Sales Tax Nexus Explained: When You Must Collect

Written by CA Sumit ChandwaniChartered Accountant & Founder · Reviewed by Minal Bihani, EA

"Nexus" is the most important sales tax word you may never have heard. It's the connection between your business and a state that legally obligates you to collect and remit that state's sales tax. Before a 2018 Supreme Court decision, nexus mostly meant physical presence. Now, simply selling enough into a state can create it, which is why online sellers can suddenly owe sales tax in states they've never set foot in. Here's how it works.

Two kinds of nexus

There are two ways to trigger sales tax nexus in a state: physical nexus and economic nexus. You only need one to be on the hook.

Physical nexus

Physical nexus is the traditional kind, a tangible connection to the state. That includes an office, a warehouse, employees, or inventory stored there. For e-commerce sellers, the big one is inventory: if you use Amazon FBA and Amazon stores your goods in a warehouse in a given state, that inventory can create physical nexus there, even if you've never visited.

Economic nexus

Economic nexus is the newer kind, created by the 2018 Wayfair decision. It says that if you sell more than a certain amount into a state, measured in revenue or number of transactions, you have nexus there regardless of any physical presence. Each state sets its own threshold, but a very common one is $100,000 in sales or 200 transactions in a year.

Why this matters so much for online sellers

If you sell nationwide online, you can cross economic nexus thresholds in many states at once without realizing it. Each state where you have nexus expects you to register, collect the right sales tax from customers there, and file returns on a schedule. Ignore it and the liability accrues quietly, and because you were supposed to collect the tax from customers, unpaid sales tax often comes out of your own pocket later, plus penalties and interest.

Marketplace facilitator laws

There's some relief: most states now have "marketplace facilitator" laws requiring platforms like Amazon, Etsy and eBay to collect and remit sales tax on behalf of their sellers. If all your sales go through such a marketplace, much of the collection may be handled for you. But if you also sell through your own website (for example, on Shopify), those direct sales are your responsibility, and you can still have registration and filing obligations even where the marketplace collects.

How to stay compliant

• Track where your inventory is stored (especially with FBA)
• Monitor your sales by state against each state's economic nexus threshold
• Register for a sales tax permit in states where you have nexus
• Collect the correct rate from customers in those states
• File sales tax returns on each state's schedule, even zero returns when required

The role of a resale certificate

Once you're registered, a resale certificate lets you buy inventory you intend to resell without paying sales tax on it yourself, you collect the tax from the end customer instead. Used correctly, it prevents you from being taxed twice on the same goods. Getting registered and obtaining the right certificates is part of setting up sales tax properly.

How Wayfair changed everything

Before 2018, the rule was essentially physical: a state could only require you to collect its sales tax if you had a physical presence there. The Supreme Court's decision in South Dakota v. Wayfair overturned that, allowing states to require sales tax collection based purely on economic activity, sales volume or transaction count, even with no physical presence at all. In the years since, nearly every state with a sales tax has enacted economic nexus rules. For online sellers, this was a seismic shift: a business selling nationwide from a single location can now have collection obligations in dozens of states simultaneously. Understanding this history explains why sales tax suddenly became so complicated for e-commerce.

Tracking nexus across many states

Because each state sets its own threshold and rules, monitoring nexus is an ongoing exercise, not a one-time check. You need to track your sales by state against each state's specific threshold, watch where your inventory is stored (especially with FBA), and recognize when you cross into a new obligation. Crossing a threshold mid-year typically means you must register and begin collecting going forward in that state. The businesses that get into trouble are usually the ones that set up sales tax once and never revisited it as their sales grew and spread, by which point the unpaid liability has quietly accumulated.

Registration, collection and filing

Having nexus triggers a three-part obligation. First, you register for a sales tax permit in the state. Second, you collect the correct rate from customers there, which can vary by locality, not just by state. Third, you file sales tax returns on the state's schedule, which might be monthly, quarterly or annually, and often requires filing even in periods with no sales. Each step has its own rules and deadlines, and managing them across multiple states is where the real administrative burden lies. Automation tools and professional help exist precisely because doing this manually across many states is so error-prone.

The cost of getting it wrong

Sales tax is uniquely punishing to ignore because it's money you were supposed to collect from customers on the state's behalf. If you fail to collect it, the state will still want it, and since you can't easily go back and bill past customers, it often comes straight out of your own pocket, plus penalties and interest. For a fast-growing online business, an unaddressed multi-state sales tax problem can become a five- or six-figure liability before anyone notices. That asymmetry, small effort to comply, large cost to ignore, is why staying on top of nexus is worth taking seriously from early on.

Staying ahead of your obligations

Sales tax nexus rewards businesses that stay ahead of it and punishes those that fall behind. Because obligations are triggered automatically by where you sell and where your inventory sits, not by any action you take, the only way to stay compliant is to monitor your footprint deliberately as you grow. That means watching your sales by state, knowing where your goods are stored, registering promptly when you cross a threshold, and filing on each state's schedule. The businesses that get blindsided by large sales tax liabilities almost always did so by setting up once and never revisiting the question as their sales spread across more states. Treat nexus as a living part of your operations, review it periodically, and the obligation stays manageable. Let it drift, and it compounds silently until it becomes a serious problem, which is exactly why a periodic nexus review is worth building into your routine.

Frequently asked questions

What is sales tax nexus in simple terms?

Nexus is the connection between your business and a state that requires you to collect and remit that state's sales tax. You can create it through physical presence (an office, employees or stored inventory) or through economic activity (enough sales or transactions).

What's a typical economic nexus threshold?

A common one is $100,000 in sales or 200 transactions into a state per year, but thresholds vary by state. You have to check each state where you sell, since crossing the threshold triggers registration and collection obligations there.

Does Amazon handle sales tax for me?

For sales made through Amazon, marketplace facilitator laws generally make Amazon responsible for collecting and remitting sales tax. But sales through your own website are your responsibility, and you may still have registration and filing obligations even where Amazon collects.

The bottom line

Nexus determines where you owe sales tax, and in the post-Wayfair world, online sellers can create it in many states through sales volume alone or through FBA inventory placement. Staying compliant means tracking nexus, registering where required, and filing on time. MOREOFTAX handles sales tax registration, resale certificates and nexus review so you collect correctly and avoid surprise liabilities. Get a free quote.