Bookkeeping · Payroll & Compliance · Brief · Working level
Sales tax nexus: when a state can make you collect
Physical presence and economic nexus in concept — what creates a collection obligation, why registration must precede collection, and how to monitor thresholds.
Nexus is the connection that lets a state require you to collect its sales tax. Since South Dakota v. Wayfair (2018), there are two independent routes to it: physical presence — people, property, or inventory in the state — and economic nexus — crossing a sales threshold into the state with no footprint at all. Either one, alone, creates the obligation. And the obligation runs in a strict order: nexus first, registration second, collection third. Never collect a state's tax before you hold its permit.
The two routes, in concept
Physical nexus is the old rule and it never went away. Common triggers:
| Trigger | Why it counts |
|---|---|
| Office, store, or warehouse | Property in the state |
| Employee or regular contractor working there — including remote hires | People in the state; see /bookkeeping/payroll-compliance/state-payroll-registrations |
| Inventory stored in the state — including in a marketplace's fulfillment warehouse | Property, even if you never chose the warehouse |
| Repeated in-person selling, installation, or service visits | Activity in the state |
Economic nexus is post-Wayfair: cross the state's threshold of sales into the state and you owe collection regardless of footprint. Most states set the trigger in the neighborhood of $100,000 of annual sales; some use different amounts, different measurement periods (current or prior calendar year), and different bases (gross vs. taxable sales), and many have dropped their old transaction-count prongs. Treat every threshold as a mechanism to verify on the state revenue agency's site — these rules have changed repeatedly and keep changing.
Two overlays narrow the problem for small sellers: marketplace facilitator laws put the collection duty on the marketplace for sales it facilitates (those sales may still count toward your threshold math, state by state), and sales of nontaxable services may cross thresholds without producing much tax due — but registration can still be required.
Registration before collection
The sequence matters because collected tax is trust money. Collecting without a permit is itself a violation; collecting and not remitting is the sales-tax sibling of the payroll trust-fund problem. So:
- Inventory your footprint: where are employees, inventory, and property? (Payroll registrations are your cheat sheet.)
- Pull a sales-by-state report at least quarterly and compare against each state's current threshold.
- When a threshold or footprint trips, register with that state's revenue agency; the registration sets your first filing period and collection start date.
- Configure the invoicing or cart system to collect from that date — and post collections to a liability account, never to revenue, exactly as laid out in /bookkeeping/foundations/sales-tax-payable-basics.
Once registered, the ongoing rhythm — filing cadence, reconciling the liability account, rounding — is covered in /bookkeeping/payroll-compliance/sales-tax-filing-workflow.
Frequently asked questions
- What creates sales tax nexus in a state?
- Two routes: physical presence — an office, inventory, employees, or regular in-person activity in the state — or economic nexus, crossing a state-set threshold of sales into the state (commonly around $100,000 of annual sales, though thresholds and measurement rules vary and change). Either one obligates registration and collection on taxable sales.
- Can I collect sales tax before registering in a state?
- No. Collecting tax without a permit is unlawful in most states — collected tax is the state's money, and holding it unregistered is treated seriously. The sequence is always: determine nexus, register with the state's revenue agency, then begin collecting on the effective date the registration establishes.
- Does a remote employee create sales tax nexus?
- Usually yes — an employee working in a state is classic physical presence, independent of any sales threshold. A business that registers for payroll in a new state should check its sales tax footprint there at the same time.