Few areas of tax compliance have changed more dramatically in recent years for small businesses than sales tax — specifically, the obligation to collect and remit sales tax in states where you may have never set foot. The 2018 Supreme Court decision in South Dakota v. Wayfair fundamentally altered the landscape by allowing states to require out-of-state businesses to collect and remit sales tax based on their sales volume in the state — a standard called “economic nexus” — regardless of whether the business has any physical presence there. For online sellers, multi-state service businesses, and any business that sells to customers in multiple states, understanding nexus is no longer optional. The penalties for non-compliance accumulate silently and can be substantial by the time they are discovered. This guide explains what sales tax nexus is, how it is triggered, what it requires, and how to approach compliance.
What Is Nexus?
Nexus is the legal connection between a business and a state that gives the state the authority to require that business to collect and remit the state’s sales tax. Without nexus, a state cannot legally require you to act as an unpaid tax collector for their revenue authority.
Prior to the Wayfair decision, nexus was generally established only through physical presence: having an office, employee, warehouse, or inventory in the state. A business could sell millions of dollars of goods to customers in California without having any sales tax obligation there, as long as it had no physical presence in California.
The Wayfair decision changed this by establishing that economic activity — specifically, sufficient sales volume in a state — can create nexus independently of any physical presence. The Supreme Court upheld South Dakota’s law, which required businesses to collect sales tax once they exceeded $100,000 in annual sales to South Dakota customers or 200 individual transactions. Every state with a sales tax has now enacted an economic nexus standard based on the Wayfair framework.
Physical Nexus vs Economic Nexus
There are now two primary ways to establish nexus in a state: through physical presence (physical nexus) and through economic activity (economic nexus). Both can exist independently and both can exist simultaneously.
Physical nexus is established through: having an office, store, or other facility in the state; having employees or independent contractors working in the state — including remote workers; storing inventory in the state, including in third-party fulfillment centers; regularly sending employees or agents into the state for business purposes (such as sales visits or trade shows); or having affiliates in the state that generate sales for your business.
Economic nexus is established through: exceeding the state’s specific sales threshold (typically $100,000 in annual sales to customers in the state, or 200 transactions, or both, in the prior or current calendar year). States have enacted varying threshold amounts and measurement periods. Most states use the $100,000 threshold, though some have different levels.
The key practical implication: if you sell products or taxable services online to customers in multiple states, you have likely crossed the economic nexus threshold in numerous states — even if you have never visited any of them.
Who Is Affected?
The Wayfair decision and the subsequent state economic nexus laws affect any business that sells taxable products or services to customers in states other than its home state. This includes:
E-commerce businesses: any business selling physical products online that ships to customers in multiple states is at high risk of having economic nexus in many of those states once its sales volume reaches the applicable thresholds.
Amazon, Etsy, and other marketplace sellers: marketplace facilitator laws in most states now require platforms like Amazon, Etsy, and eBay to collect and remit sales tax on behalf of their sellers for sales made through the platform. However, this does not cover direct sales made outside the platform, and multi-channel sellers may still have direct obligations.
Software and SaaS businesses: many states now impose sales tax on software as a service (SaaS), digital products, and other digital services. The taxability of software and digital products varies significantly by state.
Service businesses: most traditional services are not subject to sales tax in most states, but some states tax specific service categories. Professional services (accounting, legal, consulting) are generally exempt in most jurisdictions, but other services may not be.
Economic Nexus Thresholds by State
While most states have adopted the $100,000 or 200 transaction threshold from the South Dakota law, there are important variations.
Most common threshold: $100,000 in annual sales to customers in the state (some states measure by gross sales, others by taxable sales specifically).
Some states eliminate the transaction count: several states have moved to a threshold based solely on dollar amount ($100,000) without the alternative 200 transaction test.
Retroactive lookback periods: states apply their thresholds to either the prior calendar year, the current calendar year, or a rolling 12-month period. This affects when the obligation first attaches and when it expires if your sales fall below the threshold.
Alaska, Delaware, Montana, New Hampshire, and Oregon have no state sales tax and therefore no nexus concerns at the state level (though Alaska allows local jurisdictions to impose local sales taxes).
Given the complexity and variation by state, a comprehensive nexus analysis — typically performed with specialized software or by a sales tax professional — is necessary to determine exactly which states require registration and collection.
What You Must Do Once You Have Nexus
Once you determine that you have economic nexus in a state, you have specific obligations.
Register for a sales tax permit: you must register with the state’s tax authority before you begin collecting sales tax. Operating without registration is non-compliant, even if you are collecting the tax from customers.
Collect the correct rate: sales tax rates vary not just by state but by city, county, and special taxing district. In California, for example, rates range from approximately 7.25% to over 10% depending on the local jurisdiction. You must collect the rate applicable to the buyer’s location (destination-based sourcing), not the rate in your home state or city.
File and remit on schedule: each state has its own filing frequency (monthly, quarterly, or annually, typically based on your sales volume in that state) and its own filing deadlines. Missing deadlines triggers penalties and interest.
Maintain records: keep records of all sales by state for at least four years, longer in some states. Your accounting software should be configured to generate state-level sales reports.
Tools and Resources for Sales Tax Compliance
Managing sales tax across multiple states manually is impractical for most businesses above a modest size. Automated sales tax software integrates with e-commerce platforms and accounting software to calculate the correct rate automatically, file returns, and remit payments.
Avalara, TaxJar, and Vertex are the leading sales tax automation platforms. Each integrates with major e-commerce platforms (Shopify, WooCommerce, Magento), marketplaces (Amazon, Etsy), and accounting software (QuickBooks, Xero). Pricing is based on transaction volume.
The Multistate Tax Commission’s Voluntary Disclosure Program allows businesses with historical exposure to come into compliance with reduced penalties and limited lookback periods. If you have had economic nexus in states for several years without collecting, voluntary disclosure is often the most cost-effective path to compliance.
Conclusion
Sales tax nexus — particularly economic nexus in the post-Wayfair landscape — is a compliance obligation that catches many online sellers and multi-state businesses by surprise. The exposure accumulates silently: every untaxed sale to a customer in a state where you have nexus potentially adds to a growing liability.
The solution is awareness and proactive compliance. Conduct a nexus analysis to identify which states require registration. Implement automated sales tax collection at checkout. File and remit in each state on schedule. Review your nexus status as your sales grow into new states. The compliance cost — both in software fees and administrative time — is real but manageable. The cost of non-compliance — accumulated back taxes, penalties, and interest discovered during an audit — is far higher.