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As businesses grow and expand across state lines, whether by opening new physical locations, hiring remote staff, or increasing online sales, they face increasingly complex tax responsibilities. At the heart of these responsibilities lies the concept of “nexus”, which determines whether a business has a sufficient connection to a state that obligates it to comply with that state’s tax laws.
For many growing companies, especially those without dedicated tax departments, navigating these rules can feel overwhelming. Understanding how nexus is triggered, and how it varies by jurisdiction, is essential to managing risk, ensuring compliance, and sustaining long-term growth.
What Is Tax Nexus and Why Does It Matter?
Tax nexus refers to the minimum level of activity or presence a business must have in a state before that state can impose tax obligations. Once nexus is established, a company may be required to:
- Register with the state’s tax authority
- Collect and remit sales and use tax
- File income, franchise, or gross receipts tax returns
- Comply with employment tax and payroll requirements
The criteria for triggering nexus vary significantly between states, making it essential for businesses to stay informed and maintain strong internal tracking systems.
Physical Nexus: The Traditional Foundation
Historically, states could only require tax compliance from businesses with a physical presence in their jurisdiction. This included having an office, warehouse, retail store, or employees in the state. Even storing inventory, especially through third-party logistics providers, can establish nexus.
Physical presence still triggers nexus today, especially for income and payroll taxes. For example, if a company has a remote employee working from home in a state, that alone may be enough to require payroll registration and income tax filings there.
Economic Nexus: The Wayfair Era
The 2018 South Dakota v. Wayfair, Inc. decision dramatically changed the nexus landscape. The Supreme Court ruled that states could require out-of-state businesses to collect and remit sales tax based on economic activity, even if there was no physical presence.
Since then, nearly every state with a sales tax has adopted some form of economic nexus threshold, typically:
- $100,000 in annual sales into the state
- 200 or more separate transactions
This shift has especially impacted e-commerce businesses, SaaS providers, and other companies with widespread online sales.
Remote Work: A New Source of Nexus Risk
The rise of remote work has added new layers of complexity. If a business has employees working from home in different states, those locations may establish nexus, triggering not only payroll obligations but also corporate income and sales tax filing requirements.
Common risks include:
- Income/franchise tax nexus due to payroll in the state
- Sales tax obligations if remote staff are involved in sales or service delivery
- Payroll tax withholding and unemployment insurance registration
- Businesses must closely monitor employee locations and assess their impact on nexus exposure.
Marketplace Facilitator Rules
For companies selling through platforms like Amazon, Etsy, or Walmart Marketplace, marketplace facilitator laws may shift the responsibility of collecting and remitting sales tax to the platform itself. While this can simplify sales tax compliance, it doesn’t absolve sellers of all responsibility.
Sellers still need to:
- Register for income/franchise tax where applicable
- Track and report sales accurately
- Retain documentation for audit readiness
It’s important to understand exactly what tax obligations are being handled by the facilitator and which still fall on the business.
Affiliate and Click-Through Nexus
Some states have passed laws targeting indirect relationships, such as:
- Affiliate Nexus – Created when a company has an affiliate or agent in the state that helps establish or maintain a market.
- Click-Through Nexus – Triggered when in-state websites direct traffic to a business’s site through affiliate links in exchange for commissions.
Even without a physical or economic presence, these marketing relationships can create nexus. Businesses engaged in affiliate marketing should carefully review agreements and monitor where referral partners are located.
Key Tax Types Affected by Nexus
While sales tax is the most obvious, nexus impacts several types of state and local taxes, including:
- Sales and Use Tax – Triggered by sales into a state; requires collection and remittance.
- Corporate Income/Franchise Tax – Imposed on income generated from in-state activity; many states now apply economic nexus here as well.
- Payroll and Employment Taxes – Required in any state where employees are located.
- Gross Receipts or Excise Taxes – Some states tax revenue instead of income (e.g., Washington’s B&O tax).
Each of these tax types has different thresholds and rules, adding to the complexity of compliance.
The Cost of Noncompliance
Failure to manage multistate nexus can lead to costly consequences. States are becoming more aggressive in identifying non-compliant businesses using advanced data analytics, cross-referencing sales data, and targeting remote employers.
Potential consequences include:
- Payment of back taxes, often with penalties and interest
- Increased audit risk and associated costs
- Loss of business reputation and investor confidence
- Disqualification from tax incentives or grants
Ignoring nexus is not a sustainable option, especially for fast-growing companies.
Using Voluntary Disclosure Agreements (VDAs)
If you discover that your business has unknowingly triggered nexus in a state where you haven’t registered or filed, you may still have options. Many states offer Voluntary Disclosure Agreements (VDAs), which allow businesses to come forward and:
- Disclose past liabilities anonymously
- Limit the lookback period (often 3–4 years)
- Waive or reduce penalties
VDAs can help clean up past noncompliance and offer a fresh start, but they must be handled carefully, ideally with professional assistance.
Strategic Growth with Nexus in Mind
Expansion should be exciting, not stressful. But too often, tax compliance is an afterthought in growth planning. Whether you’re launching a new product, hiring in another state, or entering a new marketplace, it’s vital to evaluate how these moves impact your tax footprint.
By proactively asking questions like:
- “Will hiring in this state create new tax obligations?”
- “Do we need to register in states where we store inventory?”
- “Are we using systems that track our exposure automatically?”
you can manage compliance with confidence and prevent nasty surprises.
Final Thoughts
In today’s digital and distributed economy, multistate nexus is a challenge no business can afford to overlook. The rules are changing fast, and enforcement is becoming more sophisticated.
Whether your growth comes from e-commerce, remote hiring, or geographic expansion, understanding and managing your tax obligations across states is essential.
With proper planning, the right tools, and a commitment to staying informed, you can transform multistate tax compliance from a headache into a competitive advantage.
Expanding your business across state lines?
It’s time to review your tax strategy. Understanding where your nexus risks lie today will save you money, and stress, tomorrow.
