Sales tax nexus refers to the connection between a business and a state or jurisdiction that creates a legal obligation to collect and remit sales tax on taxable sales in that area. Nexus is established when a business exceeds the thresholds for physical presence and/or economic activity set by that particular state or jurisdiction.
Understanding and managing nexus is essential for compliance with varying state tax laws and to avoid penalties. For details on economic nexus rules for the US, see our State-by-State Sales Tax Guide.
Types of Sales Tax Nexus
1. Physical Nexus
Physical nexus occurs when a business has a tangible presence in a state, such as:
A storefront or brick-and-mortar location
Warehouse or office space
Employees working in the state
Inventory stored in the state
Any of these factors can trigger a legal obligation to collect and remit sales tax in that state.
💡 Physical nexus requirements may differ from economic nexus rules, so be sure to keep your physical presence settings in your dashboard up to date. This ensures our team registers you according to the correct requirements.
2. Economic Nexus
Economic nexus is established when a business meets specific sales or transaction thresholds in a state, even without a physical presence.
The South Dakota v. Wayfair (2018) ruling allows states to require sales tax collection based on revenue or transaction volume.
Common thresholds: $100,000 in sales or 200 transactions—some states require meeting one or both thresholds, while others (like California and New York) set higher revenue thresholds ($500,000) and may not use a transaction limit.
Implications for Businesses
Establishing nexus creates obligations that can impact your business in multiple ways:
Compliance Costs: Registering for sales tax permits, calculating, collecting, and remitting taxes, and filing returns in multiple states can be administratively complex. Numeral offers end-to-end registrations for a one-time fee of $150 per state.
Penalties and Interest: Non-compliance can lead to fines, interest, and other financial penalties.
Competitive Disadvantage: Errors or delays in managing tax obligations can increase costs compared to compliant competitors.
Reputational Risks: Non-compliance can harm customer trust and business relationships.
Steps to Ensure Compliance
Identify Nexus Locations: Evaluate where your business has nexus based on physical presence, sales volume, and economic activity. Regularly review state-specific thresholds. Numeral offers a free Nexus Study to help determine your potential sales tax liabilities.
Register for Sales Tax Permits: Once nexus states are identified, register for sales tax permits in each jurisdiction to legally collect and remit sales tax.
Collect and Remit Taxes: Charge the appropriate sales tax rates, track collected taxes, and remit them according to each state’s filing schedule. Numeral can handle both ongoing filings and any necessary backfilings.
Maintain Detailed Records: Keep comprehensive records of transactions, invoices, and taxes collected to support compliance and prepare for audits.
Stay Updated on Tax Laws: Sales tax regulations change frequently. Monitor updates to rates, thresholds, and requirements, or work with a tax professional to remain compliant.
💡 Additional resources with more detailed guidance:
💬 Questions? Reach out to our team anytime via the messaging widget in your Numeral dashboard.