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State Sales Tax Nexus Guide
What is sales tax nexus?
“Nexus” is the requisite contact between a taxpayer and a state before the state has jurisdiction to tax the taxpayer.
Sales tax nexus is generally established when a business’s retail activity in a state meets a certain dollar amount and/or number of individual transactions.
Understanding what creates sales tax nexus in each state is an important part of state tax planning for corporations. Multistate businesses need a corporate tax planning strategy that reduces risk with an accurate picture of state sales tax nexus requirements in every state where they do business.
State sales tax nexus requirements and limitations
The U.S. Constitution imposes two significant restrictions on a state’s ability to compel an out-of-state seller to collect and remit use tax on its sales to in-state residents:
- The Due Process Clause requires that there be some minimum connection between a state and the person, property, or transaction it seeks to tax.
- The Commerce Clause, which governs the taxation of interstate commerce, requires that there be a “substantial nexus” between the taxed activity and the taxing state. The Commerce Clause has also been interpreted as prohibiting states from unduly burdening interstate commerce.
A significant distinction between the Due Process Clause and the Commerce Clause nexus requirements is that the Commerce Clause nexus requirements may be changed by Congress.
Physical nexus vs. economic nexus
In 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc., overturning the physical presence requirement for sales and use tax nexus. The statute at issue in the case required out-of-state retailers who lacked physical presence in South Dakota to nonetheless collect and remit the state’s sales tax if the retailer had $100,000 in sales or 200 transactions delivered into South Dakota in the preceding year.
Prior to the Supreme Court’s South Dakota v. Wayfair decision, a physical presence in the state was required for sales and use tax nexus. Post-Wayfair, the economic nexus standard, which historically applied to corporate income tax only, became the prevailing standard for sales and use tax nexus. Economic nexus looks at economic activity within a state to determine if a business has nexus.
All states with a sales tax have enacted provisions like South Dakota’s, under which sales tax nexus is imposed on nonresident businesses that meet a specified economic threshold. This may cause businesses to have nexus in significantly more states than they had previously, especially for businesses making online sales of taxable tangible personal property or services.
Economic nexus threshold
The economic presence nexus standard looks at the levels of economic activity within a state to determine if a business activity creates nexus. These statutes generally require out-of-state businesses to collect or pay tax in a state if they meet a specified threshold of sales made or revenue generated within the state. The Supreme Court validated economic nexus for sales tax purposes in South Dakota v. Wayfair.
Under the economic presence nexus standard, an out-of-state corporation may trigger nexus by conducting a certain amount of economic activity within the state (e.g., $100,000 of annual sales to customers in the state) even if the corporation lacks a physical presence within the state’s borders.
What states have economic nexus for sales tax?
State policies regarding economic nexus versus physical presence nexus are varied. Download our Summary of States’ Wayfair and Marketplace Implementation for a high-level comparison of the current state economic nexus and marketplace facilitator thresholds implemented following the Wayfair decision.
Sales tax nexus standards
Sales tax nexus by state chart
Track and evaluate the impacts of sales tax nexus with Bloomberg Tax Research
Since the 2018 Wayfair decision, evaluating state sales tax nexus requirements has become an increasingly important part of state tax planning for corporations. Tax professionals must manage their company’s or clients’ tax position with a corporate tax planning strategy that keeps them compliant in each state where they do business. Download our Summary of States’ Wayfair and Marketplace Implementation to gain more clarity on how states are implementing and enforcing economic nexus.
Bloomberg Tax Research offers a smarter, faster approach to tracking sales tax nexus by state with in-depth, practitioner-focused multistate and state-by-state analysis – including a 50-state chart of sales tax nexus requirements and an interactive Sales and Use Tax Nexus Evaluator Tool to help you determine whether a taxpayer has nexus in a particular state. See for yourself – sign up for a guided demo to explore Bloomberg Tax tools and expertise.