Understanding Economic Nexus:
What Every Business Needs to Know
- Author : Alice Mensch
- Date : May 4, 2025
- Category : Sales Tax Compliance
- Estimated Reading Time : 7 minutes
Introduction
Economic Nexus and Sales Tax Compliance for Online Sellers
Navigating sales tax has never been simple, but the rise of economic nexus has added new complexity for businesses selling across state lines. Before 2018, companies typically needed a physical presence in a state to trigger tax obligations. However, the landmark Supreme Court ruling in South Dakota v. Wayfair, Inc. changed that. Now, even without setting foot in a state, your business may be required to collect and remit sales tax there.
This shift affects e-commerce sellers, wholesalers, and service providers alike. Understanding how economic nexus works is essential to staying compliant and avoiding unexpected tax liabilities.
What Is Economic Nexus?
Economic nexus refers to a sales tax obligation triggered not by physical presence, but by economic activity within a state. If your business reaches a certain threshold of sales or transactions into a particular state, you may be required to register, collect, and remit sales tax—even if you have no office, warehouse, or employees there. This shift affects e-commerce sellers, wholesalers, and service providers alike. Understanding how economic nexus works is essential to staying compliant and avoiding unexpected tax liabilities.
The thresholds vary by state, but they often include:
- A total of $100,000 or more in gross sales into the state during a calendar year
- 200 or more separate transactions shipped to customers in the state
Why It Matters for Remote Sellers
If your company sells goods or services online, you likely reach customers in multiple states. Economic nexus means that a spike in sales could quietly create new tax obligations in states you’ve never considered before. Even small businesses can be affected. It’s not just a problem for large corporations.
Here are a few key points to consider:
- Once you cross a state’s threshold, registration is typically required promptly—sometimes by the very next sale.
- Failure to comply can result in uncollected taxes, interest, and penalties.
- Having nexus in a state for sales tax may also expose your business to other obligations, such as income or franchise tax filings.
Tracking and Managing Nexus Obligations
To manage economic nexus effectively, businesses need to implement tracking systems. Relying on memory or spreadsheets may not be enough as your sales channels expand. Many platforms now offer alerts when your sales approach a state’s threshold. Taking action early can save time and reduce risk.
Best practices include:
- Regularly reviewing sales by destination state: Monthly or quarterly reviews help identify when thresholds are close to being reached.
- Understanding state-specific rules: Each state sets its own nexus criteria, registration processes, and timelines.
- Documenting your sales: Keep records that clearly show your volume and type of sales per state, including taxable vs. exempt sales.
- Using tax automation tools: Software solutions can help track nexus, calculate rates, and prepare returns across multiple states.
Common Misconceptions and Mistakes
Despite widespread awareness, many businesses still make assumptions that can lead to compliance issues. By clearing up these misunderstandings, businesses can take more informed steps toward compliance. Here are some common misconceptions:
- "We don’t have a physical office there, so we’re fine." Physical presence is no longer the only standard. Economic activity alone can create nexus.
- "We only make exempt sales." Many states count all sales—taxable and exempt—toward their thresholds.
- "We’ll deal with it later." Some states expect registration and tax collection immediately after a threshold is crossed.
- "Our marketplace handles all taxes." While marketplace facilitator laws have simplified some aspects of compliance, businesses that sell on multiple channels must still understand their broader obligations.
Conclusion: Stay Informed, Stay Compliant
Economic nexus has reshaped the landscape of sales tax compliance. Even businesses with no physical presence in a state may now owe tax based on their economic footprint alone. As states continue to refine and enforce their rules, staying proactive is critical.
Understanding the thresholds, tracking your activity, and addressing new obligations promptly can help you avoid costly surprises. Whether you handle tax in-house or work with an advisor, economic nexus is no longer a distant concern—it’s a current reality for many businesses operating in today’s interconnected economy.
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