Physical Nexus vs. Economic Nexus

Physical and economic nexus determine when an out-of-state business must collect and remit sales tax. Physical sales tax nexus is triggered by presence or activity in a state, while economic nexus is triggered by sales and/or transaction thresholds.

However, figuring out sales tax nexus isn’t as simple as knowing where you have locations or online customers. States have different rules on what triggers nexus. Plus, getting it wrong can mean having to pay penalties and diverting resources to catch up. Let’s compare the main differences between physical and economic nexus so you’re set up for success.

What Is Sales Tax Nexus?

If your company triggers sales tax nexus in a state, it has an obligation to collect and pay sales tax in that state. Each state with sales tax has nexus laws, and while they can be different, triggering nexus will require you to register your business, collect sales tax, and remit the appropriate tax to the state. If your company doesn’t meet nexus requirements, you don’t have to collect and remit sales tax.

Physical Nexus vs. Economic Nexus: Comparison

The confusing part is that rules for both physical and economic nexus apply today. Below is a quick comparison between the two types.

Aspect	Physical Nexus	Economic Nexus
Definition	Connection to a state through physical presence or property	Connection to a state based on economic activity thresholds
Legal Basis	- Traditional constitutional - Commerce Clause interpretation	Post-Wayfair Supreme Court decision (2018)
Primary Triggers	- Physical locations, like offices and warehouses - Employees working in a state - Property ownership or leaseInventory storage - Regular business activities - Temporary activity like tradeshows or pop-up events	- Sales revenue thresholds (generally $100,000 and up) - Number of transactions (usually 200 and up)

Understanding Physical Nexus

Physical nexus is rooted in traditional interpretations of the Constitution’s Commerce Clause, which holds that states can only tax entities with a significant connection to that state. A company with employees, offices, property, leases, or qualifying temporary activities in a state has an obligation to collect sales tax.

Common Physical Nexus Triggers

Physical nexus is commonly triggered when a company:

• Has offices, warehouses, or retail stores within state boundaries
• Has an employee presence, including sales representatives or remote workers
• Stores any amount of inventory in warehouses, including third-party fulfillment centers (like Amazon FBA)
• Participates in trade shows, organizes events, or sets up temporary stores or work sites
• Owns or leases equipment or property in the state

Challenges of Managing Physical Nexus Compliance

Managing your physical nexus requirements can be challenging because you need to identify all possible triggers that might apply to your business’s activities across state boundaries.

For example, if you have fulfillment centers in multiple states, you could have multiple sales tax rates to collect and remit for sales in those states. Sales made at trade shows can also create nexus (even a single sale). States interpret presence differently, so there isn’t a single standard to rely on. This creates accounting burdens and raises the risk of audits, penalties, and uncollected liabilities.

Keep in mind that sales tax rates can differ within states themselves. For example, Alaska doesn’t have a statewide sales tax, but the city of Juneau does. Your company would have to remit local sales tax if it had physical nexus in that city.

Anytime you consider expanding activities, you have to think about physical nexus. And while economic nexus is more frequently talked about, physical nexus still matters.

Understanding Economic Nexus

The Supreme Court’s 2018 ruling in South Dakota v. Wayfair, Inc. allowed states to impose tax obligations based on sales volume or transaction counts rather than physical presence. Enter, economic nexus. Now, simply making enough sales value or transactions in a state can obligate you to pay sales tax.

Before this ruling, people could shop from online stores and not pay sales tax if the company had no physical nexus in their state. Technically, customers had to pay a use tax themselves, but they rarely did.

Learn More About How Economic Nexus Laws Are Changing: How E-Commerce Nexus Laws Are Changing (And Why You Need to Act Now) ⏰

Common Economic Nexus Triggers

Economic nexus triggers are typically based on revenue and transactions:

• Revenue thresholds range from $100,000 to $500,000 in annual sales within a state
• Transaction thresholds usually range from 100 to 200 sales in a year in a state

Many states have both thresholds. Some require both limits to be met, while others require only one. Some states only use revenue, but not transaction thresholds.

The silver lining of economic nexus rules is that they’re set at the state level, eliminating the concern of different thresholds in different cities.

Challenges of Managing Economic Nexus Compliance

Managing economic nexus may seem simple at first glance, but it requires tracking revenue and sales by state, modifying operations as needed, and staying up to date with changing laws.

Monitoring your sales and transaction thresholds in each state is up to you. E-commerce platforms and marketplaces will provide the data, but you have to calculate whether you’ve hit the trigger for a state. And when you hit the threshold, you’ll have to register with the state and implement processes to collect and remit the right amount of sales tax at the right time.

Knowing what qualifies as the first measurement year is another challenge. States can measure the current calendar year, previous calendar year, previous 12 months, or fiscal year. You have to be aware of the measurement period and filing expectations in different states to maintain compliance.

Finally, states frequently change sales tax laws, including rules for economic nexus. For example, Utah recently removed its transaction threshold in July 2025.

Why Understanding Nexus Matters for Your Business

Nexus determines whether your company has a legal duty to collect and remit sales tax. Ignoring nexus could expose your business to risks like penalties and audits, which drive up the cost of postponing tax collection and remittance.

Risk of Penalties and Fines

State revenue departments actively enforce compliance and can impose penalties, interest, and back taxes on your company if it's out of compliance. And if you didn’t collect sales tax from customers, you can’t go back and charge them after the fact. Your business could be liable for years of back taxes with interest, but voluntarily disclosing the lapse can limit some penalties.

Potential Audits

If a business fails to register and pay sales tax despite having nexus, it’s more likely to get audited. States look at business registrations, marketplace filings, payment processor filings, and more to see what they’re owed. Audits can be costly, disruptive, and expose liabilities spanning multiple years.

How to Determine Your Sales Tax Nexus Obligations

To determine your nexus obligations,

1. Evaluate all out-of-state business activities, including locations, employees, inventory, trade shows, and online sales and transactions
2. Analyze physical and economic nexus triggers in each state according to their tax codes
3. Manually track thresholds for online sales or use automated tax software
4. File for sales tax licenses in every state where nexus applies
5. Consider working with a sales tax specialist to maintain compliance as your business evolves and nexus obligations change

Tips to Make Sales Tax Nexus Compliance Easier

Tracking nexus and fulfilling state sales tax requirements is complex, but here are a few ways to make compliance easier:

• Keep accurate records: Maintain clear records of transaction volume and sales by state.
• Use sales tax software: Modern tools can automatically calculate how close you are to hitting different thresholds in various states.
• Include sales tax in business planning: Whether expanding to a new market or leasing a warehouse, include sales tax remittance in your cost analysis.
• Don’t wait for an audit: If you’ve failed to remit sales tax for any reason, file a voluntary disclosure agreement to get ahead of the issue.

Physical Nexus vs. Economic Nexus: Conclusion

To recap, physical nexus arises from a tangible presence, while economic nexus is based on sales activity. While the Wayfair decision created economic nexus, it didn’t erase physical nexus. Companies have to consider both concepts to stay compliant when selling across state lines.

Want to know exactly what nexus applies to your company by state?

Learn how Zamp's managed sales tax solution automates nexus monitoring, state registration, return filing, and tax remittance state-by-state so you can concentrate on business growth.