Published January 24, 2025
Sales Tax Nexus: Requirements, Thresholds, and Compliance
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Growing your business across state lines is exciting, filled with new markets, new customers, and new opportunities. But with that growth comes new responsibilities, particularly regarding sales tax. If you're selling in multiple states, you've probably encountered the term "nexus".
It sounds like technical tax jargon, but the concept is straightforward: it determines when your business must collect sales tax in a state. Think of it as a trigger point. When your business activities in a state reach a certain level, either through physical presence or sales volume, you must follow that state's sales tax rules.
Why does this matter for your business? Because getting it wrong can be costly.
States are becoming increasingly aggressive in enforcing sales tax compliance, and non-compliance penalties can be significant. But don't worry — understanding nexus doesn't have to be overwhelming. In this article, we'll explain what sales tax nexus means for your business, the different types of nexus, and, most importantly, how to stay compliant.
States recognize two main sales tax nexus types: physical and economic. Each has specific triggers and thresholds determining when you must collect and pay sales tax. Understanding these differences is key to maintaining compliance.
Physical nexus occurs when your business has a tangible presence in a state. This presence can range from permanent establishments like retail stores to temporary activities like attending trade shows. Any physical business activity in a state may create a sales tax obligation.
Here are everyday situations that create physical nexus:
Even minimal activity in a state, like attending one trade show or hiring a single remote employee, can trigger nexus and create sales tax obligations. Monitor your business activities across state lines to ensure compliance and avoid unexpected tax liabilities.
Since the landmark South Dakota v. Wayfair decision in 2018, states can require businesses to collect sales tax based on their economic activity alone — no physical presence required. This change altered sales tax collection, especially for online sellers and remote businesses.
Economic nexus typically triggers when your business exceeds either:
These thresholds vary by state, and some states use only one of these criteria rather than both.
Introducing economic nexus marked a significant shift in how businesses need to think about their sales tax obligations. Now, even purely online businesses need to carefully monitor their sales volumes and transaction counts in each state to ensure they comply with local tax laws.
Understanding where you have nexus is just the first step. Managing your sales tax obligations requires ongoing attention to changing requirements and carefully tracking your business activities. Most businesses must monitor their physical presence, including employee locations and inventory storage, while tracking each state's sales revenue and transaction counts.
Missing nexus triggers or failing to track your obligations can lead to significant penalties and back taxes. States rarely notify you when you've triggered nexus; it's your responsibility to know and act. This makes regular monitoring of your business activities crucial for compliance.
To stay compliant, start by creating a state-by-state activity tracker. Review your sales thresholds quarterly, and register for permits before starting activities in new states. Remember to set up proper tax collection systems and file returns by required deadlines. Many businesses find that automated solutions help manage these requirements effectively, but they are NOT a set-it-and-forget-it fail-safe solution.
Each state sets its own rules for when businesses must collect and pay sales tax. Here are the current economic nexus thresholds for key states:
Most other states use a $100,000 sales threshold, though some still maintain transaction counts as part of their requirements. Notable variations include:
Remember that these thresholds can change, and meeting them creates an immediate obligation to register and collect sales tax. Verify current requirements through state tax authorities or consult a sales tax expert.
Once you determine you have nexus in a state, act fast. Most states offer a grace period of about 30 days to register and begin collecting sales tax, but penalties can add up quickly if you delay.
First, you may need to register for a sales tax permit in each state where you have nexus. Never collect sales tax without a permit (this is illegal in most states and can cause significant penalties). The registration process typically requires basic business information, including your EIN, business address, and information about your products or services.
After registration, configure your sales platforms — whether that's your e-commerce website, point-of-sale software, or accounting tools — to collect the correct amount of tax. This means understanding whether the state uses origin-based or destination-based tax rates, and configuring your point of sale or e-commerce platform accordingly. It also means understanding the taxability of your sales and services.
Many businesses use automated sales tax software like Ceretax, Avalara, Sovos, or Vertex to manage rates and rules across multiple states.
Keep detailed records of all your sales tax activities. Most states require you to maintain records for at least three years, though some require longer. These records should include:
Ready to get your sales tax compliance in order? The dedicated team at The Sales Tax People specializes in helping businesses navigate sales tax obligations across multiple states. Contact us for a free consultation to ensure your business stays compliant and avoids costly penalties.
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