Economic Nexus by State

E-commerce sellers selling in the United States must collect sales tax in states where they have sales tax nexus. Sales tax nexus occurs when a retailer has a connection to a state, such as an office, warehouse, or other business activity. However, it can also be established simply by making a certain number or amount of sales in a state, referred to as economic nexus.

This article will explain everything you need to know about economic nexus. We’ll cover what it is, when it became legal, and take a look at the nexus threshold requirements by state.

What Is Economic Nexus?

Economic nexus is defined as a connection between a state and a business that allows the state to require companies to register to collect and remit sales tax. As mentioned above, it’s established when a business reaches a threshold for transactions or sales revenue.

In many states, this threshold is $100,000 in gross sales or 200 separate sales transactions in a year. Some states may even require a sales threshold and a certain number of transactions for businesses to register and file state sales tax returns.

Who Does Economic Nexus Affect?

Economic nexus impacts companies that don’t have a physical presence in a state, namely e-commerce or other online sellers. They may sell goods and services in that state and meet or exceed its economic nexus threshold. 

Economic Nexus Example

Earnie’s E-Commerce Emporium is based in California but sells to customers nationwide. Earnie’s has sales tax nexus in California because they are based there. But they also sell to many customers in Colorado. Last year, they sold over $300,000 annually to Colorado customers. 

Colorado’s economic nexus sales tax threshold is either $100,000 in annual sales or 200 transactions. This means that even though Earnie’s E-Commerce Emporium isn’t based in Colorado and has no employees, stores, or warehouses there, it has economic nexus in Colorado and is required to collect Colorado sales tax.

Why Does Economic Nexus Exist?

Before the Supreme Court’s June 21, 2018, decision in South Dakota v. Wayfair, e-commerce sellers were only required to collect sales tax in states where they had a physical presence, such as a store, employee, or inventory. 

However, states had a complaint. States use sales tax collected to fund budget items like schools and roads, and they realized that e-commerce sellers not collecting sales tax was leaving them at a disadvantage. Technically, if a consumer buys a product tax free, they must pay “use tax” on that item to their state. However, this is nearly impossible to enforce on consumers, especially on small purchases.

The way states saw it, large online retailers like Wayfair, Overstock, or NewEgg were making millions of dollars in sales to buyers in their states but had an unfair advantage in that they weren’t required to collect sales tax from these buyers and remit it back to the state's treasury.

Operating on that assumption, states like South Dakota decided to legally test the idea that e-commerce sellers were not required to collect sales tax from buyers in their state. They sued retailers like Wayfair et al., and the case went all the way to the Supreme Court. 

The Supreme Court agreed with the states. The Wayfair ruling allows states to pass economic nexus sales tax laws. 

How Economic Nexus Changed Sales Tax Collection

Pre-Wayfair, retailers were generally only required to collect sales tax in states where they had a physical presence. This physical presence could be anything from having an office or store in a state to some forms of advertising or having a third-party affiliate in a state. 

But post-Wayfair, many online sellers found themselves with sales tax nexus in more states. This means e-commerce companies are required to register for sales tax permits in their economic nexus states, set up sales tax collection on all e-commerce sales channels, and file and remit sales tax in multiple states. 

Pre-and Post-Wayfair Sales Tax Collection Example

Pre-Wayfair, even a huge online store like Overstock.com was only required to collect sales tax in states where they had a physical presence. 

So even though they might sell millions in sales per year into a lightly populated state like South Dakota, they were not required to collect sales tax on their sales. (Buyers who purchase an item and don’t pay sales tax are supposed to pay “use tax” to the state on that purchase, but most consumers don’t even know about this obligation.) 

So, the way South Dakota saw it, they were missing out on vital sales tax revenue they used to pay for budget items like hospitals and roads.

Now, post-Wayfair, South Dakota requires large companies like Overstock.com to collect sales tax from buyers in their state. This is because Overstock (and many, many other e-commerce companies) meet South Dakota’s threshold of $100,000 in sales or 200 sales transactions in the current or last calendar year.

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What Is the Economic Nexus Threshold by State?

This chart shows each state’s economic nexus threshold. The threshold may be a dollar amount, such as $100,000 in sales, or it may also include a transaction amount, such as 200 or more separate transactions. 

When reading economic nexus threshold information, be sure to look for tricky language. For example, some states only count retail sales, but others may count “gross receipts” which include wholesale sales. Some states include sales made through third-party marketplaces when it comes to calculating economic nexus, while others do not. 

As always, we recommend contacting the state or a dedicated sales tax expert for questions specific to your business.

Economic Nexus Sales Tax: Conclusion

Economic nexus is relatively new to states and has only been around for a handful of years. However, its impact is felt nationwide by e-commerce and remote sellers who do business in states where they don’t have a physical location. Being able to track nexus thresholds, keep up on sales tax rate changes, and any other changes coming down from the states is vital for businesses to thrive and avoid paying out-of-pocket penalties.

Zamp is a completely automated sales tax solution that handles the day-to-day of sales tax for you. We are a complete service that handles nexus tracking, state registrations, accurate calculations, product taxability research, mapping, reporting, and filing. Set up a call with our team below to learn more!

Economic Nexus Sales Tax: FAQ

How do I know when I have economic nexus? 

Zamp! Zamp’s Economic Nexus Calculator will alert you when you have economic nexus in a new state.

How does it work? We integrate with your online stores, ERPs and marketplaces and alert you when you are approaching or have crossed over a state’s economic nexus threshold. No more trying to count individual transactions into a state or dreading doing your business’s books each month.

I have physical presence in a state, but do not meet that state’s economic nexus threshold. Do I still need to collect sales tax there? 

Yes. Economic nexus did not override any other forms of sales tax nexus. If you have an office, store, employee, etc. in a state you still have nexus in that state even if you don’t meet that state’s economic nexus sales or transactions threshold.

Does economic nexus apply to income tax?

In the US, Federal Public Law 86-272 prevents states from requiring that businesses who only solicit sales of tangible personal property pay income tax. However, this law is quietly being eroded. You can read more about economic nexus and income tax here. We recommend speaking with a sales tax expert should you have any questions about whether sales tax nexus also leads to an income tax obligation.

About the author

The Zamp Team

The Zamp Team consists of experienced writers and editors who are dedicated to researching sales tax topics to help readers make smart decisions about their business and sales tax compliance. Collectively, the team has over 200 years of sales tax experience.