Understanding Economic Nexus: A Complete Guide

Dealing with sales tax across different states can be complicated. In recent years, a concept called economic nexus has transformed the way businesses must approach tax compliance. Instead of focusing only on where a company is physically located, tax obligations can now be triggered by sales volume within a state. For online sellers and remote operators, this shift has been game-changing.

This guide breaks down what economic nexus means, how it developed, and what you need to know to remain compliant in every state where you do business.

Key points to know

  • Economic nexus is based on sales activity, not physical presence.
  • Businesses that fail to comply can face severe consequences such as back taxes, interest charges, penalties, and in extreme cases even criminal exposure.
  • Technology, particularly tax automation tools, can make it far easier to track thresholds and manage filings across multiple states.

What exactly is economic nexus?

Economic nexus refers to the legal relationship between a business and a state that arises purely from commercial activity. Put simply: once your sales in a state pass a certain threshold, you are considered to have a taxable connection there. That means you’re required to collect and remit sales tax, even if you don’t have an office, warehouse, or employees within the state’s borders.

For e-commerce and digital companies, this concept is especially important. A seller in one state who ships across the country can quickly cross those thresholds without ever stepping foot in another jurisdiction.

Physical presence vs. economic activity

Before online shopping became widespread, the sales tax rules were tied to physical presence. If a company had a storefront, staff, or property in a state, it was responsible for collecting tax there.

Economic nexus changed the landscape. The trigger is no longer a physical footprint but sales activity. If your revenue or transaction count in a state goes above the defined level, you must comply with its tax rules. In practice, many companies today meet both tests: they might have a small office in a state and also exceed sales thresholds, increasing their obligations even further.

How did economic nexus develop?

The turning point came with the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair. In that ruling, the Court overturned the long-standing “physical presence” requirement, allowing states to enforce tax collection on remote sellers based on economic thresholds.

This decision opened the door for nearly every state with a sales tax to adopt economic nexus laws. For businesses, it introduced new complexity: thresholds differ from state to state, reporting rules vary, and there is little uniformity.

The Wayfair case and its impact

South Dakota brought the case to strengthen its ability to collect revenue from online sales. The Court sided with the state, establishing that an out-of-state seller can indeed be required to charge sales tax if their economic activity crosses the line set by state law.

The aftermath for businesses has been profound:

  • Economic nexus laws are now widespread.
  • Compliance has become more complex due to inconsistent thresholds.
  • Many states have added marketplace facilitator laws, meaning large platforms must collect on behalf of their sellers.

For companies, this has meant registering in more jurisdictions, monitoring sales carefully, and ensuring proper systems are in place.

State thresholds for economic nexus

Thresholds are not universal. They differ from state to state, often measured by revenue, number of transactions, or both. Below is a summary of current requirements (2024). States like Delaware, New Hampshire, Oregon, and Montana do not levy sales tax, so they have no nexus rules.

  • Alabama – $250,000 in sales
  • Alaska – $100,000 or 200 transactions
  • Arizona – $100,000 in sales
  • Arkansas – $100,000 or 200 transactions
  • California – $500,000 in sales
  • Colorado – $100,000 in sales
  • Connecticut – $100,000 and 200 transactions
  • Florida – $100,000 in sales
  • Georgia – $100,000 or 200 transactions
  • Hawaii – $100,000 or 200 transactions
  • Idaho – $100,000 in sales
  • Illinois – $100,000 or 200 transactions
  • Indiana – $100,000 or 200 transactions
  • Iowa – $100,000 in sales
  • Kansas – $100,000 in sales
  • Kentucky – $100,000 or 200 transactions
  • Louisiana – $100,000 in sales
  • Maine – $100,000 in sales
  • Maryland – $100,000 or 200 transactions
  • Massachusetts – $100,000 in sales
  • Michigan – $100,000 or 200 transactions
  • Minnesota – $100,000 or 200 transactions
  • Mississippi – $250,000 in sales
  • Missouri – $100,000 in sales
  • Nebraska – $100,000 or 200 transactions
  • Nevada – $100,000 or 200 transactions
  • New Jersey – $100,000 or 200 transactions
  • New Mexico – $100,000 in sales
  • New York – $500,000 and 100 transactions
  • North Carolina – $100,000 or 200 transactions
  • North Dakota – $100,000 in sales
  • Ohio – $100,000 or 200 transactions
  • Oklahoma – $100,000 in sales
  • Pennsylvania – $100,000 in sales
  • Rhode Island – $100,000 or 200 transactions
  • South Carolina – $100,000 in sales
  • South Dakota – $100,000 or 200 transactions
  • Tennessee – $100,000 in sales
  • Texas – $500,000 in sales
  • Utah – $100,000 or 200 transactions
  • Vermont – $100,000 or 200 transactions
  • Virginia – $100,000 or 200 transactions
  • Washington – $100,000 in sales
  • West Virginia – $100,000 or 200 transactions
  • Wisconsin – $100,000 in sales
  • Wyoming – $100,000 or 200 transactions
  • District of Columbia – $100,000 or 200 transactions

Staying compliant

Once a company establishes economic nexus in a state, the real work begins: making sure tax collection and reporting are handled correctly. Compliance isn’t just about charging customers a bit extra at checkout, it’s a structured process that includes registration, calculation, collection, remittance, and meticulous record-keeping.

Registration

The first step is obtaining a permit in every state where obligations arise. To do this, a business typically needs its Employer Identification Number (EIN) and other basic company details. Applications are submitted through the state’s Department of Revenue website, usually under the Sales and Use Tax section. In most states registration is free, though some charge a small administrative fee, often under $20. Processing times can range anywhere from two to six weeks.

Collecting and remitting

Once registration is complete, the business is responsible for applying the correct tax rate on each sale. Rates depend not only on the customer’s location, often determined by their five-digit ZIP code, but also on the nature of the product or service. Each state defines its own rules about exemptions, which makes it essential to apply the correct classification. Collected amounts must then be remitted on a regular schedule set by the state.

Record keeping

Accurate documentation underpins compliance. States expect businesses to maintain detailed sales records, including tax collected, product classifications, and proof of remittance. These records are vital both for preparing returns and for defending against potential audits. In practice, companies should monitor their sales volume in every state, track thresholds, and document all transactions thoroughly.

Risks of ignoring the rules

Failing to comply with economic nexus laws can have lasting consequences:

  • Owing back taxes plus interest for periods of non-payment.
  • Financial penalties that grow with time.
  • The potential for audits, which are often costly and disruptive.
  • Damage to reputation if non-compliance becomes public.
  • In some cases, even the suspension of licenses required to operate.

The bottom line: non-compliance is far more expensive than setting up proper systems from the start.

The role of tax automation

With dozens of states, varying thresholds, and changing laws, manual tracking is unrealistic for most businesses. Tax automation platforms provide monitoring tools, calculate the correct rates, generate filings, and help companies remain compliant.

Solutions like these can handle updates when state laws change, apply exemptions where they are allowed, and store records for audit defense. For companies selling across state lines, automation is increasingly not just helpful, but essential.

Conclusion

Economic nexus has reshaped U.S. sales tax rules. Understanding how it works is vital for any business operating across state borders, particularly online sellers. By keeping an eye on thresholds, registering where required, and using technology to manage compliance, companies can avoid penalties and focus on growth.

Frequently asked questions

What is economic nexus?
It’s the obligation to collect and remit sales tax in a state once your sales there exceed a defined threshold, regardless of physical presence.

How is it triggered?
Each state sets its own threshold, usually based on annual sales revenue, transaction count, or both. Crossing that line creates nexus.

How is it different from physical nexus?
Physical nexus comes from having property, staff, or a storefront in a state. Economic nexus is based purely on economic activity.

Do all states have these rules?
Nearly all states with a sales tax have adopted them, though the details differ widely.

What happens if I ignore it?
You risk owing back taxes, paying interest and fines, facing audits, and harming your reputation.

How can businesses manage this across many states?
The most effective approach is using tax automation software that tracks thresholds, applies correct rates, and files returns.

 

Please note that Delaware, Montana, New Hampshire, and Oregon do not impose a state sales tax; therefore, economic nexus laws are not applicable in these states. Moreover, notice that Kansas does not specify a sales or transaction threshold; any amount of sales into Kansas establishes economic nexus. These data and information are accurate as of March 2025.