Nexus is the legal link between a business and a state that determines whether the business must register, collect, and remit sales tax. Traditionally, nexus was triggered by a physical presence such as offices, warehouses, inventory, or employees in the state. Since the 2018 Wayfair decision, most states now impose economic nexus, requiring remote sellers to comply if they exceed sales or transaction thresholds, even without physical presence. Businesses must also watch for other triggers: affiliate relationships, click-through marketing arrangements, participation in trade shows, or remote employees. Each state sets its own thresholds and rules, which may include non-taxable sales in the calculation. Failing to identify nexus correctly can lead to missed obligations, penalties, and audits. Regularly evaluating where nexus is triggered is critical for compliance and risk management as operations expand across state lines.
What Is Nexus?
Nexus refers to the connection between a business and a state that gives the state the authority to require that business to register, collect, and remit sales tax.
There are multiple types of nexus that may require a business to register in a state, including:
- Physical presence
- Economic presence
- Affiliate relationships
- Click-through arrangements
The landmark Wayfair decision in 2018 overturned decades of precedent by allowing states to demand tax compliance from out-of-state sellers, even those without physical presence. This expanded the definition of nexus from a purely physical connection to include economic activity, prompting the rollout of economic nexus laws in nearly every state.
Physical Nexus
Physical nexus is the most traditional form and is based on whether a business maintains a tangible presence in the state. This includes:
- Having offices or branches
- Operating warehouses or distribution centers
- Employing staff or independent contractors within the state
- Storing or maintaining inventory there
Example:
If your business has an office in Colorado, you must register, collect, and remit sales tax in Colorado — regardless of how much sales volume you generate. The mere physical presence is enough to trigger the obligation.
Physical nexus is often the easiest to identify but should not be overlooked as a business expands its footprint across state lines.
Economic Nexus
Economic nexus rules allow a state to require sales tax collection even without physical presence, based purely on sales volume or number of transactions into that state.
Many states have adopted thresholds similar to South Dakota’s model:
- $100,000 in annual sales, or
- 200 separate transactions into the state
However, these thresholds — and how they are calculated — vary by state. For example, some states require businesses to include non-taxable sales (such as exempt or resale transactions) in their economic nexus calculations. That means a business might need to register and file returns even if they’re not collecting tax on every sale.
The period used to determine nexus may be based on the current calendar year or the previous year, depending on the rules of each state.
Example:
A company located in Illinois makes $150,000 in online sales to customers in California, with no physical presence there. Under California’s economic nexus rules, the company must register for sales tax due to exceeding the threshold.
Other Key Triggers for Nexus
Beyond physical and economic nexus, several other activities can also create sales tax obligations in a state. These include:
Affiliate Nexus
Occurs when a business is related to or associated with another business that has a physical presence in a state — such as subsidiaries, holding companies, or corporate affiliates. This relationship can trigger nexus for the entire group.
Click-Through Nexus
This applies when a business pays a commission or referral fee to a third party (often a website or affiliate marketer) located in a state for referring customers. These arrangements create a presumption of nexus for the seller.
Participating in Trade Shows
Attending trade shows or professional events in a state can trigger nexus — especially if the business is soliciting sales during the event or signing up customers.
Employees or Agents
If a company has remote employees or agents working in another state, even temporarily, that may establish nexus. This applies regardless of whether the employee works from home, travels, or works on-site.
Businesses should regularly assess their operations to determine whether any of these triggers apply in states where they conduct business.
Stay Tuned for More
Understanding where and when nexus is triggered is foundational to sales tax compliance. Failing to recognize a nexus trigger can lead to missed registrations, under-collected tax, and increased audit risk.
Future alerts in the M2K Advisors US Sales Tax Series will focus on:
- Registration and compliance
- Voluntary disclosure agreements
- Tax treatment of software and SaaS
These topics will help businesses better understand how to stay compliant and avoid costly surprises.
To receive updates and access the full series, visit www.m2kadvisors.com.
