Published February 5, 2025
How To Determine When You Have Sales Tax Nexus
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Determining if you have sales tax nexus is not as clear-cut as it may sound. Different factors, such as physical locations, third-party employees, and volume of sales, all factor into each state’s unique criteria for sales tax nexus in different ways. If your business is starting to cross state lines or you are increasing sales online, the lingering question about sales tax nexus is never far behind.
Below, we will discuss exactly what sales tax nexus is, the different types of nexus, and the implications of successfully managing your sales tax responsibilities.
What Is Sales Tax Nexus?
Broadly speaking, sales tax nexus is the criteria that determine whether or not your business is responsible for charging and remitting sales tax to its customers in a particular location. Nexus defines your connection to that jurisdiction. It is your business’s “link” to a state. The criteria might include a physical location, having a store or warehouse, employing people locally, or passing an economic threshold in sales.
One of the most difficult things to manage and understand about sales tax nexus is that the rules and regulations can change from state to state and even within state lines. That’s why it is so critical for businesses to understand where and how they may become responsible for remitting sales tax.
There are several different types of sales tax nexus, which means your team should be watching for any of the following triggers that could indicate sales tax nexus.
Physical nexus can be one of the easiest ways to identify sales tax liability. If you open a new location in a new state, you are clearly liable for sales tax in that state. However, the states’ definitions dive a little bit deeper into what is considered physical nexus.
Here are a few examples of how some states define physical nexus:
As you can see above, physical nexus isn’t just triggered by opening a new brick-and-mortar location, you may also have physical nexus if you have employees or agents working for you in that state. If you carry inventory or use a distribution facility in another state, you are also triggering physical nexus.
In Alabama, there was an out-of-state company that used non-related individuals working on commission to measure students for caps and gowns. There was no written agreement between the company and the individuals doing the measurements, but a judge ruled that they were most certainly implied company employees. In addition, the company was liable to pay sales tax because of the significant presence of their income-producing property (the caps and gowns) in the state of Alabama.
Economic nexus refers to the obligation a business has to collect and remit sales tax in a state, based solely on the volume of its sales or the number of transactions, even if the business has no physical presence there.
Economic nexus became decidedly more critical after the 2018 court case, South Dakota vs. Wayfair, that determined that e-commerce businesses that had no physical presence, but a significant volume of sales, could still be liable to remit sales tax.
Different states have different thresholds for what triggers economic nexus. While there are some common numbers to watch for, always check with the state’s tax authorities for exact nexus thresholds. Here are some state examples:
*There may be caveats as to what types of transactions are included in hitting the economic nexus threshold. In Alabama, for example, excluded transactions include sales made through marketplace facilitators, wholesale sales, and exempt services.
When assessing your economic nexus, check the state’s guidelines for how to calculate and when your economic nexus officially goes into effect. In Illinois, you hit their economic threshold when you have $100,000 in gross sales over the past 12 months or 200 or more annual transactions. Even registration requirements will differ. In Indiana, your registration obligation commences on the day the threshold is exceeded. In Iowa, the registration requirement falls on the first day of the month, 30 days after the business surpasses the threshold of $100,000 in annual gross sales.
If a clothing retailer in Florida meets the economic requirements for nexus in New York (more than $500,000 in sales to New York customers or 100 or more separate transactions) in a calendar year, it now has the responsibility to register for, collect, and remit sales tax for the state of New York.
Affiliate nexus occurs when a business has a relationship with a partner in a state and it triggers sales tax responsibility. This could be a business partner, salesperson, affiliate marketer, or distributor. While the business may have no other physical presence in the state, they will still be responsible for remitting sales tax.
Since nexus essentially identifies any links your business has with a state, an affiliate establishes that (even without a physical store or warehouse) someone in that state is conducting business on your behalf.
More than 30 states have affiliate nexus laws, which may include sales thresholds (varying from $0 to thousands of dollars) and definitions for what qualifies as an affiliate.
An out-of-state electronics retailer partners with a local business in Texas to store and distribute their products. The local business handles all the inventory, packaging, and shipping for the electronics company. Even though this is a partnership and not a direct-hire, the electronics company has set up operations in Texas that could trigger affiliate nexus.
Click-through nexus and affiliate nexus are very similar. Click-through nexus focuses on the act of generating sales through online links on a website, blog, or social media, often referred to as affiliate marketing.
Most states have a revenue threshold that must be met for click-through nexus to apply. It can be over the course of a 12-month period or a calendar year.
Let’s say your business sells fitness equipment. As part of your marketing strategy, you partner with fitness bloggers who use affiliate links on their blogs to drive traffic and sales. If sales generated through that link exceed the sales threshold for affiliate nexus (California is $100,000, for example), then your company is required to collect and remit sales tax.
Your business can trigger nexus in additional ways, such as through affiliate marketing programs, drop shipping, remote employees, or third-party contractors. With so many channels open to triggering sales tax nexus, it’s important that your business is vigilant about identifying sales tax liabilities.
With the help of robust sales tax software, you can automate parts of your sales tax compliance. Software is good for repetitive tasks and collecting sales tax. However, there are limitations where your team needs to oversee accuracy, remittance, and changing tax laws. The more complex your business is, the more oversight your tax software may require.
We recommend the following steps to assess your nexus states to ensure sales tax compliance:
Not everyone thinks about sales tax as much as we do. For leaders of high-growth or expanding companies, sales tax compliance often falls to the bottom of the to-do list repeatedly. It can be an intimidating task requiring in-depth knowledge of sales tax regulations or at least the time and patience to review all necessary jurisdictions thoroughly. Unfortunately, government entities don’t see it that way, so your business could face serious consequences for unremitted sales tax.
In the event of an audit, unpaid sales tax can cost you additional penalties and fees, including interest on the unpaid balance. If you are looking at years of unpaid sales tax, the cost implications could be enough to disrupt the flow of business. Shortages of cash could damage vendor relationships or hurt your reputation with customers.
The way you conduct business may also be the trigger for an auditor to take a closer look. If they notice a high volume of sales from an out-of-state retailer or even a significant number of 1099 employees for a business not in their state, it may be enough to launch an investigation.
Although sales tax may not be on your radar, the state is definitely watching. Make sure you are tracking nexus thresholds and registering for sales tax in the states where your business has met the nexus requirements.
When you’ve identified states where you have already or are going to soon meet the nexus requirements, you have to register with the state for a sales tax permit. This basically means that you have the legal right to charge, collect, and remit sales in that state. The registration process is generally straightforward and will request information such as your business name, type, location, and ownership information.
Once you have your sales tax permit, you’ll need to set up internal procedures for collecting and remitting sales tax. This might look like updating software, websites, and point-of-sale systems to include sales tax as part of the full purchase price of the items. You may also want to review if any of your products qualify as exempt sales in the states that don't require sales tax. Routine monitoring and internal audits can ensure you stay compliant with the latest legislation and sales tax laws.
While you aren’t responsible for sales tax on the purchases made up to the point of nexus being established, some states have statutes of limitations that can lead to back taxes, penalties, and interest if your business fails to comply after triggering nexus. You can avoid this by planning early, particularly if you are experiencing growth, and consulting with sales tax professionals for guidance.
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