Sales Tax Nexus Explained for Online Businesses

What Nexus Actually Means

"Nexus" is the legal term for a connection between your business and a state that's substantial enough for that state to require you to collect and remit its sales tax. It's a separate concept from a sales tax permit: nexus is the condition that triggers the obligation, and the permit is the registration you file with the state's tax agency once nexus exists. You can have nexus in a state you've never set foot in, and you can't get a valid permit in a state where you don't yet have nexus, since the registration follows the connection, not the other way around.

Physical Nexus: The Traditional Trigger

The original, and still simplest, way to create nexus is a physical connection to a state: an office, a retail location, an employee or contractor working there, or inventory stored there, including stock held in a third-party fulfillment center that a marketplace uses to ship your orders. Physical nexus doesn't depend on how much you sell into that state; a single employee working remotely from a state, or a single pallet of inventory sitting in a warehouse there, can create nexus even if your sales into that state are minimal.

Economic Nexus: Nexus From Sales Volume Alone

For decades, physical presence was the only basis for sales tax nexus, under a rule the Supreme Court set in 1967's National Bellas Hess and reaffirmed in 1992's Quill Corp. v. North Dakota. That changed in 2018 with South Dakota v. Wayfair, Inc. South Dakota had passed a law requiring an out-of-state seller with no physical presence in the state to collect its sales tax once the seller exceeded $100,000 in sales into South Dakota, or had 200 or more separate transactions there, in a year. The Supreme Court upheld this standard, ruling that the physical presence rule was an incorrect interpretation of the Commerce Clause and that South Dakota's sales-and-transaction-based standard satisfied the "substantial nexus" the Constitution requires. The decision didn't write one national threshold into law; it approved the concept of economic nexus and left each state free to set its own dollar and transaction criteria.

States Set Their Own Thresholds, and They Aren't All the Same

Since Wayfair, nearly every state that charges sales tax has adopted its own economic nexus threshold, and the specific numbers vary. California's threshold, set by state law (AB 147, amending Revenue and Taxation Code Section 6203), requires an out-of-state retailer to register once its combined sales of tangible personal property delivered into California exceed $500,000 in the preceding or current calendar year, with no separate transaction-count test, according to the California Department of Tax and Fee Administration. Texas sets the same $500,000 figure as a safe harbor: a remote seller with less than $500,000 in total Texas revenue in the preceding twelve months isn't required to register or collect Texas tax, per the Texas Comptroller. That's a meaningfully higher bar than the $100,000 figure in South Dakota's original Wayfair-era law. Because each state legislates its own number, and some states have changed their thresholds or dropped a transaction-count test since first adopting one, check the specific, current threshold directly with the revenue agency in any state where your sales are approaching a meaningful level, rather than assuming one figure applies nationally.

Other Ways Nexus Can Arise

Beyond the two main categories, some states apply narrower nexus theories that online sellers should be aware of:

• Affiliate nexus. Some states treat an in-state affiliate, such as a business that refers customers to you in exchange for a commission, as creating physical presence nexus on your behalf, separate from the economic nexus analysis.
• Click-through nexus. A related theory some states apply to an online referral arrangement, where an in-state website links to your store for a cut of the resulting sales.
• Marketplace facilitator nexus. If you sell exclusively through a marketplace that's registered as a marketplace facilitator in a state, state law may shift the collection duty to the marketplace for those specific sales, which can affect whether you also need your own registration there. See our guide on how to register for sales tax for how marketplace sales interact with your own registration.

These theories are narrower and more state-specific than the main physical and economic nexus categories, so confirm whether they apply to your specific selling arrangement with each state's revenue agency.

How to Actually Determine Where You Have Nexus

Track your sales by state on an ongoing basis, not as a one-time exercise, since economic nexus is based on rolling sales activity and can be crossed well after your business has been operating in a state. For each state where your sales are approaching a meaningful figure, or where you have any physical connection at all, check that state's own department of revenue or tax agency directly for its current threshold and registration process, since this is the only way to get the current, accurate number rather than a figure that may be outdated.

Nexus Can Continue After Your Sales Drop

Once you've registered in a state because you crossed its threshold, some states expect you to continue filing returns there for a defined period even if your sales in a later year drop back below the threshold, rather than treating your obligation as automatically over the moment you dip under the number. If your sales in a state decline significantly or stop, check that state's specific process for formally closing your registration rather than simply ceasing to file.

Don't Wait Until You're Over a Threshold to Start Tracking

Because economic nexus depends on your rolling sales volume, a business that only checks its nexus exposure once a year can discover it crossed a state's threshold months earlier than it realized, creating a gap where tax should have been collected but wasn't. Review your state-by-state sales on a regular schedule, such as monthly or quarterly, especially as your online sales grow.

A Threshold You Read Last Year May Already Be Outdated

Several states have adjusted their economic nexus thresholds, or dropped a transaction-count test, since first adopting one after Wayfair. Confirm the current figure directly with the state's revenue agency before relying on a number from an older article, a competitor's site, or your own memory of a prior year's research.

Nexus for Sales Tax Isn't the Same as Nexus for Other State Obligations

Crossing a state's economic nexus threshold for sales tax doesn't automatically mean you also have nexus for that state's corporate income tax or that you need to foreign-qualify your LLC or corporation there; each of those has its own separate legal standard. Treat a new sales tax registration as a prompt to check your broader multi-state picture, not a complete answer to it.

This Is Not Tax Advice

Whether you have nexus in a specific state, how a marketplace or affiliate relationship affects your own registration duty, and how to handle sales made before you realized you'd crossed a threshold are fact-specific questions. Talk to a tax professional experienced in multistate sales tax if you sell online across more than a handful of states.