Nexus is the foundation of sales tax registration and compliance, determining whether, when and where a business must collect and remit sales tax.
Nexus refers to the connection or presence that a business has in a particular state that gives that state the authority to require the business to collect and remit sales tax on its taxable sales in that state.
In the context of U.S. sales tax, nexus is established when a business has a physical presence in a state (physical nexus), such as a store, warehouse, or employees, or when it engages in certain types of economic activity in that state (economic nexus).
If a business has no nexus in a particular state, then that state cannot require the business to register for and charge sales tax.
Type of Nexus & Key Triggers
Physical Nexus
Physical nexus is when a business has a tangible connection to a state.
This could be through owning or leasing property, having employees, storing inventory, or maintaining physical operations within the state.
Physical Location: renting or owning an office, store, warehouse, trade house or other facility.
Employees: Having employees who work in or visit a state regularly, including remote workers.
Inventory: Storing goods or inventories in a warehouse or fulfilment center within the state.
Representatives: Full time sales or contractors who operate in the state.
Economic Nexus:
When a business exceeds a certain threshold of sales or transactions within a state, even if it has no physical presence.
Sales Thresholds: Most states set a specific dollar amount of sales (most common: $100,000) or a number of transactions (most common: 200) which if you cross, only then you have met economic nexus in that state and you are required to register for sales tax in that state.
No physical presence needed: Businesses can establish economic nexus in a state purely based on sales activity, without having any physical operations, employees, or inventory in that state.