A legal connection between a business and a U.S. state that requires the business to collect and remit taxes in that state.
What is Tax Nexus?
Tax nexus is the term used to describe a business’s legal obligation to collect, remit, or pay taxes in a particular U.S. state. A business is said to have “nexus” in a state when it has enough of a connection—physical, economic, or operational—with that state to trigger tax responsibilities.
There are different types of tax nexus, most commonly:
- Sales tax nexus: Requires the business to collect and remit sales tax from customers in that state.
- Income tax nexus: Requires the business to file state income tax returns and potentially pay state income tax on earnings sourced to that state.
Physical Nexus
A business has physical nexus in a state if it has a tangible presence there—such as an office, employee, warehouse, or inventory. For example, using Amazon FBA, where inventory is stored in U.S. warehouses across multiple states, can create physical nexus in those states.
Economic Nexus
Even without physical presence, a business can create nexus through economic activity, like reaching a certain number of sales or transactions in a state. Many states have adopted economic nexus rules after the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc..
For example, if your business makes over $100,000 in sales or 200+ separate transactions to customers in a given state within a year, that may establish nexus and require you to collect sales tax in that state.
Affiliate Nexus
If a business has relationships with affiliates or third-party representatives in a state (e.g., referral partners or contractors), it might create nexus.
For non-U.S. founders, nexus is crucial to understand. If your U.S. company creates nexus in a state, you may be:
- Required to register for a sales tax permit
- Obligated to collect sales tax from customers in that state
- Expected to file state income tax returns or franchise tax reports
- Subject to audits or penalties for non-compliance
E-commerce businesses, in particular, are highly affected by sales tax nexus, especially when selling across multiple states using platforms like Shopify, Etsy, or Amazon. While some platforms collect and remit sales tax on the seller’s behalf due to marketplace facilitator laws, it remains the seller’s responsibility to track where nexus exists and ensure compliance for non-platform sales.
