Business finance terms, explained simply.

Tax nexus is the legal connection between a business and a state (or other taxing jurisdiction). It has to be strong enough to give that state authority over the business. That authority means the state can require registration, tax collection, and payment. No nexus, no tax obligation. Once nexus exists, the clock starts. Registration, collection, and filing duties begin – whether or not the business has ever set foot in that state. 

That one-line version covers the basics. But “strong enough” is doing a lot of work in that sentence. The rules for what counts have changed more in the last eight years than in the previous eighty. Here’s the fuller picture. 

The Idea Behind Nexus, in Plain Terms 

Every state’s power to tax stops at its own authority to reach out and touch a business. A state can’t just decide to tax a company in another state because it feels like it. The U.S. Constitution won’t allow it. Nexus is the legal term for the minimum level of contact a business must have with a state. Cross that minimum, and the state can impose a tax obligation. 

Think of it less like a switch and more like a threshold. Below the threshold, a state has no claim on your business. Cross it – by opening an office, hiring a remote employee, storing inventory, or simply selling enough into that state – and you’re inside its tax jurisdiction. That means whatever registration, collection, and filing rules apply there now apply to you. 

Nexus questions come up most often around two very different taxes. It’s worth keeping them separate in your head: 

• Sales and use tax nexus – determines whether you must collect tax from customers in a state and remit it. 
• Income and franchise tax nexus – determines whether a state can tax your business’s net income or require a franchise/excise filing. This applies even if you never collect a dollar of sales tax there. 

A business can easily have sales tax nexus in a state without having income tax nexus there, or vice versa. They’re governed by different legal tests. 

Where the Modern Rules Come From 

For most of the 20th century, nexus meant physical presence – full stop. A 1967 case, National Bellas Hess, set that standard. Quill Corp. v. North Dakota (1992) reinforced it. Together they established that a state couldn’t force an out-of-state seller to collect its sales tax unless that seller had some kind of physical footprint in the state – a store, warehouse, office, or employee. 

That held until 2018. In South Dakota v. Wayfair, Inc., the U.S. Supreme Court overturned the physical presence rule for sales tax purposes. The Court upheld a South Dakota law requiring out-of-state sellers to collect and remit sales tax under a specific test. The trigger: $100,000 in sales or 200 separate transactions into the state in a year. No physical presence required at all. Every state that levies a sales tax has since adopted its own version of this “economic nexus” standard. 

That single decision explains a common modern problem. A small e-commerce brand shipping from one warehouse can end up with tax obligations in dozens of states it has never physically touched. 

The Two Constitutional Guardrails States Still Can’t Cross 

Even after Wayfair, a state’s taxing reach isn’t unlimited. Two clauses of the U.S. Constitution still constrain it: 

1. Due Process Clause – requires some minimum connection between the state and the person, property, or transaction being taxed. Purposeful availment of the state’s market is generally enough. 
2. Commerce Clause – requires a “substantial nexus” between the taxed activity and the state. It also prohibits states from unduly burdening interstate commerce. Unlike the Due Process standard, Congress can modify Commerce Clause nexus rules by statute. 

Wayfair addressed the Commerce Clause specifically. It didn’t touch Due Process. That distinction matters more in disputed or edge cases than in day-to-day compliance. But it’s the reason nexus law still has real constitutional limits, rather than being whatever a state legislature decides on a given day. 

The Main Types of Nexus You’ll Actually Run Into 

Physical presence nexus 

The original and still-valid standard. Triggered by things like: 

• An office, store, warehouse, or other real property in the state 
• Employees, contractors, or sales reps working in the state (remote workers included) 
• Inventory stored in the state – including inventory sitting in a third-party fulfillment warehouse 
• Attending trade shows or trainings in the state beyond a handful of days per year, in some states 
• Owning or leasing equipment, servers, or other tangible property there 

Economic nexus 

Triggered purely by the volume of business done in a state. No physical footprint needed. Most states set the bar at $100,000 in annual sales, 200 transactions, or both. The exact numbers vary by state, and so does whether the “or” is really an “and.” Several states have dropped the transaction-count leg entirely in recent years. Thresholds and effective dates change fairly often. Always confirm the current figure directly with the state’s department of revenue before relying on it. 

Income (and franchise/excise) tax nexus 

A separate test governs whether a state can tax your net income, not just your sales. States apply their own “doing business” standards. Many now use factor-presence tests similar to economic nexus for sales tax. A set dollar amount of sales, payroll, or property in the state can create income tax nexus – even without a single employee or building there. 

Affiliate and click-through nexus 

Some states attribute nexus to a business based on the activities of a related entity. That could be a subsidiary, franchisee, or commonly owned company operating in the state. Nexus can also come through referral arrangements with in-state affiliates who send traffic in exchange for a commission above a set dollar threshold. 

Trailing nexus 

A handful of states hold that nexus doesn’t disappear the instant a business stops its in-state activity. Some jurisdictions keep treating a business as having nexus for a defined period after the triggering activity ends. That period often runs through the rest of the current calendar year, plus the following one. 

Public Law 86-272: the One Federal Shield That Still Matters 

Passed in 1959, Public Law 86-272 is a narrow but genuinely useful federal protection. It prevents a state from imposing net income tax on an out-of-state business under specific conditions. The business’s only in-state activity must be soliciting orders for tangible personal property. Those orders also have to be approved and shipped from outside the state. 

A few things worth knowing about it: 

• It only blocks net income tax. It does nothing for sales tax, gross receipts taxes, franchise taxes, or capital-based taxes. 
• It only covers sales of tangible personal property. Services and digital products get no protection under it. 
• It doesn’t create nexus and it doesn’t erase it. It only shields an otherwise-nexus business from one specific tax, and only if its activity stays inside the solicitation-only lane. 
• States, and the Multistate Tax Commission, have been narrowing what counts as “solicitation only” for years. Activities like post-sale online chat support, remote employees, or certain website cookies have been argued to fall outside the protection in some states. 

The statute is more than sixty years old and was written for a mail-order economy. That’s part of why it’s one of the more actively contested corners of state tax law right now. Its treatment of online activity also varies significantly by state. 

How Nexus Actually Gets Determined in Practice 

There’s no single national nexus test. Each state runs its own analysis, using its own thresholds and its own definitions of taxable presence. A workable process looks like this: 

1. Map every state where you have any activity – sales, remote employees, contractors, inventory (including third-party fulfillment centers and marketplaces), affiliates, or trade show attendance. 
2. Check each state’s physical presence rules against that map. 
3. Run your sales and transaction counts against each state’s current economic nexus threshold. 
4. Separately evaluate income tax nexus. The trigger points often differ from sales tax nexus in the same state. 
5. Check whether PL 86-272 protection applies for any state where you might otherwise have income tax exposure. 
6. Register, collect, and file where thresholds are met. Keep re-checking, since nexus is a moving target as your business grows and states amend their rules. 

Selling through a marketplace (Amazon, Etsy, Walmart Marketplace, etc.) complicates this further. Marketplace facilitator laws in most states now shift the sales-tax collection duty onto the marketplace itself. But that doesn’t necessarily mean the underlying nexus goes away for other tax purposes, including income tax. 

What Happens if Nexus Goes Unaddressed 

Ignoring nexus doesn’t make the obligation disappear. It just delays the bill, usually with interest and penalties attached once a state notices. States identify unregistered businesses through several channels. These include data-sharing agreements, marketplace reporting, audits of customers or vendors, and increasingly aggressive nexus questionnaires sent directly to businesses. Back taxes in multiple states can add up fast. That’s why most tax advisors recommend a formal nexus study – a systematic review of where a business’s activities and sales create obligations – well before a state comes asking.