Sales tax nexus can be created in two primary ways: physical nexus and economic nexus. While both create sales tax obligations, they are triggered differently and affect businesses in very different ways.
Understanding the difference between physical nexus and economic nexus is critical for determining where sales tax obligations may exist and how compliance should be approached.
Use this sales tax nexus guide to stay compliant
What Is Physical Nexus
Physical nexus is created when a business has a tangible presence in a state. This was the original standard used by states to impose sales tax obligations.
Common physical nexus triggers include:
- Offices or business locations
- Employees or sales representatives
- Inventory stored in warehouses or fulfillment centers
- Contractors or service providers operating in the state
- Trade show attendance in certain situations
Physical nexus is often easier to identify because it involves visible activity within a state.
What Is Economic Nexus
Economic nexus is created when a business exceeds a state’s sales or transaction thresholds, even without physical presence.
Economic nexus thresholds typically include:
- A dollar amount of sales into the state
- A number of transactions within a defined period
- A combination of revenue and transactions
Economic nexus applies to remote sellers, SaaS companies, digital product sellers, service businesses, and ecommerce companies that operate nationally or globally.
Why Economic Nexus Changed Everything
Economic nexus became widely enforceable after states were allowed to impose sales tax obligations based on economic activity alone.
This change shifted sales tax compliance from a location based problem to a data driven problem. Businesses can now create nexus simply by growing.
As a result, many businesses have sales tax nexus in states they have never visited.
Understand your sales tax exposure before it becomes a risk
Key Differences Between Physical and Economic Nexus
How Nexus Is Triggered
Physical nexus is triggered by presence.
Economic nexus is triggered by activity.
A single employee can create physical nexus.
Thousands of small transactions can create economic nexus.
How Easy It Is to Detect
Physical nexus is usually obvious to internal teams.
Economic nexus often goes unnoticed without deliberate analysis.
Businesses frequently discover economic nexus months or years after it was created.
How Often It Occurs
Physical nexus typically exists in a limited number of states.
Economic nexus can exist in many states simultaneously.
Growing businesses often have economic nexus in more states than they realize.
Examples of Physical Nexus
A company creates physical nexus when:
- It hires a remote employee in another state
- It stores inventory with a fulfillment provider
- It opens a satellite office
- It sends technicians to perform services on site
Physical nexus usually creates immediate awareness, but compliance decisions still depend on timing and exposure.
Examples of Economic Nexus
A company creates economic nexus when:
- SaaS subscriptions exceed a state revenue threshold
- Ecommerce orders exceed a transaction count
- Digital products are sold consistently into a state
- Marketplace sales push total volume over a limit
Economic nexus is cumulative and often accelerates quickly as businesses scale.
Physical Nexus vs Economic Nexus in Practice
Many businesses have both types of nexus at the same time.
For example:
- A company may have physical nexus in one state due to employees
- Economic nexus in several states due to online sales
- Marketplace driven nexus in additional states
This layered reality is why sales tax compliance cannot rely on assumptions or single triggers.
Why Economic Nexus Creates More Risk
Economic nexus creates more compliance risk because:
- It is harder to track manually
- Thresholds vary by state
- Trigger dates are easy to miss
- Exposure accumulates quietly over time
Businesses often discover economic nexus only after exposure has built up.
Nexus Does Not Equal Immediate Filing
Neither physical nexus nor economic nexus automatically requires immediate filing.
What matters is:
- When nexus was triggered
- What products or services are taxable
- Whether exposure exists
- What filing strategy makes sense
Nexus is the starting point for analysis, not the final decision.
How Nexus Should Be Evaluated
Modern compliance evaluates nexus by:
- Reviewing transaction data
- Identifying trigger dates
- Comparing activity to state thresholds
- Connecting nexus findings to exposure analysis
This approach prevents over compliance and reduces unnecessary risk.
Know what to do next before filing sales tax
Final Thought
Physical nexus is visible.
Economic nexus is silent.
Most sales tax risk today comes from economic nexus, not physical presence. Businesses that understand the difference gain control over compliance decisions instead of reacting after the fact.
