What Is Physical Nexus?

Physical nexus is the connection that allows a state to impose a sales tax obligation on an out-of-state company based on its presence within that state. Physical nexus can be created if the company has offices, employees, warehouses, or physical inventory in the state (even through third-party services like Amazon FBA).

Perhaps you’ve received a sales tax remittance notice from another state or had an auditor question your company’s tax filing obligations. Physical nexus can be triggered by things besides having a brick-and-mortar presence, so it’s important to understand your obligations to avoid compliance gaps, penalties, and audit exposure. We’ll explore what constitutes physical nexus below, so you aren’t caught off guard by sales tax obligations.

Understanding Physical Nexus

When a company has a tangible, physical presence in a state, it has physical nexus, and the state has jurisdiction to impose sales tax obligations. Sales tax is essentially a trust tax. This means that when customers pay for your goods or services, the state owns a portion of that money, and your company holds it in trust until the remittance is made. Companies based out of state must remit sales tax when they meet nexus requirements.

Physical nexus has been the standard of sales tax jurisdiction for many decades and was affirmed by the Supreme Court in the 1967 National Bellas Hess v. Illinois case. However, the South Dakota v. Wayfair ruling in 2018 created another dimension: economic nexus.

Physical Nexus vs. Economic Nexus

While physical nexus requires companies to maintain some type of physical presence in the state, economic nexus looks only at sales volume or the number of transactions. For example, Nevada requires remote sellers with over $100,000 in annual sales or 200 transactions to register and remit sales and use tax. So, if your company does significant e-commerce transactions in a state, you could have an economic sales tax nexus threshold.

Keep in mind that both physical and economic nexus apply today. Say you have a small company and didn’t make over $100,000 in sales in a certain state, but you did travel there for a trade show and made a handful of sales. While you’re nowhere near the economic nexus threshold, you may trigger physical nexus based on trade show activity.

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

How Physical Nexus Works

Physical nexus happens automatically when your company meets certain conditions, like using a building or employing remote workers in a state. 

Key Triggers of Physical Nexus

Common triggers of physical nexus include permanent business locations, employee activity, inventory storage, and even temporary business activities.

It’s easy to see how having an office or retail store in a state establishes physical nexus. When an out-of-state company owns or leases buildings in a state, it satisfies the sales tax connection. Other triggers can be less obvious, like:

• You employ remote workers, contractors, or sales reps in another state
• You drive to another state with a company vehicle and make sales or perform services
• You hold inventory in another state, which qualifies as physical presence (including in Amazon FBA fulfillment centers)
• Your company visits another state periodically for trade shows, pop-up stores, installations, and other temporary events

Why Is Understanding Physical Nexus Important?

Understanding physical nexus can help you avoid penalties, maintain clarity in tax obligations, prepare for audits, and be more informed when considering expansion. 

When you accurately determine your nexus footprint, you can register, collect, and remit sales tax in the required states before receiving a notice and potential penalties. You can allocate resources across your locations to keep state governments happy. You don’t want to end up being noncompliant, because states will charge interest and impose penalties for failing to file or pay.

Knowing your sales tax obligations can also streamline audit preparation, since nexus positions will be clearly documented. Whether you start with trade show appearances or warehousing inventory, you’ll know what to expect when entering new state markets as you expand

State-by-State Guide of Physical Nexus Requirements

The vast majority of states have sales tax and require companies with physical nexus to remit tax. Some, like Montana, don’t have sales tax but impose other taxes based on physical nexus. Alaska doesn’t have a statewide sales tax, but some municipalities have their own. Additionally, municipalities in other states can have their own sales tax rates, resulting in thousands of individual tax jurisdictions across the country. Learn about sales tax in different states below.

State	Physical Nexus Requirements?
Alabama	Yes
Alaska	Some local municipalities require sales tax based on physical nexus
Arizona	Yes
Arkansas	Yes
California	Yes
Colorado	Yes
Connecticut	Yes
Delaware	No as there is no statewide sales tax
Florida	Yes
Georgia	Yes
Hawaii	Yes
Idaho	Yes
Illinois	Yes
Indiana	Yes
Iowa	Yes
Kansas	Yes
Kentucky	Yes
Louisiana	Yes
Maine	Yes
Maryland	Yes
Massachusetts	Yes
Michigan	Yes
Minnesota	Yes
Mississippi	Yes
Missouri	Yes
Montana	No as there is no statewide sales tax
Nebraska	Yes
Nevada	Yes
New Hampshire	No as there is no statewide sales tax
New Jersey	Yes
New Mexico	Yes
New York	Yes
North Carolina	Yes
North Dakota	Yes
Ohio	Yes
Oklahoma	Yes
Oregon	No as there is no statewide sales tax
Pennsylvania	Yes
Rhode Island	Yes
South Carolina	Yes
South Dakota	Yes
Tennessee	Yes
Texas	Yes
Utah	Yes
Vermont	Yes
Virginia	Yes
Washington	Yes
West Virginia	Yes
Wisconsin	Yes
Wyoming	Yes

Challenges and Misconceptions of Physical Nexus

We always recommend companies operating in multiple jurisdictions seek professional advice, considering the wide range of nexus rules and thresholds across states. Below are a few myths we see when business owners evaluate their nexus footprint.

Myth	Reality
We only sell online, so we don’t have physical nexus outside our state.	Warehouse inventory, remote employees, and trade show activity can create physical nexus for an online business.
Physical nexus is less important after Wayfair.	Physical nexus can be easy to overlook, but it has the same importance as before and has a broader set of rules that could apply to your business.
Nexus only affects sales tax obligations.	Nexus applies to other types of tax, like corporate income tax and franchise tax, which can be triggered if your company has a physical presence in a state.

In the era of remote work, it’s especially important to have a keen eye on where your employees conduct their business so you stay compliant. Also, keep in mind that use tax may apply if your company doesn’t collect sales tax. This could be the case if a marketing firm purchases laptops in a state without sales tax for employees in a sales tax state to use.

How to Stay Compliant With Physical Nexus Laws

Staying compliant with physical nexus laws includes mapping out your nexus footprint, researching tax obligations, applying for sales tax permits, remitting tax, and monitoring your tax obligations over time.

1. Map Out Your Nexus Footprint

Document all your business activities in other states, including building ownership and leases, deliveries, mobile events, remote employees, warehouse inventory, and temporary activities. 

2. Research Tax Obligations in All Jurisdictions

Consult the tax codes in each state and municipality where you operate. States can have differing regulations: one might allow three days of trade show attendance, and another ten days without establishing nexus. Working with an expert sales tax service can be helpful, especially for this step.

While researching, note other taxes that could apply based on physical nexus, like corporate income or franchise (also called excise or capital stock, depending on the state).

3. Register for Sales Tax Permits

Apply for sales tax permits once you know where you have physical nexus. It’s important to apply before collecting any taxes. Your business could owe back taxes if you wait to get a sales tax permit while operating.

4. Set Up Tax Collection and Remittance

Once you have a permit, configure your point of sale, e-commerce platform, or invoicing system to calculate and collect sales tax. Then, create a remittance process to satisfy each jurisdiction’s requirements for payment timing, which can vary depending on the location and your sales volume.

5. Monitor and Maintain Sales Tax Compliance

Monitor your nexus footprint for any changes, such as opening a new warehouse or attending shows in a different region. It’s also important to track updates to tax laws that could change how much you owe or when to pay. Fortunately, using an automated solution can help keep your tax obligations running smoothly.

Physical Nexus: Conclusion

For companies with tangible presence across state lines, physical nexus continues to be an important compliance factor as before the Wayfair decision. The rules may seem complex, but proper nexus management eliminates the stress of wondering whether you're meeting your obligations in every jurisdiction.

Ready to get sales tax compliant? Our tax experts can handle your physical nexus obligations across all states. We combine the benefits of automation with expert guidance and support. Our nexus tracker monitors thresholds so you can apply state nexus rules tailored to your channels. Book a call with our experts today!