.

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Need Help with Nexus Compliance?

Explore our resources on sales tax automation or schedule a consultation with a sales tax expert to simplify your compliance journey.

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