Business tax nexus is the minimum connection between your company and a state that gives that state legal authority to require you to collect or pay its taxes. You can establish it two main ways: by having a physical footprint in the state, or by generating enough economic activity there to cross a dollar or transaction threshold. Since a 2018 Supreme Court decision, the second path has become the dominant reason online and out-of-state sellers end up on the hook in places they’ve never visited.
Nexus is not a single test. Sales tax nexus and income tax nexus are separate determinations with different rules, and triggering one does not automatically trigger the other. Understanding which type you’ve created, in which states, is the starting point for every multi-state compliance decision that follows.
Physical Presence Nexus
The oldest form of nexus comes from having a physical footprint in a state. A retail store, office, or warehouse obviously counts. So does a single employee working remotely from their home across a state line. Storing inventory in a third-party fulfillment center creates nexus too, which catches many e-commerce sellers who use services like Fulfillment by Amazon without realizing the tax consequences.
The bar is lower than most owners expect. Attending a trade show, sending a repair technician to a customer site, or having a sales rep make regular visits to prospects can all trigger physical presence nexus. Duration matters less than the nature of the activity. Physical presence, once established, applies to both sales tax and income tax obligations in that state.
Economic Nexus and the Wayfair Threshold
The 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. overturned decades of precedent requiring physical presence for sales tax. The Court ruled that a state can compel a remote seller to collect sales tax based purely on the seller’s economic activity there.1Supreme Court of the United States. South Dakota v. Wayfair, Inc., et al. (No. 17-494)
The South Dakota law upheld in Wayfair set the threshold at $100,000 in gross sales or 200 separate transactions delivered into the state on an annual basis.1Supreme Court of the United States. South Dakota v. Wayfair, Inc., et al. (No. 17-494) Most states with a sales tax adopted thresholds modeled on this standard, though a growing number have dropped the transaction count and rely solely on the dollar figure. Five states have no statewide sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Tracking cumulative sales into every taxing state is an ongoing obligation, not a one-time check. States use either a calendar-year or a rolling twelve-month measurement period. Crossing the threshold mid-year means you need to register and begin collecting promptly, sometimes within 30 to 90 days.
Marketplace Sales and Affiliate Relationships
If you sell through a platform like Amazon, eBay, or Etsy, marketplace facilitator laws in most states shift the sales tax collection responsibility from you to the platform itself.2Streamlined Sales Tax. Marketplace Facilitator The platform calculates, collects, and remits tax on sales it facilitates. If you also sell directly through your own website, those direct sales are usually a separate stream for threshold analysis, and they can create economic nexus independently.
A related trigger is affiliate or click-through nexus. If an in-state entity refers customers to you for a commission, such as a blogger who links to your products, some states treat that relationship as sufficient connection to require sales tax collection.
Income Tax Nexus Is a Separate Question
Whether a state can tax your business’s profits follows its own rules. You can owe sales tax in a state without owing income tax there, and vice versa.
The P.L. 86-272 Shield
A federal law known as Public Law 86-272 protects certain businesses from state income taxes. If your only activity in a state is soliciting orders for tangible personal property, and those orders are approved and fulfilled from outside the state, the state cannot impose a net income tax on you.3Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272
The protection is narrower than it sounds. It covers only sales of physical goods. Services, software subscriptions, digital downloads, and licensed intellectual property get no protection at all.3Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 The shield also vanishes if you go beyond pure solicitation. Repairing products at a customer’s location, maintaining an office, or collecting delinquent accounts crosses the line. Several states have adopted the Multistate Tax Commission’s position that common internet activities, such as placing cookies on in-state users’ devices or letting customers create accounts on your website, count as non-protected activities that void the shield.
P.L. 86-272 applies only to taxes measured by net income. States that impose gross receipts or business activity taxes, including Texas, Washington, and Ohio, operate outside its reach entirely.
Factor Presence Nexus
For income tax purposes, many states use a factor presence standard modeled on the Multistate Tax Commission framework. A business has nexus if it exceeds any one of three thresholds during the tax period: $50,000 of property, $50,000 of payroll, or $500,000 of sales.4Multistate Tax Commission. Explanation of the Multistate Tax Commission’s Proposed Factor Presence Nexus Standard Some states adjust the dollar figures periodically.
Trailing Nexus: When the Obligation Outlasts the Trigger
Dropping below a state’s economic threshold does not immediately end your obligation to collect tax there. Most states impose trailing nexus, requiring you to keep collecting and remitting sales tax for a period after you no longer meet the threshold. The typical trailing period runs through the end of the calendar year in which you last qualified, plus the entire following calendar year. Some states use a straight twelve-month window. A handful require you to stay registered until you affirmatively cancel your permit.
Before canceling any registration, confirm the specific state’s rule. Closing a permit too early can itself become a compliance problem.
What Non-Compliance Costs
States typically assess three layers on businesses that should have been collecting tax but weren’t: the unpaid tax, interest running from when it was originally due, and penalties for late filing and payment. Penalty rates of 2% to 5% per month are common, often capped at 20% to 50% of the tax owed. Some states set interest rates well above commercial lending rates.
Sales tax exposure is more serious than income tax exposure, because sales tax is a trust fund tax. Your business collects it from customers on behalf of the state. When that money isn’t remitted, states treat it similarly to misappropriated funds. In most states, corporate officers, owners, and anyone with authority over the business’s finances can be held personally liable for unremitted sales tax, and that personal liability survives dissolution or bankruptcy of the business itself. Some states require only that the person had authority and duty to remit; others require willfulness or gross negligence.
Audit exposure compounds the risk. Most states can look back three to four years, but many extend that window to six or more years when no return was ever filed. A state that discovers you should have been collecting for the past five years will assess the full amount plus interest and penalties for every month.
Voluntary Disclosure Agreements
If you find that you should have been collecting or paying tax in a state but weren’t, a Voluntary Disclosure Agreement is usually the best path forward. A VDA is a formal arrangement in which you agree to register, file returns, and pay back taxes for a limited lookback period. In return, the state typically waives some or all penalties and agrees not to pursue liability for periods before that window.5Multistate Tax Commission. Frequently Asked Questions – Multistate Voluntary Disclosure Program
The lookback is usually three to four years for income tax and 36 months for sales tax, though each state sets its own terms.5Multistate Tax Commission. Frequently Asked Questions – Multistate Voluntary Disclosure Program The Multistate Tax Commission operates a centralized program that lets businesses file VDA applications covering multiple states at once. Many states also allow you to apply anonymously through a representative to assess exposure before committing.
Two important limits. VDAs are only available to businesses that come forward before the state contacts them; a nexus questionnaire or audit notice in your mailbox generally closes this door. And if you actually collected sales tax from customers but failed to remit it, penalty waivers are typically limited or unavailable, because states view collected-but-unremitted tax as far more serious than failing to collect in the first place.
Registering and Staying Compliant
Once nexus is established, register with the state’s tax authority and obtain the required permits. Most states issue sales tax permits at no charge, though a few charge fees or require security deposits. Income tax registration is a separate process and may involve a different agency.
Tax registration is not the same as registering with a state’s Secretary of State as a foreign entity. Tax thresholds are generally lower than the activity level requiring formal foreign qualification. You can owe sales tax in a state without needing to register your LLC or corporation there, though a significant ongoing presence may eventually require both. Treat them as separate questions.
After registration, calculating tax accurately is the operational challenge. Rates vary by state, county, city, and special taxing district, and a single state can have hundreds of distinct rates depending on the buyer’s location. Automated tax software is a practical necessity for anyone selling into multiple states. Filing frequency depends on volume: high-volume sellers file monthly, moderate sellers quarterly, and low-volume sellers annually. States expect a return for every period, even one reporting zero sales; skipping a zero-dollar return is treated the same as failing to file.6Streamlined Sales Tax. Filing Sales Tax Returns
Keep detailed records of every activity that could create nexus: sales by state, transaction counts, employee travel, inventory locations, and affiliate relationships. Review your exposure quarterly rather than at tax time. That cadence gives you enough lead time to register and set up collection before you’re already behind.