Sales tax nexus is often discussed as a single concept, but in practice it comes from two very different sources.
Physical nexus and economic nexus are triggered in different ways, create different risks, and are frequently misunderstood by growing businesses.
Understanding the difference between the two is critical to identifying obligations accurately.
What physical nexus actually is
Physical nexus exists when a business has a tangible presence in a state.
Common physical nexus triggers include:
- Offices or locations
- Employees or contractors
- Inventory stored in a warehouse
- Fulfillment centers
- In-state installations or services
- Trade shows or in-person activity
Physical nexus has existed for decades and is generally easier to recognize once it occurs. However, modern business models have expanded what qualifies as “presence.”
Why physical nexus is often underestimated
Many businesses assume physical nexus only applies if they intentionally set up operations in a state.
In reality, physical nexus can be created indirectly through:
- Remote employees working from home
- Third-party logistics providers
- Inventory stored by marketplaces
- Contractors performing services
- Temporary or project-based activity
These triggers often occur without deliberate planning, which is why physical nexus is frequently discovered after the fact.
See how sales tax tools can save time.
What economic nexus actually is
Economic nexus is triggered by economic activity rather than physical presence.
Most states define economic nexus using thresholds such as:
- Revenue volume
- Transaction count
- A combination of both
Once a business exceeds a state’s threshold within a defined period, nexus is created even if the business has no physical presence.
Economic nexus has become the most common source of multi-state obligations for online, SaaS, and service businesses.
Why economic nexus causes the most confusion
Economic nexus is misunderstood because:
- Thresholds vary by state
- Measurement periods differ
- Trigger dates are not obvious
- Data is often fragmented
- Thresholds can be crossed quietly
A business can trigger economic nexus simply by growing normally. There is no alert, registration notice, or automatic signal when a threshold is crossed.
Physical vs economic nexus is not an either/or decision
Many businesses assume they fall into one category or the other.
In reality, businesses often have:
- Physical nexus in some states
- Economic nexus in others
- Both in high-activity jurisdictions
- Neither in certain regions
Each state must be evaluated independently.
Why economic nexus usually creates exposure first
Physical nexus often coincides with intentional expansion, which makes it easier to anticipate.
Economic nexus tends to appear later and quietly, after:
- Sales accelerate
- Customer bases expand
- New markets are entered digitally
As a result, economic nexus is more likely to create historical exposure before it is noticed.
Nexus does not equal tax owed
Both physical and economic nexus create the potential obligation to collect tax.
They do not determine:
- Whether products or services are taxable
- Whether use tax applies
- Whether historical exposure exists
- Whether filing should begin immediately
Those questions must be evaluated separately.
Why businesses misclassify their nexus
Common mistakes include:
- Assuming marketplace collection removes all obligations
- Assuming SaaS is never taxable
- Assuming services are exempt everywhere
- Assuming small volume equals no risk
- Assuming registration date equals nexus start date
These assumptions often lead to incorrect conclusions.
How experienced teams evaluate nexus correctly
Experienced teams:
- Separate physical and economic triggers
- Validate thresholds using actual data
- Identify trigger dates
- Evaluate nexus independently by state
- Treat nexus as input, not instruction
This approach prevents unnecessary compliance actions.
Nexus is about awareness, not panic
Discovering nexus does not require immediate filing.
It requires understanding:
- How nexus was created
- When it started
- Whether it matters financially
- Whether exposure exists
- What options are available
Clarity comes before commitment.
