Nexus may sound like something straight out of your favorite sci-fi show, but here in the real world, nexus rules are a critical concept that leaders at expanding startups and growing businesses need to understand.
The trouble is, most resources related to physical and economic nexus are so full of jargon and technical language that busy business leaders could find themselves unsure of where exactly their business stands and what their obligations are.
Here’s everything businesses like yours need to know about physical nexus, economic nexus, and your responsibilities and obligations.
In the context of U.S. tax compliance, the term “nexus” describes a business’s relationship with an individual U.S. state. If a business has enough of a connection or presence — described as nexus — then that business must pay sales taxes to that state.
Technically, nexus is relevant for both sales tax and use tax. However, growing businesses that sell physical products should be concerned about the sales tax component. Sales tax collection on retail and ecommerce transactions is the most common scenario where nexus comes up — and where businesses get tripped up.
In fact, nexus is so closely tied to sales tax that many states refer to nexus as “sales tax nexus.” This can create confusion, though: states use “sales tax nexus” to refer to both physical and economic nexus interchangeably, giving businesses a harder time sorting out the difference between the two.
All nexus used to be physical in nature: if you operate in a state, you pay state sales tax for transactions that occur within that state. But the rise of ecommerce led to the “Amazon effect,” where e-retailers avoided sales taxes in a way that brick-and-mortar retailers described as creating an unfair advantage.
This changed in 2018, thanks to the decision in South Dakota v. Wayfair, Inc., where the U.S. Supreme Court expanded nexus to have an economic sense, not just a physical one.
Physical nexus is having a physical presence within a state. States create a connection (nexus) with a business, allowing the business to operate and the state to collect sales and use taxes.
Any obvious physical presence, like a retail store, office, or warehouse, triggers physical nexus. Other specific triggers vary from state to state. These are a few more scenarios that may trigger physical nexus:
It’s important to understand that the triggers we’ve listed aren’t exhaustive, and they don’t always work identically in states that share a similar trigger.
Whatever a state’s specific triggers, when a business triggers physical nexus in a state, it must collect and remit state sales tax in that state. Other state-specific tax liabilities, such as franchise taxes or business entity taxes, may also apply.
Note for startups: Incorporating in a state establishes a legal presence in that state, which can be enough to create physical nexus in that state, even when other more obvious triggers don’t apply. That’s because incorporation typically requires designating a registered agent in the state, which establishes an official physical presence (and nexus as a result).
Physical nexus can take many forms, including these:
Thanks to scenarios like these and the wide variance between state thresholds and regulations, physical nexus compliance can be trickier than it seems. Here are a few common sticking points:
Economic nexus is a relatively new doctrine that applies to businesses that exceed certain sales or revenue thresholds in a state within a calendar year or 12-month period, regardless of physical presence or physical nexus.
Economic nexus came about as one result of South Dakota v. Wayfair, where large online businesses (like Amazon or Wayfair, Inc., the furniture retailer named in the case) were seen as dodging state sales tax and gaining an unfair price advantage over physical retailers, which had to collect and remit sales tax.
This argument makes a lot of practical sense: if you can buy a couch for $600 online or $600 plus $48 in sales tax at Couches R Us in your city, you’ll probably choose to save that $48. Lots of consumers made similar choices, threatening both brick-and-mortar retailers and a critical revenue stream for U.S. states.
Economic and physical nexus are different, and the newer one (economic) didn’t replace the older (physical). Instead, both exist concurrently.
Note for startups: Incorporating a startup does not directly create economic nexus, which is based on state-specific transaction or revenue thresholds. As your business expands, you may eventually trigger economic nexus by meeting sales thresholds in other states. For example, a startup incorporated in Delaware that has no physical nexus in Texas will create economic nexus compliance obligations there if it reaches $500,000 in annual sales of products or services in the state.
On the surface, examples in this category are more straightforward: cross a threshold, and you’ve created economic nexus.
Thresholds vary by state (here’s a comprehensive list). The most common threshold is $100,000 in sales. Among states that include a threshold based on number of transactions, 200 is the most common.
Managing economic nexus can be a challenge as well:
Income tax nexus is far less commonly discussed, yet it’s important for startups and growing businesses. Both types of nexus can be triggered by physical or economic factors, and it’s important to understand the difference.
Both physical nexus (like a location, warehouse, or office) and economic nexus (like passing a sales or transaction threshold) can trigger obligations under both income tax rules and sales tax rules. To be totally compliant, businesses may need to adhere to additional requirements in some states around income taxes.
One challenge when discussing nexus is the amount of jargon you’ll often encounter: this is a technical topic dealing with tax and finance along with specific legal language and jurisprudence.
So before we go any further, let’s pause and define a few terms.
A sales threshold is either a dollar amount (e.g., $100,000 in retail, taxable, or gross sales) or a number of sales (e.g., 200 unique transactions) that triggers economic nexus. Crossing the threshold ($100,000 of qualifying sales or 200 unique transactions) means that your business is now obligated to collect and remit sales tax in the relevant state.
Tangible personal property (TPP) refers to objects that exist in the real world (they are tangible, meaning you can touch or hold them) and that can either be used or consumed. States have varying definitions for this term (ours was taken from the state of Illinois). TPP is in contrast to real property (like land or real estate) and paper assets (stocks).
Many states include TPP in their definition of economic nexus, and certain uses of TPP may be exempt from nexus calculations. For example, reselling TPP qualifies in some states but is exempt in others.
A remote seller sells to customers in states where the seller has no physical presence. A company with no land, employees, or inventory in New Mexico can still sell its products to New Mexico individuals and businesses. That company would be considered a remote seller.
Remote sellers don’t have physical nexus, but they may have obligations under economic nexus if they cross a state’s thresholds (in New Mexico’s case that’s $100,000 in taxable sales).
Marketplace facilitator law covers what digital marketplaces (places like Amazon Marketplace or Etsy) must do regarding sales tax for products sold on their marketplaces. In some situations, the marketplace must collect and remit sales taxes, not the individual sellers on those marketplaces.
In many states, marketplace facilitators must cross similar thresholds to those under economic nexus. Businesses that sell both on marketplaces and outside of them should take special care to understand state regulations on which transactions must be included in nexus calculations.
Many states exempt certain types of items, services, or transactions from their state’s threshold calculations. For example:
The two types of nexus likely both affect expanding and growing startups, especially as sales rise into the six figures annually within individual states. It’s important to remember that physical and economic nexus are not identical, and your business is obligated to comply with either type where applicable. You may achieve one type without the other in a state.
These are a few of the key differences between the two.
Triggers
Complexity
Audit/compliance risk
Yes, it’s possible — likely, even — for a growing business to fall under both physical and economic nexus in differing states. One example is a retailer with a warehouse in Oregon that exceeds a sales threshold in Wyoming. The warehouse triggers physical nexus in Oregon, and the sales threshold triggers economic nexus in Wyoming.
If a business falls under both physical and economic nexus laws in the same state, then it must collect state sales tax in that state. Guidelines on how to do so should align, but check with relevant state offices to resolve any apparent discrepancies.
Nexus isn’t the easiest element to understand (much less track). If your business is approaching nexus for the first time, it’s tempting to brush this topic aside or push it out another year.
But failing to understand (and act on) nexus creates big risks for your business. Here are three reasons why it pays to stay informed and compliant.
Businesses that fail to comply with nexus obligations may incur financial consequences. If a state determines that you fall under a sales tax nexus, you may be required to repay back taxes — with interest.
Other penalties are possible, especially for repeat or seemingly willful compliance violations. These can add up and seriously cut into margins, something most growing businesses can’t easily handle.
While there’s no public formula for who gets audited and when, certain triggers do seem to influence which entities get targeted. Where state regulators see signs of significant sales volume and no sales tax remitted, audits seem to follow.
Whether willful or accidental, tax errors can damage a business’s reputation. Customers may see a business that gets caught up in a sales tax compliance issue as less competent, trustworthy, or reliable.
Determining nexus obligations can be difficult as a business grows, especially if your business is expanding physically or starting to reach six-figure sales at the state level.
Part of the challenge, of course, is knowing whether and where the latter is happening!
Follow these five actionable steps to help determine your business’s nexus obligations so you can stay compliant, avoid fines, and keep growing in healthy ways.
The first step in determining nexus obligations is getting a clear sense of what your business looks like, both in physical and economic terms. We’ll start with the elements tied to physical nexus.
Start by reviewing any physical locations tied to your business. This inventory of your physical or geographical footprint should include at least these:
Keep in mind that the last bullet likely includes remote employees working in a state where you otherwise have no physical presence.
Internal audits and inventory tracking systems are good options to identify and track where you have a physical presence.
Next, for economic nexus you’ll need to track sales by state. Any state that has a threshold based on revenue, transaction volume, or both must be tracked accordingly.
This isn’t easy to do manually: we’re talking about hundreds of thousands in revenue in up to 50 states with differing calculations, exceptions, and reporting mechanisms. Software tools can help businesses track sales against state-specific thresholds in real time. For most businesses, these tools are well worth the investment once the business reaches this scale.
(Speaking of software tools: Check out our top software and SaaS tools for startups!)
Bear in mind that any sales tracking you do must account for all applicable sales channels. These include online sales on your website, on online marketplaces, direct sales, and brick-and-mortar retail sales, among others. Missing a channel could mean overlooking a nexus threshold and falling out of compliance.
Next up is learning about how various states handle nexus laws. These do vary widely from state to state, and each business is responsible for understanding the criteria for states where they operate or sell.
Start with the states where you’re likely coming up against thresholds: when you’re close to the magic number, it matters whether certain types of transactions qualify for nexus calculations or are excluded.
As you research individual states, go back to step 2 and refine your sales tracking approach for that state (for example, including or excluding TPP resale and marketplace sales).
There’s a lot to learn here, and you’ll find numerous resources available online. But states are still changing their thresholds with some frequency, so even a formerly accurate resource could be out of date. It’s a good idea to stick to reliable, official resources (such as the website for a state’s tax authority).
Key areas to pay attention to during this step:
Navigating nexus compliance is complex. For many startups and businesses in a growth phase, handling nexus issues internally without any outside help is at best an unnecessary resource burden. More likely, it’s an unnecessary risk.
Instead, consider consulting a tax professional or firm that specializes in helping businesses navigate nexus issues. Someone who focuses on businesses around your size and growth trajectory can provide valuable tailored guidance. If you’re already operating in multiple taxing jurisdictions (or expect to do so in the near future), look for a tax professional who has expertise in multi-state compliance.
Working with tax professionals is a smart way to better understand and evaluate your business’s nexus obligations. Tax pros can also help you file accurately and identify risks related to nexus compliance.
The best part? Your business stays compliant without losing unnecessary focus or resources to nexus concerns, allowing you to keep the focus where it ought to be: on growth.
We talked about implementing software back in step 2, but software tools can do more than just track sales. The right tools can also simplify nexus compliance by automating tax calculations and filing processes alongside sales tracking.
Compliance tools can greatly reduce the work involved here. They can evaluate your status continually, identifying your obligations and showing you where you may be out of compliance (or approaching non-compliance).
Features to look for:
One more tip: Make sure the tools you’re using can communicate with each other. Look for a compliance tool that integrates well with existing systems and software tools like your ecommerce platform or the accounting software you’re already invested in.
Adapting your business practices to handle expanding nexus obligations can be a challenge, but getting it right from the outset can greatly reduce the difficulty.
Follow these tips to simplify your nexus compliance efforts.
First: adopt automation tools that can track your sales data automatically across all states where your business operates. This is something we’ve already hinted at, because we can’t overemphasize its importance. Tracking this data manually is time-consuming and error-prone, whereas automated systems never forget or make mathematical or transcription errors.
Using automation here reduces the risk of human error creeping in. It also helps you avoid overlooking key nexus thresholds.
The more sales channels you have, the more valuable automation becomes. For example, many businesses operate physical stores and sell via ecommerce, including through multiple marketplaces. It’s just far too easy to miss a channel or some overlapping piece of information that could trigger nexus. Automation greatly reduces the likelihood of this happening.
State laws surrounding economic nexus standards have been in flux ever since economic nexus became a thing in 2018. Some states rushed to get legislation on the books, only to refine their guidelines based on feedback, backlash, or workability. Other states took a slower, more cautious approach, and some states still don’t have any nexus guidance — though they might adopt some in the coming years.
So it’s a good idea to regularly check for updates to state-specific nexus laws because a change to those laws could mean a change to your nexus compliance obligations.
The most important elements are new thresholds or filing requirements. Watch for these when new legislation passes. Also, some states have set up a graduated system where reporting requirements change incrementally over several years. Make sure your compliance system has this information and updates accordingly.
Many state tax authorities offer newsletters or alert systems to keep businesses and individuals up to date on these sorts of changes. Look for these and sign up where you can.
Even with automations in place, it’s a good idea to build time into your calendar to conduct compliance reviews. Periodic reviews of your business’s nexus obligations, especially after operational changes, can help you avoid tax and reporting liabilities
Building a compliance review cadence (quarterly, yearly, etc.) is one option. Another is building in triggers for reviews based on actions that could change your nexus obligations, such as these:
Last, this is an area where many growing businesses should consider bringing in outside help.
Nexus just has too much complexity and too many exceptions and loopholes for most businesses to navigate this area efficiently. Tax experts with experience in multi-state compliance can provide insights and oversight in areas that businesses frequently overlook, like exemptions or rules specific to certain industries.
Additionally, businesses that are establishing a physical presence or registering to do business in multiple states often need a registered agent to receive legal documents, tax notices, and compliance correspondence. This is another area where working with experts (like the team at Stable) is better than going it alone.
For expanding startups and other businesses on a growth trajectory, complying with nexus rules is both necessary and difficult. Businesses must understand their physical presence and their sales data to avoid penalties, audits, and other risks. But properly calculating sales by state (including exceptions, industry-specific rules, and types of sales included) is a real challenge — at least without the right tools.
By adopting the right tools and resources, you can get ahead of nexus compliance, reducing the resource burden and risk that physical and economic nexus compliance create.
Stable helps businesses comply with state regulations through its registered agent services. We help startups and growing businesses maintain an official presence for receiving and managing tax-related communications, which can be key to complying with nexus requirements.
Explore Stable today and start simplifying your nexus compliance. Get started now.
Nexus may sound like something straight out of your favorite sci-fi show, but here in the real world, nexus rules are a critical concept that leaders at expanding startups and growing businesses need to understand.
The trouble is, most resources related to physical and economic nexus are so full of jargon and technical language that busy business leaders could find themselves unsure of where exactly their business stands and what their obligations are.
Here’s everything businesses like yours need to know about physical nexus, economic nexus, and your responsibilities and obligations.
In the context of U.S. tax compliance, the term “nexus” describes a business’s relationship with an individual U.S. state. If a business has enough of a connection or presence — described as nexus — then that business must pay sales taxes to that state.
Technically, nexus is relevant for both sales tax and use tax. However, growing businesses that sell physical products should be concerned about the sales tax component. Sales tax collection on retail and ecommerce transactions is the most common scenario where nexus comes up — and where businesses get tripped up.
In fact, nexus is so closely tied to sales tax that many states refer to nexus as “sales tax nexus.” This can create confusion, though: states use “sales tax nexus” to refer to both physical and economic nexus interchangeably, giving businesses a harder time sorting out the difference between the two.
All nexus used to be physical in nature: if you operate in a state, you pay state sales tax for transactions that occur within that state. But the rise of ecommerce led to the “Amazon effect,” where e-retailers avoided sales taxes in a way that brick-and-mortar retailers described as creating an unfair advantage.
This changed in 2018, thanks to the decision in South Dakota v. Wayfair, Inc., where the U.S. Supreme Court expanded nexus to have an economic sense, not just a physical one.
Physical nexus is having a physical presence within a state. States create a connection (nexus) with a business, allowing the business to operate and the state to collect sales and use taxes.
Any obvious physical presence, like a retail store, office, or warehouse, triggers physical nexus. Other specific triggers vary from state to state. These are a few more scenarios that may trigger physical nexus:
It’s important to understand that the triggers we’ve listed aren’t exhaustive, and they don’t always work identically in states that share a similar trigger.
Whatever a state’s specific triggers, when a business triggers physical nexus in a state, it must collect and remit state sales tax in that state. Other state-specific tax liabilities, such as franchise taxes or business entity taxes, may also apply.
Note for startups: Incorporating in a state establishes a legal presence in that state, which can be enough to create physical nexus in that state, even when other more obvious triggers don’t apply. That’s because incorporation typically requires designating a registered agent in the state, which establishes an official physical presence (and nexus as a result).
Physical nexus can take many forms, including these:
Thanks to scenarios like these and the wide variance between state thresholds and regulations, physical nexus compliance can be trickier than it seems. Here are a few common sticking points:
Economic nexus is a relatively new doctrine that applies to businesses that exceed certain sales or revenue thresholds in a state within a calendar year or 12-month period, regardless of physical presence or physical nexus.
Economic nexus came about as one result of South Dakota v. Wayfair, where large online businesses (like Amazon or Wayfair, Inc., the furniture retailer named in the case) were seen as dodging state sales tax and gaining an unfair price advantage over physical retailers, which had to collect and remit sales tax.
This argument makes a lot of practical sense: if you can buy a couch for $600 online or $600 plus $48 in sales tax at Couches R Us in your city, you’ll probably choose to save that $48. Lots of consumers made similar choices, threatening both brick-and-mortar retailers and a critical revenue stream for U.S. states.
Economic and physical nexus are different, and the newer one (economic) didn’t replace the older (physical). Instead, both exist concurrently.
Note for startups: Incorporating a startup does not directly create economic nexus, which is based on state-specific transaction or revenue thresholds. As your business expands, you may eventually trigger economic nexus by meeting sales thresholds in other states. For example, a startup incorporated in Delaware that has no physical nexus in Texas will create economic nexus compliance obligations there if it reaches $500,000 in annual sales of products or services in the state.
On the surface, examples in this category are more straightforward: cross a threshold, and you’ve created economic nexus.
Thresholds vary by state (here’s a comprehensive list). The most common threshold is $100,000 in sales. Among states that include a threshold based on number of transactions, 200 is the most common.
Managing economic nexus can be a challenge as well:
Income tax nexus is far less commonly discussed, yet it’s important for startups and growing businesses. Both types of nexus can be triggered by physical or economic factors, and it’s important to understand the difference.
Both physical nexus (like a location, warehouse, or office) and economic nexus (like passing a sales or transaction threshold) can trigger obligations under both income tax rules and sales tax rules. To be totally compliant, businesses may need to adhere to additional requirements in some states around income taxes.
One challenge when discussing nexus is the amount of jargon you’ll often encounter: this is a technical topic dealing with tax and finance along with specific legal language and jurisprudence.
So before we go any further, let’s pause and define a few terms.
A sales threshold is either a dollar amount (e.g., $100,000 in retail, taxable, or gross sales) or a number of sales (e.g., 200 unique transactions) that triggers economic nexus. Crossing the threshold ($100,000 of qualifying sales or 200 unique transactions) means that your business is now obligated to collect and remit sales tax in the relevant state.
Tangible personal property (TPP) refers to objects that exist in the real world (they are tangible, meaning you can touch or hold them) and that can either be used or consumed. States have varying definitions for this term (ours was taken from the state of Illinois). TPP is in contrast to real property (like land or real estate) and paper assets (stocks).
Many states include TPP in their definition of economic nexus, and certain uses of TPP may be exempt from nexus calculations. For example, reselling TPP qualifies in some states but is exempt in others.
A remote seller sells to customers in states where the seller has no physical presence. A company with no land, employees, or inventory in New Mexico can still sell its products to New Mexico individuals and businesses. That company would be considered a remote seller.
Remote sellers don’t have physical nexus, but they may have obligations under economic nexus if they cross a state’s thresholds (in New Mexico’s case that’s $100,000 in taxable sales).
Marketplace facilitator law covers what digital marketplaces (places like Amazon Marketplace or Etsy) must do regarding sales tax for products sold on their marketplaces. In some situations, the marketplace must collect and remit sales taxes, not the individual sellers on those marketplaces.
In many states, marketplace facilitators must cross similar thresholds to those under economic nexus. Businesses that sell both on marketplaces and outside of them should take special care to understand state regulations on which transactions must be included in nexus calculations.
Many states exempt certain types of items, services, or transactions from their state’s threshold calculations. For example:
The two types of nexus likely both affect expanding and growing startups, especially as sales rise into the six figures annually within individual states. It’s important to remember that physical and economic nexus are not identical, and your business is obligated to comply with either type where applicable. You may achieve one type without the other in a state.
These are a few of the key differences between the two.
Triggers
Complexity
Audit/compliance risk
Yes, it’s possible — likely, even — for a growing business to fall under both physical and economic nexus in differing states. One example is a retailer with a warehouse in Oregon that exceeds a sales threshold in Wyoming. The warehouse triggers physical nexus in Oregon, and the sales threshold triggers economic nexus in Wyoming.
If a business falls under both physical and economic nexus laws in the same state, then it must collect state sales tax in that state. Guidelines on how to do so should align, but check with relevant state offices to resolve any apparent discrepancies.
Nexus isn’t the easiest element to understand (much less track). If your business is approaching nexus for the first time, it’s tempting to brush this topic aside or push it out another year.
But failing to understand (and act on) nexus creates big risks for your business. Here are three reasons why it pays to stay informed and compliant.
Businesses that fail to comply with nexus obligations may incur financial consequences. If a state determines that you fall under a sales tax nexus, you may be required to repay back taxes — with interest.
Other penalties are possible, especially for repeat or seemingly willful compliance violations. These can add up and seriously cut into margins, something most growing businesses can’t easily handle.
While there’s no public formula for who gets audited and when, certain triggers do seem to influence which entities get targeted. Where state regulators see signs of significant sales volume and no sales tax remitted, audits seem to follow.
Whether willful or accidental, tax errors can damage a business’s reputation. Customers may see a business that gets caught up in a sales tax compliance issue as less competent, trustworthy, or reliable.
Determining nexus obligations can be difficult as a business grows, especially if your business is expanding physically or starting to reach six-figure sales at the state level.
Part of the challenge, of course, is knowing whether and where the latter is happening!
Follow these five actionable steps to help determine your business’s nexus obligations so you can stay compliant, avoid fines, and keep growing in healthy ways.
The first step in determining nexus obligations is getting a clear sense of what your business looks like, both in physical and economic terms. We’ll start with the elements tied to physical nexus.
Start by reviewing any physical locations tied to your business. This inventory of your physical or geographical footprint should include at least these:
Keep in mind that the last bullet likely includes remote employees working in a state where you otherwise have no physical presence.
Internal audits and inventory tracking systems are good options to identify and track where you have a physical presence.
Next, for economic nexus you’ll need to track sales by state. Any state that has a threshold based on revenue, transaction volume, or both must be tracked accordingly.
This isn’t easy to do manually: we’re talking about hundreds of thousands in revenue in up to 50 states with differing calculations, exceptions, and reporting mechanisms. Software tools can help businesses track sales against state-specific thresholds in real time. For most businesses, these tools are well worth the investment once the business reaches this scale.
(Speaking of software tools: Check out our top software and SaaS tools for startups!)
Bear in mind that any sales tracking you do must account for all applicable sales channels. These include online sales on your website, on online marketplaces, direct sales, and brick-and-mortar retail sales, among others. Missing a channel could mean overlooking a nexus threshold and falling out of compliance.
Next up is learning about how various states handle nexus laws. These do vary widely from state to state, and each business is responsible for understanding the criteria for states where they operate or sell.
Start with the states where you’re likely coming up against thresholds: when you’re close to the magic number, it matters whether certain types of transactions qualify for nexus calculations or are excluded.
As you research individual states, go back to step 2 and refine your sales tracking approach for that state (for example, including or excluding TPP resale and marketplace sales).
There’s a lot to learn here, and you’ll find numerous resources available online. But states are still changing their thresholds with some frequency, so even a formerly accurate resource could be out of date. It’s a good idea to stick to reliable, official resources (such as the website for a state’s tax authority).
Key areas to pay attention to during this step:
Navigating nexus compliance is complex. For many startups and businesses in a growth phase, handling nexus issues internally without any outside help is at best an unnecessary resource burden. More likely, it’s an unnecessary risk.
Instead, consider consulting a tax professional or firm that specializes in helping businesses navigate nexus issues. Someone who focuses on businesses around your size and growth trajectory can provide valuable tailored guidance. If you’re already operating in multiple taxing jurisdictions (or expect to do so in the near future), look for a tax professional who has expertise in multi-state compliance.
Working with tax professionals is a smart way to better understand and evaluate your business’s nexus obligations. Tax pros can also help you file accurately and identify risks related to nexus compliance.
The best part? Your business stays compliant without losing unnecessary focus or resources to nexus concerns, allowing you to keep the focus where it ought to be: on growth.
We talked about implementing software back in step 2, but software tools can do more than just track sales. The right tools can also simplify nexus compliance by automating tax calculations and filing processes alongside sales tracking.
Compliance tools can greatly reduce the work involved here. They can evaluate your status continually, identifying your obligations and showing you where you may be out of compliance (or approaching non-compliance).
Features to look for:
One more tip: Make sure the tools you’re using can communicate with each other. Look for a compliance tool that integrates well with existing systems and software tools like your ecommerce platform or the accounting software you’re already invested in.
Adapting your business practices to handle expanding nexus obligations can be a challenge, but getting it right from the outset can greatly reduce the difficulty.
Follow these tips to simplify your nexus compliance efforts.
First: adopt automation tools that can track your sales data automatically across all states where your business operates. This is something we’ve already hinted at, because we can’t overemphasize its importance. Tracking this data manually is time-consuming and error-prone, whereas automated systems never forget or make mathematical or transcription errors.
Using automation here reduces the risk of human error creeping in. It also helps you avoid overlooking key nexus thresholds.
The more sales channels you have, the more valuable automation becomes. For example, many businesses operate physical stores and sell via ecommerce, including through multiple marketplaces. It’s just far too easy to miss a channel or some overlapping piece of information that could trigger nexus. Automation greatly reduces the likelihood of this happening.
State laws surrounding economic nexus standards have been in flux ever since economic nexus became a thing in 2018. Some states rushed to get legislation on the books, only to refine their guidelines based on feedback, backlash, or workability. Other states took a slower, more cautious approach, and some states still don’t have any nexus guidance — though they might adopt some in the coming years.
So it’s a good idea to regularly check for updates to state-specific nexus laws because a change to those laws could mean a change to your nexus compliance obligations.
The most important elements are new thresholds or filing requirements. Watch for these when new legislation passes. Also, some states have set up a graduated system where reporting requirements change incrementally over several years. Make sure your compliance system has this information and updates accordingly.
Many state tax authorities offer newsletters or alert systems to keep businesses and individuals up to date on these sorts of changes. Look for these and sign up where you can.
Even with automations in place, it’s a good idea to build time into your calendar to conduct compliance reviews. Periodic reviews of your business’s nexus obligations, especially after operational changes, can help you avoid tax and reporting liabilities
Building a compliance review cadence (quarterly, yearly, etc.) is one option. Another is building in triggers for reviews based on actions that could change your nexus obligations, such as these:
Last, this is an area where many growing businesses should consider bringing in outside help.
Nexus just has too much complexity and too many exceptions and loopholes for most businesses to navigate this area efficiently. Tax experts with experience in multi-state compliance can provide insights and oversight in areas that businesses frequently overlook, like exemptions or rules specific to certain industries.
Additionally, businesses that are establishing a physical presence or registering to do business in multiple states often need a registered agent to receive legal documents, tax notices, and compliance correspondence. This is another area where working with experts (like the team at Stable) is better than going it alone.
For expanding startups and other businesses on a growth trajectory, complying with nexus rules is both necessary and difficult. Businesses must understand their physical presence and their sales data to avoid penalties, audits, and other risks. But properly calculating sales by state (including exceptions, industry-specific rules, and types of sales included) is a real challenge — at least without the right tools.
By adopting the right tools and resources, you can get ahead of nexus compliance, reducing the resource burden and risk that physical and economic nexus compliance create.
Stable helps businesses comply with state regulations through its registered agent services. We help startups and growing businesses maintain an official presence for receiving and managing tax-related communications, which can be key to complying with nexus requirements.
Explore Stable today and start simplifying your nexus compliance. Get started now.
Nexus may sound like something straight out of your favorite sci-fi show, but here in the real world, nexus rules are a critical concept that leaders at expanding startups and growing businesses need to understand.
The trouble is, most resources related to physical and economic nexus are so full of jargon and technical language that busy business leaders could find themselves unsure of where exactly their business stands and what their obligations are.
Here’s everything businesses like yours need to know about physical nexus, economic nexus, and your responsibilities and obligations.
In the context of U.S. tax compliance, the term “nexus” describes a business’s relationship with an individual U.S. state. If a business has enough of a connection or presence — described as nexus — then that business must pay sales taxes to that state.
Technically, nexus is relevant for both sales tax and use tax. However, growing businesses that sell physical products should be concerned about the sales tax component. Sales tax collection on retail and ecommerce transactions is the most common scenario where nexus comes up — and where businesses get tripped up.
In fact, nexus is so closely tied to sales tax that many states refer to nexus as “sales tax nexus.” This can create confusion, though: states use “sales tax nexus” to refer to both physical and economic nexus interchangeably, giving businesses a harder time sorting out the difference between the two.
All nexus used to be physical in nature: if you operate in a state, you pay state sales tax for transactions that occur within that state. But the rise of ecommerce led to the “Amazon effect,” where e-retailers avoided sales taxes in a way that brick-and-mortar retailers described as creating an unfair advantage.
This changed in 2018, thanks to the decision in South Dakota v. Wayfair, Inc., where the U.S. Supreme Court expanded nexus to have an economic sense, not just a physical one.
Physical nexus is having a physical presence within a state. States create a connection (nexus) with a business, allowing the business to operate and the state to collect sales and use taxes.
Any obvious physical presence, like a retail store, office, or warehouse, triggers physical nexus. Other specific triggers vary from state to state. These are a few more scenarios that may trigger physical nexus:
It’s important to understand that the triggers we’ve listed aren’t exhaustive, and they don’t always work identically in states that share a similar trigger.
Whatever a state’s specific triggers, when a business triggers physical nexus in a state, it must collect and remit state sales tax in that state. Other state-specific tax liabilities, such as franchise taxes or business entity taxes, may also apply.
Note for startups: Incorporating in a state establishes a legal presence in that state, which can be enough to create physical nexus in that state, even when other more obvious triggers don’t apply. That’s because incorporation typically requires designating a registered agent in the state, which establishes an official physical presence (and nexus as a result).
Physical nexus can take many forms, including these:
Thanks to scenarios like these and the wide variance between state thresholds and regulations, physical nexus compliance can be trickier than it seems. Here are a few common sticking points:
Economic nexus is a relatively new doctrine that applies to businesses that exceed certain sales or revenue thresholds in a state within a calendar year or 12-month period, regardless of physical presence or physical nexus.
Economic nexus came about as one result of South Dakota v. Wayfair, where large online businesses (like Amazon or Wayfair, Inc., the furniture retailer named in the case) were seen as dodging state sales tax and gaining an unfair price advantage over physical retailers, which had to collect and remit sales tax.
This argument makes a lot of practical sense: if you can buy a couch for $600 online or $600 plus $48 in sales tax at Couches R Us in your city, you’ll probably choose to save that $48. Lots of consumers made similar choices, threatening both brick-and-mortar retailers and a critical revenue stream for U.S. states.
Economic and physical nexus are different, and the newer one (economic) didn’t replace the older (physical). Instead, both exist concurrently.
Note for startups: Incorporating a startup does not directly create economic nexus, which is based on state-specific transaction or revenue thresholds. As your business expands, you may eventually trigger economic nexus by meeting sales thresholds in other states. For example, a startup incorporated in Delaware that has no physical nexus in Texas will create economic nexus compliance obligations there if it reaches $500,000 in annual sales of products or services in the state.
On the surface, examples in this category are more straightforward: cross a threshold, and you’ve created economic nexus.
Thresholds vary by state (here’s a comprehensive list). The most common threshold is $100,000 in sales. Among states that include a threshold based on number of transactions, 200 is the most common.
Managing economic nexus can be a challenge as well:
Income tax nexus is far less commonly discussed, yet it’s important for startups and growing businesses. Both types of nexus can be triggered by physical or economic factors, and it’s important to understand the difference.
Both physical nexus (like a location, warehouse, or office) and economic nexus (like passing a sales or transaction threshold) can trigger obligations under both income tax rules and sales tax rules. To be totally compliant, businesses may need to adhere to additional requirements in some states around income taxes.
One challenge when discussing nexus is the amount of jargon you’ll often encounter: this is a technical topic dealing with tax and finance along with specific legal language and jurisprudence.
So before we go any further, let’s pause and define a few terms.
A sales threshold is either a dollar amount (e.g., $100,000 in retail, taxable, or gross sales) or a number of sales (e.g., 200 unique transactions) that triggers economic nexus. Crossing the threshold ($100,000 of qualifying sales or 200 unique transactions) means that your business is now obligated to collect and remit sales tax in the relevant state.
Tangible personal property (TPP) refers to objects that exist in the real world (they are tangible, meaning you can touch or hold them) and that can either be used or consumed. States have varying definitions for this term (ours was taken from the state of Illinois). TPP is in contrast to real property (like land or real estate) and paper assets (stocks).
Many states include TPP in their definition of economic nexus, and certain uses of TPP may be exempt from nexus calculations. For example, reselling TPP qualifies in some states but is exempt in others.
A remote seller sells to customers in states where the seller has no physical presence. A company with no land, employees, or inventory in New Mexico can still sell its products to New Mexico individuals and businesses. That company would be considered a remote seller.
Remote sellers don’t have physical nexus, but they may have obligations under economic nexus if they cross a state’s thresholds (in New Mexico’s case that’s $100,000 in taxable sales).
Marketplace facilitator law covers what digital marketplaces (places like Amazon Marketplace or Etsy) must do regarding sales tax for products sold on their marketplaces. In some situations, the marketplace must collect and remit sales taxes, not the individual sellers on those marketplaces.
In many states, marketplace facilitators must cross similar thresholds to those under economic nexus. Businesses that sell both on marketplaces and outside of them should take special care to understand state regulations on which transactions must be included in nexus calculations.
Many states exempt certain types of items, services, or transactions from their state’s threshold calculations. For example:
The two types of nexus likely both affect expanding and growing startups, especially as sales rise into the six figures annually within individual states. It’s important to remember that physical and economic nexus are not identical, and your business is obligated to comply with either type where applicable. You may achieve one type without the other in a state.
These are a few of the key differences between the two.
Triggers
Complexity
Audit/compliance risk
Yes, it’s possible — likely, even — for a growing business to fall under both physical and economic nexus in differing states. One example is a retailer with a warehouse in Oregon that exceeds a sales threshold in Wyoming. The warehouse triggers physical nexus in Oregon, and the sales threshold triggers economic nexus in Wyoming.
If a business falls under both physical and economic nexus laws in the same state, then it must collect state sales tax in that state. Guidelines on how to do so should align, but check with relevant state offices to resolve any apparent discrepancies.
Nexus isn’t the easiest element to understand (much less track). If your business is approaching nexus for the first time, it’s tempting to brush this topic aside or push it out another year.
But failing to understand (and act on) nexus creates big risks for your business. Here are three reasons why it pays to stay informed and compliant.
Businesses that fail to comply with nexus obligations may incur financial consequences. If a state determines that you fall under a sales tax nexus, you may be required to repay back taxes — with interest.
Other penalties are possible, especially for repeat or seemingly willful compliance violations. These can add up and seriously cut into margins, something most growing businesses can’t easily handle.
While there’s no public formula for who gets audited and when, certain triggers do seem to influence which entities get targeted. Where state regulators see signs of significant sales volume and no sales tax remitted, audits seem to follow.
Whether willful or accidental, tax errors can damage a business’s reputation. Customers may see a business that gets caught up in a sales tax compliance issue as less competent, trustworthy, or reliable.
Determining nexus obligations can be difficult as a business grows, especially if your business is expanding physically or starting to reach six-figure sales at the state level.
Part of the challenge, of course, is knowing whether and where the latter is happening!
Follow these five actionable steps to help determine your business’s nexus obligations so you can stay compliant, avoid fines, and keep growing in healthy ways.
The first step in determining nexus obligations is getting a clear sense of what your business looks like, both in physical and economic terms. We’ll start with the elements tied to physical nexus.
Start by reviewing any physical locations tied to your business. This inventory of your physical or geographical footprint should include at least these:
Keep in mind that the last bullet likely includes remote employees working in a state where you otherwise have no physical presence.
Internal audits and inventory tracking systems are good options to identify and track where you have a physical presence.
Next, for economic nexus you’ll need to track sales by state. Any state that has a threshold based on revenue, transaction volume, or both must be tracked accordingly.
This isn’t easy to do manually: we’re talking about hundreds of thousands in revenue in up to 50 states with differing calculations, exceptions, and reporting mechanisms. Software tools can help businesses track sales against state-specific thresholds in real time. For most businesses, these tools are well worth the investment once the business reaches this scale.
(Speaking of software tools: Check out our top software and SaaS tools for startups!)
Bear in mind that any sales tracking you do must account for all applicable sales channels. These include online sales on your website, on online marketplaces, direct sales, and brick-and-mortar retail sales, among others. Missing a channel could mean overlooking a nexus threshold and falling out of compliance.
Next up is learning about how various states handle nexus laws. These do vary widely from state to state, and each business is responsible for understanding the criteria for states where they operate or sell.
Start with the states where you’re likely coming up against thresholds: when you’re close to the magic number, it matters whether certain types of transactions qualify for nexus calculations or are excluded.
As you research individual states, go back to step 2 and refine your sales tracking approach for that state (for example, including or excluding TPP resale and marketplace sales).
There’s a lot to learn here, and you’ll find numerous resources available online. But states are still changing their thresholds with some frequency, so even a formerly accurate resource could be out of date. It’s a good idea to stick to reliable, official resources (such as the website for a state’s tax authority).
Key areas to pay attention to during this step:
Navigating nexus compliance is complex. For many startups and businesses in a growth phase, handling nexus issues internally without any outside help is at best an unnecessary resource burden. More likely, it’s an unnecessary risk.
Instead, consider consulting a tax professional or firm that specializes in helping businesses navigate nexus issues. Someone who focuses on businesses around your size and growth trajectory can provide valuable tailored guidance. If you’re already operating in multiple taxing jurisdictions (or expect to do so in the near future), look for a tax professional who has expertise in multi-state compliance.
Working with tax professionals is a smart way to better understand and evaluate your business’s nexus obligations. Tax pros can also help you file accurately and identify risks related to nexus compliance.
The best part? Your business stays compliant without losing unnecessary focus or resources to nexus concerns, allowing you to keep the focus where it ought to be: on growth.
We talked about implementing software back in step 2, but software tools can do more than just track sales. The right tools can also simplify nexus compliance by automating tax calculations and filing processes alongside sales tracking.
Compliance tools can greatly reduce the work involved here. They can evaluate your status continually, identifying your obligations and showing you where you may be out of compliance (or approaching non-compliance).
Features to look for:
One more tip: Make sure the tools you’re using can communicate with each other. Look for a compliance tool that integrates well with existing systems and software tools like your ecommerce platform or the accounting software you’re already invested in.
Adapting your business practices to handle expanding nexus obligations can be a challenge, but getting it right from the outset can greatly reduce the difficulty.
Follow these tips to simplify your nexus compliance efforts.
First: adopt automation tools that can track your sales data automatically across all states where your business operates. This is something we’ve already hinted at, because we can’t overemphasize its importance. Tracking this data manually is time-consuming and error-prone, whereas automated systems never forget or make mathematical or transcription errors.
Using automation here reduces the risk of human error creeping in. It also helps you avoid overlooking key nexus thresholds.
The more sales channels you have, the more valuable automation becomes. For example, many businesses operate physical stores and sell via ecommerce, including through multiple marketplaces. It’s just far too easy to miss a channel or some overlapping piece of information that could trigger nexus. Automation greatly reduces the likelihood of this happening.
State laws surrounding economic nexus standards have been in flux ever since economic nexus became a thing in 2018. Some states rushed to get legislation on the books, only to refine their guidelines based on feedback, backlash, or workability. Other states took a slower, more cautious approach, and some states still don’t have any nexus guidance — though they might adopt some in the coming years.
So it’s a good idea to regularly check for updates to state-specific nexus laws because a change to those laws could mean a change to your nexus compliance obligations.
The most important elements are new thresholds or filing requirements. Watch for these when new legislation passes. Also, some states have set up a graduated system where reporting requirements change incrementally over several years. Make sure your compliance system has this information and updates accordingly.
Many state tax authorities offer newsletters or alert systems to keep businesses and individuals up to date on these sorts of changes. Look for these and sign up where you can.
Even with automations in place, it’s a good idea to build time into your calendar to conduct compliance reviews. Periodic reviews of your business’s nexus obligations, especially after operational changes, can help you avoid tax and reporting liabilities
Building a compliance review cadence (quarterly, yearly, etc.) is one option. Another is building in triggers for reviews based on actions that could change your nexus obligations, such as these:
Last, this is an area where many growing businesses should consider bringing in outside help.
Nexus just has too much complexity and too many exceptions and loopholes for most businesses to navigate this area efficiently. Tax experts with experience in multi-state compliance can provide insights and oversight in areas that businesses frequently overlook, like exemptions or rules specific to certain industries.
Additionally, businesses that are establishing a physical presence or registering to do business in multiple states often need a registered agent to receive legal documents, tax notices, and compliance correspondence. This is another area where working with experts (like the team at Stable) is better than going it alone.
For expanding startups and other businesses on a growth trajectory, complying with nexus rules is both necessary and difficult. Businesses must understand their physical presence and their sales data to avoid penalties, audits, and other risks. But properly calculating sales by state (including exceptions, industry-specific rules, and types of sales included) is a real challenge — at least without the right tools.
By adopting the right tools and resources, you can get ahead of nexus compliance, reducing the resource burden and risk that physical and economic nexus compliance create.
Stable helps businesses comply with state regulations through its registered agent services. We help startups and growing businesses maintain an official presence for receiving and managing tax-related communications, which can be key to complying with nexus requirements.
Explore Stable today and start simplifying your nexus compliance. Get started now.
