Sales tax nexus is the term for the legal connection that requires a business to register, collect, and remit sales tax in a particular jurisdiction. In most cases, your business establishes nexus when it maintains a physical presence, exceeds an economic revenue or transaction threshold, forms certain affiliate relationships, or facilitates marketplace sales.

The US Supreme Court's decision in South Dakota v. Wayfair, in 2018, allows states to enforce sales tax obligations based on economic activity alone, without requiring physical presence. If your business creates nexus in a state, you must register, collect, and remit sales tax there, even if you operate elsewhere.

This guide explains the different types of nexus, how to determine whether your business meets a state's threshold, and how to stay compliant.

What’s in this article?

• What is nexus tax?
  
• Types of sales tax nexus
  
• Sales tax nexus
  
• How Stripe Tax can help
  

What is nexus tax?

Nexus tax, also known as “nexus fees” or “nexus surcharges,” is a type of tax or fee imposed by states or jurisdictions on businesses that have a sales tax nexus within their borders. A sales tax nexus is created when a business has a sufficient connection to or presence in a state or jurisdiction, such as a physical presence or economic activity, which triggers a sales tax collection obligation.

Nexus tax is calculated based on the specific rules and rates of the state or jurisdiction where the business has a sales tax nexus. Typically, nexus tax is a percentage of the total sales or revenue generated by the business within the state or jurisdiction. The exact percentage can vary widely depending on the state or jurisdiction, and some states may also levy additional fees or surcharges.

State nexus tax examples

Examples of states where businesses with sales tax nexus are required to collect and remit state and local sales tax on taxable sales made within the state include:

Historically, nexus was established by physical presence. That changed after South Dakota v. Wayfair, in 2018, which allowed states to implement economic nexus and require remote businesses pay the appropriate taxes in jurisdictions in which they profit. This helps boost revenue for the state and prevents out-of-state companies from gaining unfair advantages over local retailers.

Types of sales tax nexus

Sales tax nexus is the connection or relationship between a business and a state or jurisdiction that creates a sales tax obligation. There are different types of sales tax nexus that can trigger a requirement to collect and remit sales tax, including:

Physical nexus

Physical nexus is created when a business has a physical presence in a state or jurisdiction, such as a store, warehouse, or office. This type of nexus is the traditional standard for sales tax collection and has been established through various court cases. Examples of physical nexus include a business that has a physical location, employees, or inventory in a state.

Economic nexus

Economic nexus is created when a business has a certain level of economic activity in a state or jurisdiction, even if it does not have a physical presence there. Economic nexus laws typically set a threshold for sales, transactions, or revenue generated in a state. If that threshold is met or exceeded, the business is required to collect and remit sales tax. Many states have adopted economic nexus laws in recent years in response to the US Supreme Court's decision in South Dakota v. Wayfair, which mandated that businesses must collect and remit sales taxes on transactions in any state where they conduct more than 200 transactions or $100,000 worth of sales per year, even if they don’t have a physical presence in that state. The overall framework for economic nexus laws, including amounts, transactions, effective dates, evaluation periods, and what qualifies under the law, varies by state.

Affiliate nexus

Affiliate nexus is created when a business has a relationship with another business that has a physical presence in a state. This can happen when a business has an affiliate or subsidiary in a state that is related to the business, such as a common owner or branding. Affiliate nexus laws typically require the business to collect and remit sales tax if the affiliated business has a physical presence in the state.

Click-through nexus

Click-through nexus is created when a business has a relationship with a third-party seller or referral agent in a state. This can occur when a business pays a commission or referral fee to a third-party for sales made through their website or marketing efforts. Click-through nexus laws typically require the business to collect and remit sales tax if the third-party has a physical presence in the state.

Sales tax nexus

Sales tax nexus is a term used to describe the connection between a business and state or local government that triggers the requirement to collect and remit sales tax. It is the minimum threshold of activity that a business must have in a state before it is obligated to collect and remit sales tax in that state.

For example, imagine you run an online store that sells handmade candles. Your business is based in Arizona, but you also sell your candles in California and Colorado. Each state has its own sales tax laws and rates, so you need to determine whether or not you qualify for sales tax nexus in those states.

• In California, for example, you establish sales tax nexus if you have more than $500,000 in sales in the current or previous calendar year.

• In Colorado, on the other hand, businesses that clear more than $100,000 in sales during any given year qualify for sales tax nexus.

Sales tax nexus can be created through various activities or factors, such as having a physical presence, economic activity, affiliate relationships, or click-through relationships in a state or jurisdiction.

Once a sales tax nexus is established, the business is required to collect and remit sales tax on taxable sales made within the state or jurisdiction. The rules and requirements for sales tax nexus vary by state and jurisdiction, and it is important for businesses to understand their sales tax nexus obligations and comply with all applicable tax laws to avoid potential penalties or legal action.

Criteria for establishing sales tax nexus

There’s no universal set of criteria for establishing sales tax nexus, but generally several factors are considered when determining whether a business has a sales tax obligation in a particular state or jurisdiction. Some of the common criteria for establishing sales tax nexus include:

Common scenarios that complicate nexus

While tracking basic revenue and physical office locations is a good starting point, advanced logistics and B2B sales models introduce complex regulatory gray areas:

• Fulfillment and 3PL inventory: Storing physical inventory in third-party logistics (3PL) warehouses or fulfillment centers automatically establishes physical nexus in those states, even if you have no local offices or employees there.

• Dropshipping: These multiparty transactions complicate tax collection because the supplier's physical location, the merchant's economic threshold, and the customer's delivery address can all trigger competing nexus rules.

• Resale and exemption certificates: Selling tax-free to B2B buyers requires capturing and validating active exemption certificates; missing or expired documentation leaves your business legally liable for the uncollected tax during an audit.

Impact of sales tax nexus on businesses

The impact of sales tax nexus on businesses can be significant, depending on the specific circumstances and requirements of each state or jurisdiction. It’s critical for businesses to know the states and jurisdictions where they have sales tax nexus and its impact, including:

1. Compliance costs
   Businesses that have a sales tax nexus in multiple states or jurisdictions may need to register for sales tax permits, collect and remit sales tax on taxable sales, file regular sales tax returns, and keep detailed records of sales and taxes collected.

2. Penalties and interest
   Businesses that fail to comply with sales tax nexus requirements may face penalties and interest charges for late or incorrect filings or payments, which can add up quickly.

3. Competitive disadvantage
   Businesses that don’t properly manage their sales tax obligations may face a competitive disadvantage compared to businesses that are compliant with tax laws.

4. Reputational damage
   Failing to comply with sales tax nexus requirements can also lead to reputational damage for businesses since customers may be less likely to do business with a company with a history of tax compliance issues or negative publicity.

Steps businesses can take to comply with sales tax nexus laws

Complying with sales tax nexus laws can be a complex and challenging task for businesses, especially those that have a sales tax obligation in multiple states or jurisdictions. Here are some steps that businesses can take to comply with sales tax nexus laws:

1. Determine where you have sales tax nexus
   The first step in complying with sales tax nexus laws is to determine where your business has a sales tax obligation by identifying where your business has a physical presence or economic activity.

2. Register for sales tax permits
   Once you have determined where you have a sales tax obligation, you will need to register for sales tax permits in each state or jurisdiction where you have nexus. This typically involves filling out an application and providing information about your business. To streamline this process, you can let Stripe manage your tax registrations in the US and benefit from a simplified process that prefills application details.

3. Collect and remit sales tax
   After you have registered for sales tax permits, you will need to collect and remit sales tax on taxable sales made in each state or jurisdiction where you have nexus.

4. Keep detailed records
   It’s important to keep detailed records of all sales and taxes collected to comply with sales tax nexus laws. This can include maintaining records of sales invoices, receipts, and other documentation that support your sales tax collections and remittances.

5. Stay up to date on sales tax nexus requirements
   Sales tax nexus requirements can change frequently and it’s important to stay up to date on sales tax laws and regulations in each state or jurisdiction where you have nexus.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful API.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and GST on:

• Digital goods and services in all US states and over 100 countries
  
• Physical goods in all US states and 42 countries
  

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You’ll benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax automates US filings in the Dashboard, powered by TaxJar. For global filings, Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.