Understanding sales tax nexus: A guide for US businesses

Sales tax nexus highlights whether a business has enough connection with a state that will qualify the business to collect and remit sales tax for its operations in that state. In this booming digital world, businesses may easily qualify for sales tax nexus without even realizing it.

The majority of businesses start by providing their products and services to a small locality. As they grow, their products and services transcend state lines and expand to other states across the country. For businesses operating across multiple states in the US, managing sales tax can get complicated. One of the main concepts business owners operating across states need to understand is sales tax nexus.

This article will outline what sales tax nexus is, the different types of sales tax nexus, a few examples of how they work, and tips on how businesses can manage their sales tax obligations.

What is sales tax nexus?

Sales tax nexus or simply nexus tax refers to the connection between a business and a state that creates a sales tax obligation for the business.

There are three things a business must do when it has established nexus in a state:

1. Register for a sales tax permit.

2. Collect sales tax for all sales that happen in that state.

3. File and remit sales tax to the respective tax authority.

Until 2018, businesses were required to collect sales tax only in states where they had a physical presence. However, this changed after the historic Supreme Court judgment in South Dakota vs. Wayfair Inc., that allowed states to invoke sales tax obligations based on a business' economic activity rather than physical presence.

Why is sales tax nexus important?

Understanding sales tax nexus is important for all business owners, especially for those that get their revenue from multiple states. There are several consequences a business may face for not paying sales tax to a state where it has established nexus. Some of them are:

• Back taxes and interest charges

• Late payment penalty fees

• Legal action and asset seizure

• Reputational damage

• Audits & compliance risks

As businesses scale and expand geographically, having a thorough understanding of sales tax nexus becomes key for maintaining compliance.

Type of sales tax nexus

There are different types of sales tax nexus based on a business' location and economic activity. Here are the most common types of sales tax nexus.

Physical nexus

Physical nexus happens when a business has any form of presence in a state. It is not only limited to having an office or store in a state, but also applies if a business has a warehouse and inventory stored within that state or if there are employees or contractors working in the state.

For example,  a business is operating out of Connecticut and sells its products online. They have a storage location in New York for their inventory. This establishes a physical nexus as they are storing goods in New York, so the business has to collect sales tax from New York customers.

Economic nexus

Economic nexus is based on the volume or value of transactions that a business does in a state. In most states, economic nexus threshold triggers are either 200 transactions or $100,000 worth of sales per year.

For example, an online electronics store records $125,000 worth of sales from customers in Florida. This exceeds Florida's nexus threshold so the online electronics store must register to collect and remit tax in that state.

If you are looking for the economic threshold for a specific state, check here.

Affiliate nexus

Affiliate nexus occurs when a business works with partners, affiliates, employees, contractors, or subsidiaries in a given state to drive sales. Different states have different triggers for affiliate nexus and few states don't have affiliate nexus in practice yet.

Click-through nexus

Click-through nexus, as the name suggests is based on online sales activity that happen in a state. It happens when an out-of-state business generates sales through online activities from in-state websites and pays a form of commission or incentive for the business generated. Similar to affiliate nexus, the rules for click-through nexus differs from state to state.

For example, an organic store in New Jersey runs its business in Colorado through a group of influencers who promote the store's products online and earns a commission for each sale. In such a scenario, click-through nexus is established and the organic store is liable to collect and pay sales tax in Colorado.

How businesses can determine their nexus

Nexus tax rules differ from state to state. Any business that gets its revenue from multiple states must carefully review their activities in those states to determine whether nexus exists or not.

Some of the key points that a business should note are:

• Analyzing state-wise breakup of revenue generated in the last 12 months.

• Tracking volume of transactions from each state.

• Reviewing methods of generating sales in each state.

• Reviewing inventory and storage locations in each state.

• Developing a key understanding of sales tax nexus rules.

• Registering for sales tax permits as and when nexus is triggered.

How Zoho Books helps businesses manage sales tax

As a business grows and expands into new territories, keeping an eye on sales tax nexus is essential. It is not uncommon to miscalculate or incorrectly report sales activities.  Using accounting software can help businesses stay organized by giving them a platform to maintain accurate records of all their activities.

Solutions like Zoho Books enable businesses with features that help them manage their sales tax obligations efficiently. With Zoho Books, businesses can:

• Configure state-wise sales tax rates.

• Automatically apply correct taxes to invoices.

• Track sales by state to assess nexus thresholds using reporting tags.

• Generate tax reports for easier filing.

• Handle tax exemptions as and where applicable.

• Maintain organized records of all financial transactions.

  By automating tax calculations and reporting, Zoho Books helps businesses reduce manual effort and stay compliant with evolving US sales tax regulations.

Frequently asked questions about sales tax nexus

How is sales tax nexus determined?

There are multiple triggers for sales tax nexus with the most common one being physical presence in a state. Other triggers are crossing transaction threshold limits, generated sales through affiliates and partners, and having storage locations in a state.

Which states have sales tax nexus in the US?

All states in the US that have statewide sales tax have sales tax nexus.

Do online businesses need to worry about sales tax nexus?

Sales tax nexus is no longer about physical presence alone. Many states require online businesses that cross certain thresholds to collect and remit sales tax.

What are the economic nexus threshold limits?

The most common economic nexus threshold limit is $100,000 in sales or 200 transactions. Some states have limits up to $500,000 in sales and 100 transactions as the volume limit.

How can businesses track sales tax nexus across states? 

Businesses can monitor their sales activity by state, track transaction volumes, and use accounting software to identify when they approach nexus thresholds.

Is sales tax nexus permanent?

No, sales tax nexus exists only when businesses meet a state's physical or economic threshold limit. However, many states enforce a trailing nexus rule that determines how long a business needs to be registered for sales tax.