If you sell a product or service — online, from a brick-and-mortar store, or some combination of both — sales tax compliance has far-reaching consequences for your business. Failing to collect and remit sales tax if you’re legally required to do so can result in significant fines and penalties, harm your company’s reputation, and even land you in legal trouble.
One important recent development in sales tax law is the concept of economic nexus. “Nexus” simply refers to a company’s connection to a particular location, or its presence there. Until 2018, businesses could be required to collect sales tax only if they had physical nexus, a presence (such as an office, inventory, or employees) in the state where the taxable transaction took place.
However, the definition of nexus has expanded to include economic connections as well. While it varies by state, in most jurisdictions, economic nexus is established with $100,000 in sales or 200 transactions within a year.
For online and remote sellers, understanding whether you’ve established economic nexus in a location is central to maintaining sales tax compliance. This article will explain economic nexus, why it matters, state-by-state laws, and how you can manage your sales tax obligations in an ever-evolving compliance landscape.
What is economic nexus?
If a business has economic nexus in a particular state, it means that it conducts enough business there that it’s legally obligated to collect state sales tax.
In the U.S., each state sets its own threshold for what constitutes “enough business,” which can make economic sales tax compliance tricky for e-commerce brands, online sellers, and, more recently, software companies.
On June 21, 2018, the Supreme Court case South Dakota v. Wayfair legalized the concept of economic nexus, broadening states’ ability to collect sales tax from e-commerce businesses and remote sellers. With a 5–4 majority, the court ruled that businesses could establish nexus — and therefore be required to collect and remit sales tax — in a state based solely on their economic activity.
Now, e-commerce businesses or remote sellers can trigger sales tax obligations based on their physical or economic presence in a state.
How economic nexus works
Each state sets its own thresholds when it comes to establishing economic nexus. There are two different ways a business can trigger economic nexus.
- Transaction volume: A company surpasses a certain threshold of annual transactions in a state — the most common is 200 retail sales.
- Annual revenue: A company takes in more than a certain amount of annual revenue per year in a state — the most common threshold is $100,000.
Some states use both transaction volume and annual revenue as criteria for economic nexus, and some states use only one of them.
For example, in New Jersey, economic nexus is established with either $100,000 in sales, or 200 transactions annually. In New York, however, both thresholds apply and the business must have both $500,000 in sales and 100 separate transactions. States also set their own rules for which types of transactions aren’t subject to sales tax.
It’s important to note that economic nexus is not retroactive. In other words, once you’ve established economic nexus in a state, you have to collect sales tax only on retail sales made from that point forward. Some businesses are especially susceptible to economic nexus, including e-commerce companies, SaaS companies, and sellers using a third-party marketplace like Amazon or eBay.
Why economic nexus is critical for businesses
States are highly motivated to adopt and enforce economic nexus laws. After all, these rules came into place because states wanted to ensure that businesses contributed their fair share to local economies.
If your business is found to be in violation of economic nexus sales tax laws, you could face a number of consequences, including:
- Penalties and interest charges: Depending on the severity of the violation, you could be subjected to significant fines and interest on unpaid taxes.
- Having to pay back taxes: You’ll have to pay back taxes, which can be a sizable financial burden and limit your free cash flow.
- A tax authority lawsuit: You could become embroiled in a state-level legal dispute, or even be sued by a state tax authority.
For small and medium-sized businesses (SMBs) with limited resources, the risk of accidental noncompliance is especially high. The complexity of tracking your transactions across multiple states can quickly grow overwhelming. You could easily trigger economic nexus somewhere and not realize it until the state revenue department gets in touch.
States have started using technology to track companies’ sales and quickly identify sales tax violations. Thanks to automation and data analytics, states have the tools to enforce economic nexus laws more aggressively than ever.
How to determine whether you have economic nexus
For e-commerce businesses and remote sellers, tracking economic nexus can be challenging. With each state setting its own requirements, it’s often hard to know where you’re about to establish nexus, and even harder to factor that into your financial planning.
Following these steps can help you stay on top of your sales tax obligations:
- Track sales and transactions: Businesses need to keep detailed and up-to-date sales records to track where they’re approaching nexus thresholds.
- Understand state-specific thresholds: In addition to tracking your revenue and transaction data, you need a solid understanding of what triggers economic nexus in the states where you do business.
- Review annual sales activity: A lot can change from year to year. It’s important to carefully review your sales activity to make sure that you’re aware of any economic nexus thresholds you might be approaching.
- Maintain accurate records: Companies should maintain meticulous records — you’ll need them in the event of a sales tax audit.
Are exempt products or exempt sales counted towards nexus?
Sometimes! Well, actually, most of the time.
In 42 states, exempt sales are included when determining if your business has economic nexus.
For example, for a business operating in Louisiana that does $200,000 in exempt sales and $50,000 in taxable sales, the business would have economic nexus as they’ve crossed the threshold of $100,000 in the current or previous calendar year.
What about sales made via marketplace facilitators?
As of this writing, 32 states will include sales and transactions made through marketplace facilitators when determining if your business has economic nexus.
For example, in West Virginia, sales made through registered marketplace facilitators are counted towards the state’s economic nexus threshold of $100,000 or 200 transactions in the current or previous calendar year.
Recent changes for 2025
Many states are working to simplify their economic nexus thresholds for remote sellers. For example, as of January 1st, 2025, Alaska removed its 200 transaction threshold to reduce compliance stress for smaller merchants. As of this writing, the $100,000 sales threshold remains for sellers transacting in Alaska.
New Jersey is another state that has proposed legislation to remove their transaction threshold and simply implement a sales-based threshold.
What happens if I exceed the threshold for one year but not the next?
It depends. In some states, you can deregister and will no longer be required to collect sales tax. However, in other states, you may still be required to collect and remit sales tax for an extended period of time.
For example, in California, if an out-of-state seller crosses the state’s $500,000 in sales threshold during that calendar year, they are then responsible for collecting sales tax for the remainder of that year and for the following calendar year before, even if economic nexus thresholds are not crossed in the subsequent calendar year.
Do I need to register in a state before I reach the threshold?
No, you generally only need to register for a sales tax permit once you’ve established nexus.
Economic nexus vs. physical nexus
Economic nexus is based on sales activity in a certain state, while physical nexus is triggered by your tangible presence in a specific area.
Any of the following would obligate you to pay physical nexus sales tax:
- Leasing or owning property in a state, like storefronts or offices.
- The presence of employees, regardless of whether they’re part-time, full-time, or remote.
- In-person selling or services, and the storage of sales inventory, even through third-party warehouse services like Fulfillment By Amazon.
- Attending trade shows or employing sales agents to visit clients in a particular state.
It's also possible to have both economic and physical nexus in a certain state. Say, for example, that your e-commerce store made $150,000 worth of sales in Hawaii last year. You also employ a small team of remote employees living in Hawaii. In that case, you would have both economic and physical nexus in the state.
After the Wayfair ruling reshaped the sales tax landscape, managing compliance has become significantly more difficult for e-commerce stores and other remote sellers. Now you have to not only track your physical business operations, but also carefully monitor your sales.
Managing nexus compliance
Economic nexus compliance can be a serious headache — especially for online sellers. Following a few best practices can help you keep everything in order and avoid significant penalties.
- 1. Register for sales tax permits: Register to collect and remit sales tax in any states where you have economic nexus. Remember, waiting too long to register is a compliance violation.
- 2. Use tax automation tools: Tax automation tools can streamline economic nexus compliance for businesses, from sales tax registration to automatically charging the correct amount of sales tax for every transaction. Fortunately, for ecommerce brands, there are a number of purpose-built solutions available.
- 3. Consolidate transactions: If you’re selling on multiple online marketplaces or platforms, you can track your sales activity more effectively if you consolidate your transaction data.
- 4. Conduct regular audits: By conducting regular audits, you can avoid accidentally triggering economic nexus and accruing costly penalties.
Make sure that you also leverage the advice of licensed and experienced tax experts. They might catch something you missed, saving you from serious consequences.
The role of technology
Manually tracking your sales activity, calculating sales tax, and performing other essential compliance tasks can be risky. If you’re not careful, a single employee error could cost your business tens of thousands of dollars.
Sales tax automation software can help businesses save time and money by:
- Registering for, collecting, and remitting sales tax on your behalf.
- Automatically calculating the right amount of sales tax for every transaction.
- Detecting when your business has triggered economic or physical nexus, and alerting you.
- Proactively monitoring changes to sales tax laws in all 50 states, with automatic alerts for anything that impacts you.
Sales tax compliance is getting more complex. With a tool like Numeral, you can cut the costs and constant headache of tracking your sales activity in spreadsheets — the software also automatically applies the correct amount of sales tax to transactions in more than 11,000 jurisdictions.
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Final thoughts
Understanding, tracking, and proactively managing economic nexus is essential for businesses. States are deeply invested in enforcing these laws, and violations can result in steep penalties, reputational damage, and even legal action.
As a business owner, you need to proactively monitor your tax obligations, and that means selecting the right tools.
