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.
Sales tax nexus is the legal connection between a business and a state (or other taxing jurisdiction) that creates an obligation to collect, report, and remit sales tax on taxable sales made to customers in that state. Nexus is the threshold below which a state cannot constitutionally require a business to collect its sales tax.
Historically, nexus was established only through physical presence — a store, warehouse, office, employees, or inventory in a state. The 2018 Supreme Court decision in South Dakota v. Wayfair fundamentally transformed this by upholding economic nexus laws, allowing states to impose sales tax obligations based solely on the volume or value of sales into a state, regardless of physical presence.
Following Wayfair, all 45 states with sales taxes enacted economic nexus thresholds — most commonly $100,000 in annual sales or 200 transactions into the state. Once a business crosses these thresholds, it has nexus and must register, collect, and remit sales tax in that state.
For ecommerce businesses and SaaS companies operating nationally, Wayfair created obligation to monitor nexus thresholds across 40+ states simultaneously — a dramatic expansion from the prior world where only states with physical presence mattered. This complexity has driven rapid adoption of sales tax compliance automation platforms like Avalara, TaxJar (now Stripe Tax), and Vertex.
Nexus can also be created through other activities: having employees who work remotely in a state (payroll nexus), storing inventory in a third-party fulfillment center (inventory nexus, common for Amazon FBA sellers), or making sales through a marketplace that collects tax on the seller's behalf.
FAQs
What happens if I have nexus in a state but haven't been collecting sales tax?
You may have a back-tax liability plus interest and penalties. The Voluntary Disclosure Agreement (VDA) program available in most states allows businesses to come forward proactively and receive a limited lookback period (typically 3 years vs. the normal 6–8 years) and waiver of penalties. Consult a sales tax specialist before self-disclosing.
Does SaaS have sales tax nexus obligations?
Yes, increasingly. Many states now tax SaaS as a digital service or specified digital product, though taxability varies significantly by state. A SaaS company with economic nexus in a state that taxes SaaS must collect sales tax from customers in that state. States like New York, Texas, and Pennsylvania tax SaaS; others like California generally do not.
Does using Amazon FBA create nexus in every state where Amazon stores inventory?
Yes — inventory stored in a third-party warehouse (including Amazon fulfillment centers) typically creates physical nexus in that state. Since Amazon distributes FBA inventory across fulfillment centers in many states, FBA sellers may have physical nexus in 20+ states based solely on Amazon's storage decisions, independent of economic nexus thresholds.
Related Terms
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).
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.
