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 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, such as e-commerce or other online sellers. These companies 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.

Understanding Different Types of Nexus

Here’s a quick guide to the other types of nexus you may encounter:

1. Physical Nexus: The old-school kind. If you’ve got offices, warehouses, or even a few employees in a state, congrats, you’ve got nexus!
2. Affiliate Nexus: Do you have partners or affiliates in a state who promote your products? Their activities might just bring you into nexus territory.
3. Click-Through Nexus: This happens when someone clicks on a website link, which leads them to your products. If enough clicks turn into sales, you’re looking at nexus.
4. Marketplace Nexus: Selling on platforms like Amazon or Etsy? These big players can rope you into nexus based on their own ties to various states.

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 complained. States use sales tax collected to fund budget items like schools and roads, and they realized that e-commerce sellers' failure to collect sales tax was disadvantageing them. Technically, if a consumer buys a product tax-free, they must pay a “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 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. 

However, many online sellers found themselves with sales tax nexus in more states post-Wayfair. 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

Before Wayfair, even a vast 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 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.

Registering for Sales Tax After Establishing Economic Nexus

Once you’ve identified that your business has reached economic nexus thresholds in various states or jurisdictions, the next crucial step is registering for sales tax in each location. This phase, while essential, can be complex due to differing requirements across states— and it gets even more complex if you’re selling across multiple channels. 

Fortunately, with the right tools, this is another aspect of sales tax management that can be streamlined and automated.

Utilizing a fully managed sales tax solution like Zamp can significantly simplify this process. Zamp does more than just help you determine when you've met economic nexus; it also guides you through each state’s unique registration process. Here’s how it works:

1. Automated Nexus Identification: Zamp uses advanced algorithms to track your sales activity across all states and automatically alerts you when approaching or exceeding economic nexus thresholds. This proactive approach ensures that you never miss a registration deadline.
2. Simplified Sales Tax Registration Process: Once nexus is established, Zamp provides a step-by-step guide tailored to each state’s registration requirements. This includes what documents you need to gather, how to fill out registration forms, and tips for ensuring a successful submission.
3. Centralized Management: With Zamp, all your sales tax registrations can be managed from a single platform. This saves time and reduces the potential for errors that can occur when handling multiple registrations manually.
4. Continual Monitoring and Updates: Sales tax laws are constantly evolving. Zamp stays on top of these changes for you, updating its systems to reflect the latest requirements and ensuring that your business remains compliant with minimal effort on your part.
5. Expert Support: Should you have any questions or need assistance during the registration process, Zamp’s sales tax experts are always on hand to offer guidance and support.

By leveraging comprehensive sales tax software, you can confidently and easily navigate the complexities of multi-state sales tax registration. This allows you to focus more on growing your business and less on the nuances of tax compliance.

How to Deal With Sales Tax Audits and Disputes

Facing a sales tax audit can feel like a pop quiz you didn’t study for. But no worries, we’ve got some actionable tips to help you prepare and handle any disputes like a pro:

• Be prepared: Keep your sales records, tax returns, and correspondence with tax authorities well-organized and easily accessible. Think of it as keeping your financial house in order, ready for unexpected guests.
• Understand the rules: Make sure you’re up to speed on the nexus criteria and tax obligations for each state you operate in. This knowledge can be your shield in any disputes.
• Seek professional advice: When in doubt, bring in the experts. A tax professional specializing in sales tax can offer invaluable help navigating audits and resolving issues.

Audits don't have to be scary if you're prepared. With the right practices in place, you can approach them confidently and resolve issues swiftly.

Economic Nexus Sales Tax: Conclusion

Economic nexus is relatively new to states and has only existed 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. Tracking nexus thresholds, keeping up on sales tax rate changes, and any other changes coming down from the states are vital for businesses to thrive and avoid paying out-of-pocket penalties.

Why Zamp?

Zamp always puts our customers first. And it shows — we’ve been named a Major Player in the Small, Mid, and Enterprise SUT markets in IDC’s 2024 IDC MarketScape for Worldwide SaaS and Cloud-enabled Tax Automation Software, along with being featured in the top ten best sales tax software companies by taxtech500.

Our full-service platform allows businesses to outsource their sales tax completely. Our platform manages the sales tax lifecycle by offering:

• Hands-off onboarding: We set up everything for you and ensure it’s done right.
• Full sales tax compliance service: We offer nexus tracking, registrations, roof-top accurate calculations, product taxability research, mapping, reporting, and filing. All this is included in our pricing model — one fee for everything.
• Proactive account support: We are always looking for any changes in requirements, and our team is happy to answer any questions you may have.

See how you can save time and stay sales tax compliant with Zamp. Book a call below!

About the author

Emily Kordys

Emily Kordys is a Content Marketing Manager with seven years of experience in the sales tax, auto, and real estate industries. She currently resides in North Carolina with her boyfriend and dogs, Shadow and Copr.