Sales tax nexus determines when a business is required to collect and remit sales tax in a state. Two primary types of nexus apply to most businesses today: physical nexus and economic nexus.
Understanding the difference between these two concepts is essential for businesses selling products or services across state lines. Many companies assume that nexus applies only when they have a physical location in a state. However, modern tax rules now allow states to impose sales tax obligations based on economic activity alone.
If you are new to the concept of nexus, start with the Economic Nexus Overview.
What Is Physical Nexus
Physical nexus refers to a business having a tangible presence within a state. Historically, states could only require sales tax collection if a business maintained a physical connection within that jurisdiction.
Common examples of physical nexus include
- Offices or business locations
- Employees working in the state
- Warehouses or fulfillment centers
- Retail storefronts
- Inventory stored within the state
If a business has any of these physical connections in a state, it generally must register for a sales tax permit and collect sales tax on taxable transactions within that state. Businesses often discover physical nexus through inventory storage, remote employees, or third party logistics providers.
For example, companies storing inventory in fulfillment centers may unknowingly create nexus. A detailed explanation is available in the guide: 3PL Warehouses and Sales Tax Nexus
What Is Economic Nexus
Economic nexus applies when a business reaches certain levels of sales activity within a state. Unlike physical nexus, economic nexus does not require a physical presence.
States typically determine economic nexus using thresholds such as
- Revenue generated from sales into the state
- Number of transactions completed within the state
Most states use revenue thresholds around $100,000 annually, although some states use higher limits. If a business exceeds these thresholds, it must usually register for sales tax and begin collecting tax from customers in that state.
To review the specific thresholds across all states, visit Economic Nexus by State.
You can also estimate whether your business has crossed any thresholds using the Economic Nexus Calculator.
The Wayfair Decision That Changed Nexus Rules
Economic nexus laws became widespread after the Supreme Court decision in South Dakota v Wayfair in 2018. Before this ruling, states could require tax collection only if a business had physical presence in the state. The Wayfair decision allowed states to require tax collection based on economic activity instead. Following the decision, nearly every state implemented economic nexus laws.
More details about the impact of the Wayfair ruling are explained in Sales Tax Nexus After the Wayfair Decision.
Examples of Physical Nexus
Businesses often create physical nexus in ways they do not expect. Examples include
- Hiring remote employees located in another state
- Storing inventory in third party warehouses
- Operating temporary locations such as trade show booths
- Using contractors who operate from a different state
Remote employees have become a particularly common source of nexus for growing businesses.
You can learn more about this scenario in Remote Employees and Sales Tax Nexus.
Examples of Economic Nexus
Economic nexus typically arises when businesses expand sales into new states.
Common scenarios include
- Rapid growth in ecommerce sales
- Online subscription services reaching customers nationwide
- Digital product sales across multiple states
- Marketplace sales through Amazon or similar platforms
Businesses selling through Amazon may also face additional nexus triggers due to inventory stored in fulfillment centers.
Why Understanding Nexus Types Matters
Businesses must monitor both physical and economic nexus to remain compliant with sales tax laws.
A company may trigger physical nexus in one state and economic nexus in another. As businesses grow and expand into new markets, tracking these obligations becomes increasingly complex.
Identifying nexus early helps businesses avoid unexpected liabilities, penalties, and state audits.
Businesses can also evaluate potential exposure using the Sales Tax Exposure Calculator.
Related Sales Tax Resources
If you are evaluating sales tax obligations for your business, you can start with the Economic Nexus guide and the Sales Tax Nexus overview.
To review current thresholds across the country, see the Economic Nexus by State reference or explore additional guidance in the Sales Tax Nexus Hub.
Businesses analyzing potential liability can review the Sales Tax Exposure Analysis or estimate potential exposure using the Sales Tax Exposure Calculator.
If you track activity across multiple states, tools like the Economic Nexus Tracker and the Rolling 12-Month Nexus Tracker can help monitor thresholds.
You can also estimate whether your sales exceed state thresholds using the Nexus Threshold Calculator.
For a structured compliance overview, businesses may also review the Sales Tax Risk Report.
You can also review current state thresholds in the Economic Nexus Thresholds by State reference.
FAQs
What is physical nexus?
Physical nexus occurs when a business has a physical presence in a state such as employees, offices, inventory, or warehouses.
What is economic nexus?
Economic nexus occurs when a business exceeds certain sales thresholds in a state even if the business has no physical presence there.
Can a business have both types of nexus?
Yes. A business may have physical nexus in one state and economic nexus in another depending on its operations and sales activity.
Does inventory create physical nexus?
Yes. Inventory stored in warehouses or fulfillment centers typically creates physical nexus in the state where the inventory is located.
What is the typical economic nexus threshold?
Many states use a revenue threshold of approximately $100,000 in annual sales.
