Since the landmark 2018 Supreme Court case South Dakota v. Wayfair, Inc., nearly every state that imposes sales tax has adopted economic nexus laws. These laws are primarily enacted and enforced at the state level, but in some home rule states, certain counties, cities, and other local jurisdictions also have their own economic nexus thresholds and requirements.
If you sell a product or service — online, from a brick-and-mortar store, or some combination of both — sales tax compliance has far-reaching consequences for your business. Failing to collect and remit sales tax where and when you’re legally required to do so can result in significant fines and penalties, reputational damage, and even legal trouble.
One important element of sales tax law is the concept of economic nexus. “Nexus” simply refers to a company’s connection to, or presence in, a particular location. Before 2018, a state or local jurisdiction could require a business to collect sales tax on a taxable transaction only if the business had physical nexus there — that is, a physical presence such as an office, inventory, or employees.
However, the definition of nexus has expanded to include economic connections as well. Many states have thresholds related to an amount in annual sales ($100,000 is common). And some have thresholds related to a number of sales in a year (200 is common — however, many states are currently doing away with transaction-based thresholds).
This article will explain what economic nexus is, why it matters, state and local nexus laws, and how you can manage your sales tax obligations in an ever-evolving compliance landscape.
What is economic nexus?
If a business has economic nexus in a particular state, it means that it conducts enough business there that it’s legally obligated to collect state sales tax.
Each state sets its own threshold for what constitutes “enough business,” which can make sales tax compliance tricky for e-commerce brands, online sellers, and companie that provide software as a service (SaaS).
All of these types of businesses may become obliged to collect and remit sales tax, based on their physical or economic presence in a state.
How economic nexus works
States typically use one or both of two thresholds when determining economic nexus:
- Transaction volume: A company surpasses a certain threshold of annual transactions in a state — the most common is 200 retail sales.
- Annual revenue: A company takes in more than a certain amount of annual revenue in a state — the most common threshold is $100,000.
Some states use both transaction volume and annual revenue as criteria for economic nexus, and some states use only one (more often, it’s revenue amount).
And in states that use both, you may need to reach only one or you may need to reach both of them before you must collect sales tax.
For example, in New Jersey, economic nexus is established by either $100,000 in sales or 200 transactions annually. In New York, by contrast, both thresholds apply: a business must have $500,000 in sales and 100 separate transactions.
States also set their own rules for which types of transactions are subject to sales tax.
It’s important to note that economic nexus is not retroactive. In other words, once you’ve established economic nexus in a state, you have to collect sales tax only on retail sales made from that point forward. (However, if you fail to collect and remit taxes you are obliged to, states can require payment of those back taxes, along with interest and penalties.) E-commerce companies, SaaS companies, and sellers using a third-party marketplace like Amazon or eBay need to keep a close eye on their sales to make sure they know where they are reaching economic nexus thresholds.
Why threshold monitoring is critical for businesses
States are highly motivated to adopt and enforce economic nexus laws, which came into place because states wanted to ensure that businesses contributed their fair share to local economies.
If your business is found to be in violation of sales tax laws, you could face a number of consequences, including:
- Penalties and interest charges: Depending on the severity of the violation, you could be subjected to significant fines and interest on unpaid taxes.
- Having to pay back taxes: You’ll have to pay back taxes, which can be a sizable financial burden and limit your free cash flow.
- A tax authority lawsuit: You could become embroiled in a state-level legal dispute, or even be sued by a state tax authority.
For small and medium-sized businesses with limited resources, the risk of accidental noncompliance is high. Tracking your transactions across multiple states can be a difficult, time-consuming task. It’s all too easy to trigger economic nexus somewhere and not realize it until the state revenue department gets in touch.
States have started using technology to track companies’ sales and quickly identify sales tax violations. Thanks to automation and data analytics, states now have the tools to enforce economic nexus laws more aggressively than ever.
How to determine whether you have economic nexus
For e-commerce businesses and remote sellers, tracking economic nexus can be challenging. With each state setting its own requirements, it’s often hard to know where you’re about to establish nexus, and even harder to factor that into your financial planning.
Following these steps can help you stay on top of your sales tax obligations:
- Track sales and transactions: Businesses need to keep detailed and up-to-date sales records to track where they’re approaching nexus thresholds.
- Understand state-specific thresholds: In addition to tracking your revenue and transaction data, you need a solid understanding of what triggers economic nexus in the states where you do business.
- Review annual sales activity: A lot can change from year to year. It’s important to carefully review your sales activity to make sure that you’re aware of any economic nexus thresholds you might be approaching.
- Maintain accurate records: Companies should maintain meticulous records — you’ll need them in the event of a sales tax audit.
Are exempt products or exempt sales counted towards nexus?
In every state that imposes sales tax, as well as in the District of Columbia, exempt sales may be included when determining whether your business has economic nexus. Some states do exempt some sales.
For example, a business that earns $200,000 in exempt sales and $50,000 in taxable sales from customers in Louisiana, in one year, would have economic nexus in the state, as they’ve crossed Louisiana’s threshold of $100,000.
What about sales made via marketplace facilitators?
As of this writing, many states do include sales and transactions made through marketplace facilitators when determining whether your business has established economic nexus.
For example, in West Virginia, sales made through registered marketplace facilitators are counted toward the state’s economic nexus threshold of $100,000 or 200 transactions in the current or previous calendar year.
Recent changes in nexus thresholds
Many states are working to simplify their economic nexus thresholds for remote sellers. For example, as of July 1, 2025, Utah removed its transaction threshold to reduce compliance stress for smaller merchants.
What happens if I exceed the threshold for one year but not the next?
It depends. In some states, you can deregister and will no longer be required to collect sales tax. However, in other states, trailing nexus may require that you collect and remit sales tax for an extended period of time.
For example, in California, if an out-of-state seller crosses the state’s $500,000 in sales threshold during that calendar year, they are then responsible for collecting sales tax for the remainder of that year and for the following calendar year, even if economic nexus thresholds are not crossed in the following calendar year.
Do I need to register in a state before I reach the threshold?
Unless you’ve established another type of nexus, you generally need to register for a sales tax permit only once you’ve established economic nexus.
Economic nexus vs. physical nexus
Economic nexus is based on sales activity in a certain state, while physical nexus is triggered by your tangible presence in a specific area.
Any of the following would establish physical nexus in a state:
- Leasing or owning property there, like storefronts or offices.
- The presence of employees there, regardless of whether they’re part-time, full-time, or working remotely for you in the state.
- In-person selling or services there, and the storage of sales inventory, even through third-party warehouse services like Fulfillment By Amazon.
- Attending trade shows or employing sales agents to visit clients there.
It's also possible to have both economic and physical nexus in a state. If the state requires that you meet only one criterion, the one you meet first establishes nexus.
Managing nexus compliance
Economic nexus compliance can be a serious headache — especially for sellers with customers in multiple states. Following a few best practices can help you keep everything in order and avoid significant penalties.
1. Register for sales tax permits: Register to collect and remit sales tax in any states where you have nexus. Remember, waiting too long to register is a compliance violation.
2. Use tax automation tools: Tax automation tools can streamline compliance for businesses, from sales tax registration to automatically charging the correct amount of sales tax for every transaction. Fortunately, for e-commerce brands, there are a number of purpose-built solutions available.
3. Consolidate transactions: If you’re selling on multiple online marketplaces or platforms, you can track your sales activity more effectively if you consolidate your transaction data.
4. Conduct regular audits: By conducting regular audits, you can avoid accidentally triggering economic nexus and accruing costly penalties.
Make sure that you also leverage the advice of licensed and experienced tax experts. They might catch something you missed, saving you from serious consequences.
The role of technology
Manually tracking your sales activity, calculating sales tax, and performing other essential compliance tasks can be risky. If you’re not careful, a single employee error could cost your business tens of thousands of dollars.
Sales tax automation software can help you save time and money by:
- Registering for, collecting, and remitting sales tax on your behalf.
- Automatically calculating the right amount of sales tax for every transaction.
- Detecting when your business has crossed an economic or physical nexus threshold, and alerting you.
- Proactively monitoring changes to sales tax laws across the country, with automatic alerts for anything that impacts you.
Sales tax compliance is getting more complex. With a tool like Numeral, you can cut the costs and constant headache of tracking your sales activity in spreadsheets — the software also automatically applies the correct amount of sales tax to transactions in more than 11,000 jurisdictions.
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Final thoughts
Understanding, tracking, and proactively managing economic nexus is essential for businesses. States are deeply invested in enforcing these laws, and violations can result in steep penalties, reputational damage, and even legal action.
As a business owner, you need to monitor your tax obligations proactively, and that means selecting the right tools.
