Economic Nexus in Sales Tax Guide: Triggers, Thresholds by State, and Laws

Introduction to the Economic Nexus

The sales tax landscape has undergone significant changes in recent years, particularly following the Supreme Court's decision in South Dakota v. Wayfair, Inc. in 2018 (Gillespie, 2023). This ruling allowed states to impose sales tax obligations on businesses based on economic nexus rather than just physical presence. As a result, many companies are now grappling with the complexities of economic nexus laws across various states. 

What does this mean for your business? How do you determine if you have an economic nexus in a particular state? In this guide, we will explore the concept of economic nexus, its importance for businesses, and the specific triggers and thresholds that vary by state. Understanding these elements, you can better navigate your sales tax obligations and ensure compliance.

What is the Economic Nexus for Sales Tax?

Economic nexus refers to a tax obligation that arises when a business has a significant economic presence in a state, regardless of whether it has a physical location there. This concept is crucial for sales tax compliance as it determines when a business must collect and remit sales tax to a state.

The relevance of economic nexus has grown significantly for remote sellers, marketplace facilitators, and direct sellers since the Wayfair decision. For example, an online retailer selling goods to customers in multiple states may not have a physical store in those states but could still be required to collect sales tax based on their sales volume or number of transactions.

Why is the Economic Nexus Important for Businesses?

Understanding economic nexus is vital for businesses operating across state lines. It directly impacts multi-state operations and tax obligations. For instance, consider a Shopify store that sells products nationwide. If the store exceeds the economic nexus threshold in a particular state—whether through revenue or transaction count—it must register for sales tax collection in that state.

Similarly, dropshipping businesses must be aware of their economic nexus status because they often sell products from suppliers located in various states. Failing to comply with economic nexus laws can lead to penalties and back taxes owed to states where they have established nexus.

Economic Nexus Laws and Triggers

What is Economic Nexus Law?

Economic nexus laws govern when businesses are required to collect sales tax based on revenue or transaction thresholds rather than physical presence (Di Benedetto JD LlM, 2021). Each state has its criteria for establishing economic nexus, which can include factors like total revenue generated from sales within the state or the number of transactions completed.

State and local tax authorities are responsible for enforcing these laws, which means businesses must stay updated on each state's regulations to remain compliant.

How Do Economic Nexus Laws Impact Marketplace Sellers and Service Providers?

Marketplace sellers and service providers face unique challenges under economic nexus laws. For instance, platforms like Amazon or eBay may be responsible for collecting sales tax on behalf of their sellers if they meet certain thresholds. This can simplify compliance for individual sellers but also requires them to understand their responsibilities regarding economic nexus.

Service providers operating remotely must also be vigilant about their economic nexus status. For example, a consulting firm providing services to clients in multiple states may inadvertently trigger a nexus based on the revenue generated from those states.

What Triggers Economic Nexus for Sales Tax?

Several activities can trigger economic nexus:

1. Surpassing Sales/Revenue Thresholds: Many states set specific revenue thresholds (e.g., $100,000) that when exceeded, establish an economic nexus.

2. Conducting a Specific Number of Transactions: States may also impose transaction thresholds (e.g., 200 transactions) that trigger sales tax obligations.

3. Operating as a Foreign Entity Selling to U.S. Customers: Non-U.S. businesses selling goods or services to U.S. customers may also create an economic nexus depending on their sales volume.

Who Does Economic Nexus Affect?

Economic nexus laws affect various entities:

1. Remote Sellers and Dropshipping Businesses: These businesses must monitor their sales activity across different states to ensure compliance with varying thresholds.

2. Marketplace Facilitators: Platforms like Amazon and Shopify may have additional responsibilities regarding sales tax collection based on their sellers' activities.

3. Service Providers and Non-U.S. Businesses: Companies providing services or selling products from outside the U.S. must evaluate their activities concerning U.S. customers.

How Do Economic Nexus Laws Impact Marketplace Sellers and Service Providers?

Economic nexus laws significantly affect various entities, particularly marketplace sellers and service providers. Understanding these impacts is crucial for businesses operating in multiple states or selling through online platforms.

1. Marketplace Sellers: 

For businesses selling goods through platforms like Amazon or eBay, economic nexus laws can create complex compliance requirements. For instance, if a seller exceeds the sales threshold in a state due to high sales volume during a holiday season, they must register for sales tax collection in that state. This can lead to increased administrative tasks, as sellers need to track their sales across different states and ensure they comply with varying tax rates and regulations.

Example: Consider a small business that sells handmade crafts on Etsy. If this business generates $150,000 in sales in California within a year, it triggers California’s economic nexus law, which requires the business to collect and remit sales tax. The seller must now navigate California’s tax regulations, which may differ significantly from their home state.

2. Service Providers: 

Similar challenges arise for service providers. Companies offering consulting services remotely may also establish economic nexus based on revenue generated from clients in different states (MGO CPA, 2024). For example, a digital marketing agency based in New York that provides services to multiple clients in Texas may find itself required to collect sales tax if its revenue from Texas clients surpasses the state’s threshold.

Example: A software as a service (SaaS) company that provides subscription services nationwide might not have a physical presence in every state but could still be liable for sales tax if it exceeds the economic nexus threshold in states like Florida or Washington. This necessitates careful tracking of client locations and revenue streams to ensure compliance.

Addressing Additional Entities

To further illustrate the impact of economic nexus laws, let’s consider additional examples (Ahi et al., 2022) of entities affected by these regulations:

1. E-commerce Startups: 

New online businesses often face challenges in understanding economic nexus laws as they scale. For instance, a startup selling eco-friendly products online may initially operate from a single state but quickly expand its customer base nationwide. As their sales grow, they must be vigilant about monitoring their revenue and transaction counts in each state to avoid noncompliance.

2. Dropshipping Businesses: 

Dropshipping companies, which fulfill orders directly from suppliers to customers without holding inventory, are also affected by economic nexus laws. If a dropshipping business sells products to customers in multiple states and exceeds the threshold in any of those states, it becomes responsible for collecting sales tax there. This can complicate operations since they must ensure that their suppliers are aware of these obligations as well.

3. Freelancers and Gig Economy Workers: 

Individuals working as freelancers or gig workers may also trigger economic nexus laws depending on their income levels and client locations. For example, a freelance graphic designer who works primarily with clients in California but resides in another state may need to register for California sales tax if their earnings exceed the threshold set by the state.

4. Nonprofit Organizations: 

Even nonprofit organizations can be impacted by economic nexus laws if they engage in commercial activities that generate revenue. A nonprofit hosting events or selling merchandise might inadvertently establish a nexus in states where they exceed revenue thresholds, requiring them to account for sales tax on those transactions.

By addressing these additional entities—e-commerce startups, dropshipping businesses, freelancers, and nonprofits—we can better understand the broad implications of economic nexus laws across various sectors. Each entity must remain proactive about monitoring its activities and understanding how these laws affect its operations to ensure compliance and avoid potential penalties.

As you assess your business operations:

• Stay Informed: Regularly review your sales data and understand how it aligns with each state's economic nexus thresholds.

• Consult Professionals: Engage with tax professionals who can provide tailored advice based on your specific circumstances.

• Implement Tracking Systems: Utilize software solutions that help track your sales across different states to streamline compliance efforts.

By taking these proactive steps, you can navigate the challenges posed by economic nexus laws while positioning your business for success in an increasingly complex regulatory environment.

How Does the Economic Nexus Work?

How to Calculate Economic Nexus?

To determine if your business has established economic nexus in a state:

1. Identify Revenue Sources: Review your total revenue generated from sales within each state.

2. Count Transactions: Track the number of transactions conducted within each state

3. Compare Against Thresholds: Compare your revenue and transaction counts against each state's established thresholds.

For example, if your online store generates $120,000 in sales within California and completes 250 transactions there, you have surpassed both potential thresholds for establishing economic nexus (US Economic Nexus Guide, 2024).

How Does the Economic Nexus Effective Date Work?

The effective date of economic nexus laws varies by state but generally applies retroactively from when a seller first exceeds the threshold. This means businesses should be prepared to collect and remit taxes as soon as they surpass the threshold—not just after registering with the state.

Marketplace facilitators often have specific effective dates outlined by state law that dictate when they must begin collecting taxes on behalf of sellers using their platform.

Economic Nexus Compliance

Do We Need to Register in a State Where Economic Nexus Applies?

If your business exceeds an economic nexus threshold in any state, you are required to register for sales tax collection and remittance in that state. This process typically involves completing an application with the state's revenue department.

For example, if you are a foreign entity selling products online and exceeding the threshold in Texas, you must register with the Texas Comptroller’s Office to collect sales tax from customers located there.

What if I Do Not Meet the Economic Nexus Threshold?

If your business does not meet the economic nexus threshold in any state, you are generally not required to collect sales tax there; however, it is essential to keep accurate records of your sales activity in case you exceed those thresholds in the future.

Some states may offer exemptions or special considerations for small sellers below certain revenue levels—these should be researched thoroughly before making assumptions about compliance requirements.

Why Should Businesses Prioritize Economic Nexus Compliance?

Understanding triggers, thresholds, and laws related to economic nexus is crucial for businesses operating across multiple states. Non-compliance can lead to significant penalties and back taxes owed to states where businesses have established an obligation but failed to register or collect taxes accordingly.

By prioritizing compliance with economic nexus laws, businesses can avoid costly mistakes while ensuring they meet their legal obligations as they grow.

Economic Nexus Thresholds by State

What is an Economic Nexus Threshold?

An economic nexus threshold is defined as the specific level of revenue or number of transactions that triggers a seller's obligation to collect sales tax within a particular state. These thresholds vary widely between states; some may set higher limits while others impose lower ones.

State and local tax authorities play critical roles in determining these thresholds and enforcing compliance among businesses operating within their jurisdictions.

Economic Nexus Threshold by State

This table provides a snapshot of varying thresholds across different states; however, it's essential to consult each state's specific regulations as they can change frequently due to legislative updates or court rulings. 

*Included transactions encompass total retail sales of tangible personal property delivered into the state, sales via a non-collecting marketplace, and exempt sales. 

*Excluded transactions include sales through a registered marketplace facilitator, exempt wholesale sales, and exempt services.

Marketplace laws also influence these thresholds significantly; platforms like Shopify or Amazon may have distinct requirements based on their seller activities within each jurisdiction.

Does Economic Nexus Apply to Income Tax?

While this guide primarily focuses on sales tax obligations arising from economic nexus laws, it’s important to note that some states also extend similar principles regarding income tax compliance. Businesses should consult with tax professionals familiar with both areas of taxation to ensure comprehensive compliance strategies are developed (Di Benedetto JD LlM, 2021b).

What Steps Should Businesses Take Next?

Businesses should take proactive steps regarding their economic activity:

• Evaluate Your Sales Activity: Regularly assess your revenue generated from different states.
• Track Your Transactions: Keep detailed records of all transactions conducted across state lines.
• Consult Tax Professionals: Engage with experienced accountants or tax advisors familiar with multi-state operations who can provide guidance tailored specifically to your business needs.

Conclusion

Navigating economic nexus complexities is essential for businesses operating in multiple jurisdictions, especially after the South Dakota v. Wayfair, Inc. ruling, which allows states to impose sales tax based on economic presence. 

By fostering a culture of compliance and awareness of economic nexus laws, businesses can enhance operational resilience and thrive in a connected marketplace. Commenda can assist in navigating these complexities, ensuring businesses remain compliant and informed.

References

1. Ahi, A. A., Sinkovics, N., & Sinkovics, R. R. (2022). E-commerce Policy and the Global Economy: A Path to More Inclusive Development? Management International Review, 63(1), 27–56. https://doi.org/10.1007/s11575-022-00490-1
2. Di Benedetto JD LlM, B. A. (2021, June 1). A practical guide to economic nexus. Journal of Accountancy. https://www.journalofaccountancy.com/issues/2021/jun/economic-nexus-sales-and-use-tax.html
3. Staff, C. C. (2025, July 10). Economic nexus simplified: State sales tax guide. Wolters Kluwer. https://www.wolterskluwer.com/en/expert-insights/state-by-state-economic-nexus-thresholds-under-state-sales-tax-laws

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