Economic Nexus
A sales tax obligation trigger based on the dollar value or number of transactions in a state, regardless of physical presence, established after South Dakota v. Wayfair (2018).
Economic nexus is a basis for sales tax collection obligation established by a business exceeding certain revenue or transaction volume thresholds within a state, even without any physical presence there. It was the legal concept at the center of the landmark 2018 Supreme Court case South Dakota v. Wayfair, Inc., which overturned the 1992 Quill decision requiring physical presence to create nexus.
In the Wayfair decision, the Court upheld South Dakota's economic nexus law requiring out-of-state sellers to collect sales tax if they exceed $100,000 in annual sales or 200 separate transactions in South Dakota. The Court found this sufficient nexus without physical presence, paving the way for all states to enact similar laws.
Within two years of Wayfair, all 45 states with a sales tax had enacted economic nexus legislation. While most states adopted the $100,000/200-transaction standard, some have variations — for example, California's threshold is $500,000 in sales (no transaction count threshold). Puerto Rico and some cities also have economic nexus provisions.
The 200-transaction threshold has been particularly problematic for small sellers who may have many low-value sales into multiple states, creating nexus and registration obligations far exceeding the tax revenue at stake. Several states have since eliminated the transaction threshold, moving to revenue-only tests.
Compliance with economic nexus across 40+ states requires either a dedicated sales tax team or automation software. The complexity of rate determination (each state has thousands of local jurisdictions with different rates and product taxability rules) makes manual compliance impractical above modest sales volume.
FAQs
How do I know when I've crossed an economic nexus threshold?
You must monitor sales by state on an ongoing basis, tracking both revenue and transaction counts. This requires sales data tagged by customer shipping address. Most ecommerce platforms and accounting tools can generate state-by-state sales reports. Sales tax software like Avalara and TaxJar automate threshold monitoring and alert you when thresholds are approaching or crossed.
Does economic nexus apply to B2B sales?
Economic nexus applies to all sales of taxable goods or services, regardless of whether the buyer is a consumer or business. However, many B2B sales may be exempt from sales tax through resale certificates (goods purchased for resale) or manufacturing/industrial exemptions. Exemption certificate management is a critical compliance step for B2B sellers.
Are marketplace sales counted toward economic nexus thresholds?
This varies by state. Many states have marketplace facilitator laws where the marketplace (Amazon, eBay, Etsy) collects and remits tax on behalf of third-party sellers, and those sales may not count toward the seller's own nexus thresholds. Other states count marketplace sales toward the seller's thresholds. Check each state's specific rules.
Related Terms
Sales Tax Nexus
The level of connection between a business and a state sufficient to require the business to collect and remit sales tax in that state.
Value Added Tax
A consumption tax levied at each stage of production and distribution, collected by businesses on behalf of the government throughout the supply chain.
Goods and Services Tax
A broad-based consumption tax applied to most goods and services, similar to VAT, used in Canada, Australia, India, Singapore, and other countries.
