Nexus in Plain Terms
Sales tax in the United States is administered state by state, not federally, so the obligation to collect it depends on your relationship with each individual state. That relationship is called nexus. If your business has nexus in a state, you are generally required to register, collect sales tax from customers there, and remit it to that state. If you do not have nexus, you usually have no such duty. Because every state sets its own rules, rates, and thresholds, a business selling across the country can have nexus in several states at once, each with different requirements. Understanding where you have nexus is the first step to staying compliant.
Physical Nexus
The older and more intuitive form is physical nexus, created by having a tangible presence in a state. This includes an office, store, or warehouse, employees or contractors working there, or inventory stored in the state, including inventory held in a fulfillment center on your behalf. Even temporary activity, such as attending a trade show, can create physical nexus in some states. The common thread is a real-world footprint. If your people, property, or stock are in a state, that state generally considers you connected enough to require sales tax collection on taxable sales to its residents.
Economic Nexus
A landmark 2018 Supreme Court decision, South Dakota v. Wayfair, established that states may require sales tax collection based on economic activity alone, without any physical presence. This is economic nexus, typically triggered when your sales into a state exceed a set dollar amount or transaction count over a period. Nearly every state with a sales tax has since adopted economic nexus rules, but the specific thresholds and how they are measured vary by state and change over time. The key point is that selling enough into a state, even purely online from elsewhere, can create a collection obligation there. Always check the current threshold for each state rather than assuming.
Why It Is Easy to Get Wrong
Nexus is one of the most error-prone areas for growing and online businesses precisely because it is fragmented and dynamic. A business can unknowingly cross an economic threshold in a state it has never set foot in, or trigger physical nexus simply because a marketplace stored its inventory in a new warehouse. Thresholds and rules also change, so a position that was correct last year may not be this year. The consequences of getting it wrong, uncollected tax that you may still owe plus penalties, fall on the seller. This is why tracking sales by state and monitoring thresholds matters.
Staying on Top of Nexus
Managing nexus comes down to visibility and monitoring. Track your sales and transaction counts by state so you can see where you are approaching or have crossed a threshold, and stay aware of physical triggers like new inventory locations or remote employees. When you establish nexus in a state, register before you begin collecting, then collect at the correct rate and remit on schedule. Because the rules are detailed and shifting, many businesses use software to monitor thresholds and a tax professional for registration decisions. HelloBooks helps by recording sales with the location detail needed to understand your exposure, while specific nexus determinations are best confirmed with current state rules.