Nexus means you have enough connections with a state that the state can require you to collect sales tax on its behalf. While companies once established nexus only if they had a physical presence in a state, there are now multiple types of nexus businesses must be aware of.
In the United States, merchants must collect sales tax when they sell taxable goods or services to consumers.
However, states can't just deputize every business to act as their tax collection agent. The company must have sufficient connections with the state.
This is referred to as nexus.
Once your company establishes nexus in a state, you must register, collect the correct sales tax, and file and remit it on time—or risk penalties.
This obligation exists whether you're aware of nexus rules or not.
Unfortunately, companies sometimes assume they only have an obligation to collect sales tax in the states where they're physically located. This isn't an unreasonable assumption, as it was the rule for decades.
Now, however, there are multiple ways to establish nexus, including:
If you establish any of these types of nexus, you must register, collect, and remit sales tax in that state.
This guide will help you better understand what nexus is, the different ways it gets triggered, how to work out which types apply to your business, and what to do once you've established it.
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Sales tax nexus is a legal threshold you must meet that shows you have sufficient connections with a state to be obligated to collect sales tax there.
But it isn't a single test. Each state sets its own criteria, so you can have nexus in some states and not others, for entirely different reasons.
Traditionally, a business needed a physical presence in a state before it had to collect sales tax there, a rule the Supreme Court affirmed in 1992 in Quill Corp. v. North Dakota.
This remained the rule for decades, until the Court overruled Quill in 2018 in South Dakota v. Wayfair, holding that physical presence is not required if the business has enough economic connections to the state.
This opened the door to economic nexus and the other types we go over below.
The court left it to the states to define economic nexus. Now, every state with a sales tax has economic nexus rules in place, and sellers must be aware of those rules in every state where they do business.
A failure to register, or to collect and remit the taxes due, can cause the company to incur back-tax liability plus penalties and interest. And because you can’t go back and collect uncollected taxes, businesses often end up covering the costs themselves.
Nexus can be triggered in multiple different ways and, in some cases, you may have more than one type active in the same state.
Physical nexus comes from having a physical presence in a state. While rules vary by state, this may include:
Our physical nexus guide provides a full breakdown of triggers and state rules.
Economic nexus is created not by physical connections, but by economic ones. Once you start doing a certain amount of business in a state, you have enough connections that you become obligated to collect sales tax locally.
After the Wayfair decision authorized economic nexus, many states rushed to pass economic nexus laws with the rise in popularity of online sales. Many followed South Dakota's lead, setting the thresholds at more than $100,000 in sales or 200 or more transactions.
These numbers aren't uniform, though, and states differ on what counts toward reaching the economic threshold. For example, some states have higher sales thresholds, and many have eliminated the transaction count as a metric altogether.
States also have different rules on what counts toward economic nexus thresholds. There may be discrepancies in whether a state includes:
Our economic nexus guide explains specific state-by-state thresholds for when you establish nexus, as well as what types of sales usually count in your calculation.
In Alabama, for example, you establish economic nexus once you have more than $250,000 in qualifying retail sales during the previous calendar year. Exempt sales count in this calculation, but sales with a qualifying marketplace facilitator don't, nor do qualifying resale sales.
So, if you made $251,000 in exempt and nonexempt sales, but that included $5,000 in Amazon and Etsy sales, you would not establish economic nexus. But if you made $251,000 in sales on your own platforms and that included exempt sales, you would be obligated to register for sales tax in Alabama.
Affiliate nexus is created when your company has a relationship with an in-state entity, such as a business under common ownership or a subsidiary business. You may create affiliate nexus if:
Illinois is one example of a state with affiliate nexus laws. According to the relevant statute found in 35 ILCS 105/2(1.2), affiliate nexus is established when:
“A retailer having a contract with a person located in this State under which: (A) the retailer sells the same or substantially similar line of products as the person located in this State and does so using an identical or substantially similar name, trade name, or trademark as the person located in this State; and (B) the retailer provides a commission or other consideration to the person located in this State based upon the sale of tangible personal property by the retailer.”
For nexus to be established by the affiliate relationship, cumulative gross receipts from sales of tangible personal property by the out-of-state retailer to in-state customers through the affiliate relationship must exceed $10,000 in the preceding four quarterly periods ending on the last day of March, June, September, and December.
Under this law, if the out-of-state retailer’s cumulative gross receipts from sales to Illinois customers under the covered contracts exceed $10,000 in the preceding four quarters, and the in-state business was paid a commission based on sales volume, then the out-of-state retailer has affiliate nexus.
Note that Illinois requires both elements, shared branding and a commission, so a commission alone isn't affiliate nexus.
About two dozen states have some form of affiliate nexus laws, including Alabama, Illinois, Iowa, and New York.
Click-through nexus is similar to, and often confused with, affiliate nexus, but there are important differences between the two.
Click-through nexus is created when an out-of-state seller enters into an agreement to pay a commission for referrals from an in-state person or business through a link on the referrer’s website, blog, social media account, or other online platform.
Click-through nexus is different because it involves a referral agreement, while affiliate nexus arises from activities of an affiliated in-state business, such as a subsidiary or parent company, if the affiliate company supports the out-of-state seller's local business.
New York is one example of a state with click-through nexus, with the rule established in New York Tax Law § 1101(b)(8)(vi), which states:
“A person making sales of tangible personal property or services taxable under this article (“seller”) shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller.”
For example, if a New York blogger collects a commission for linking their readers to an unrelated online shoe store, the arrangement can create a rebuttable presumption that there is click-through nexus. The seller can rebut the presumption by showing that the New York referrer didn't actively solicit customers on its behalf.
This relationship must result in excess of $10,000 in cumulative gross receipts from sales resulting from referrals under the qualifying resident agreements in the preceding four quarterly periods ending on the last day of February, May, August, and November.
However, if an online shoe store shares a name with a New York shoe store owned by the same company, which markets its online store or accepts returns for the online store, that creates affiliate nexus.
More than a dozen states have click-through statutes, including New York, New Jersey, and Illinois.
Marketplace nexus is established by marketplace facilitator rules, which have been adopted across the United States.
Marketplace facilitator rules essentially shift the burden of sales tax compliance to a third-party platform that plays an instrumental role in helping sellers to sell their products. Examples include Amazon, Etsy, and Walmart.
In states where a platform meets the marketplace facilitator definition and threshold, it must collect and remit sales tax on the sales it facilitates there.
This means that if a marketplace acts as the merchant of record or plays a critical role in things like payment processing, it assumes the obligation to collect and remit sales tax on taxable facilitated sales that are delivered into states where it meets the statutory requirements to be considered a marketplace facilitator.
Because of marketplace facilitator laws, a business that sells on a platform that is considered a marketplace facilitator generally doesn't have to directly manage sales tax for on-platform sales. However, the company must fully comply with sales tax requirements for all sales on other channels.
Sales made on a marketplace may still count in determining if a company has met the volume threshold to establish economic nexus.
So, if you sell on a platform like Amazon and sell elsewhere, track sales on all platforms to determine if you've established nexus in each state where you have customers so you can stay compliant with ecommerce sales tax rules.
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Establishing any type of nexus with a state makes you responsible for registering for sales tax locally. This means you must monitor whether you have nexus via any of these means. Here are the things you should check:
This list isn't exhaustive, so treat it as a starting checklist.
Some businesses have nexus in a state for multiple reasons. Regardless of how many ways you establish it, the result is the same. You must collect and remit taxes on nonexempt sales in that location unless a marketplace facilitator is doing it for you.
Check out our state-specific guides to see more info on each:
Once you have established nexus in a state, you must:
Tracking this manually across multiple states (and multiple types of nexus within each one) is where most businesses fall behind. You face significant liability risk if you make errors, including the possibility of an audit.
Nexus doesn't necessarily end the day the activity that created it stops—such as if your business moves to a new state.
Many states apply what's known as trailing nexus, keeping your obligation to collect and file alive for a defined period after you close an in-state location or fall below the economic threshold.
California's Regulation 1827, for example, extends nexus through the rest of the calendar year plus the entire following calendar year, and it applies to both physical and economic nexus.
Colorado and Washington take a similar approach. Michigan runs 11 months past the month physical presence ends, while Texas requires revenue to stay below the economic threshold for 12 consecutive months before the obligation lifts.
Numeral makes it easy to determine when you have established nexus and to comply with your sales tax obligations in every state where you have nexus.
You can connect Numeral to all of your sales channels, and Numeral will offer free nexus monitoring, alerting you as you approach a threshold in a new jurisdiction and again when you cross it.
You don't have to sign any long-term commitments to get free nexus monitoring.
Once you establish nexus, Numeral can auto-register for you, then handle filing and remittance. Numeral’s professional plan charges a flat fee of $150 per registration and $75 per filing. Every return is reviewed by a U.S.-based tax expert.
We also back our service with the Numeral Guarantee: your sales tax is filed on time, or Numeral pays the resulting penalties and interest.
Start monitoring nexus for free with Numeral so you can manage sales tax in as little as five minutes per month—no matter how many states you have nexus in.
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