What Is Nexus?
Nexus is the legal term for the connection between a business and a state that gives that state the authority to impose taxes on the business. If your business has nexus in a state, that state can require you to collect and remit sales tax, pay income tax, or both. Understanding where your business has nexus is essential for multi-state tax compliance.
The concept of nexus has evolved significantly over the past several decades, and the rules expanded dramatically with the U.S. Supreme Court's landmark 2018 decision in South Dakota v. Wayfair, Inc. Today, a business can have nexus in a state even without any physical presence there.
Physical Nexus
Physical nexus is the traditional form of nexus. It is established when a business has a tangible, physical connection to a state. Common triggers for physical nexus include:
Physical nexus has been the standard for decades and is well understood. If your business has any physical footprint in a state, you almost certainly have nexus there.
Economic Nexus: The Wayfair Revolution
The Wayfair Decision
In June 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc., overturning the long-standing physical presence requirement for sales tax nexus. The Court ruled that states can require businesses to collect and remit sales tax based solely on the volume of sales into the state, even if the business has no physical presence there.
This decision fundamentally changed the landscape for online sellers and service providers. Before Wayfair, a business with no physical presence in a state was not required to collect that state's sales tax. After Wayfair, virtually every state with a sales tax adopted economic nexus thresholds.
Economic Nexus Thresholds
Each state sets its own thresholds for economic nexus. The most common standard, modeled after South Dakota's law, triggers nexus when a business has:
However, many states have set their own thresholds. Some examples:
It is critical to monitor your sales into each state and register for sales tax collection once you cross a state's threshold.
Income Tax Nexus
Income tax nexus determines when a state can tax your business's income. While the Wayfair decision specifically addressed sales tax, many states have also expanded their income tax nexus standards. Income tax nexus can be triggered by:
P.L. 86-272 Protection
Federal law (Public Law 86-272) provides limited protection from state income tax for businesses whose only activity in a state is the solicitation of sales of tangible personal property. This protection does not apply to:
Sales Tax Nexus
Sales tax nexus determines when a business must register to collect and remit sales tax in a state. As discussed above, sales tax nexus can be triggered by either physical presence or economic activity.
Key Sales Tax Considerations
Strategies for Multi-State Tax Compliance
Step 1: Determine Where You Have Nexus
Conduct a thorough nexus study to identify every state where your business has physical or economic nexus. Consider all employees, property, inventory, and sales data.
Step 2: Register in All Required States
Once you have identified your nexus states, register for sales tax permits, income tax accounts, and any other required tax registrations in each state. If your business also needs to foreign qualify in those states, coordinate both processes.
Step 3: Implement Tax Collection Systems
Set up your point-of-sale or e-commerce system to correctly calculate and collect the appropriate sales tax for each jurisdiction. Given that there are over 13,000 sales tax jurisdictions in the United States, automated tax calculation software is essential for most businesses.
Step 4: File and Pay on Time
Create a compliance calendar that tracks all filing deadlines across every state where you have tax obligations. Late filings and late payments trigger penalties and interest in every state.
Step 5: Monitor for Changes
Economic nexus thresholds, tax rates, and filing requirements change frequently. Monitor your sales data against each state's thresholds and stay informed about legislative changes that could affect your obligations.
Step 6: Keep Good Records
Maintain detailed records of all sales by state, tax collected, exemption certificates received, and returns filed. Good recordkeeping is your best defense in the event of a state audit.
How CLS Can Help
While CLS does not provide tax preparation or filing services, our compliance management platform helps businesses track where they are registered and monitor their ongoing obligations across all 50 states. Our registered agent services, foreign qualification filings, and annual report monitoring ensure your entity-level compliance is handled, so you can focus on your tax obligations. Contact us for a free consultation about your multi-state compliance needs, or explore our state guides to understand specific requirements in each state.