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Understanding Nexus and Its Impact on State and Local Tax Burdens by Karen A. Lake, CPA

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Posted on March 25, 2025 by Karen Lake

Nexus is a minimum connection businesses have with a particular state that can activate state and local tax (SALT) obligations. Managing SALT compliance can be especially challenging when considering that tax rates, the criteria for creating nexus and the standards for imposing state income, sales and franchise taxes vary widely from one state to the next. Navigating these issues demands businesses be meticulous in identifying all their potential out-of-state connections and planning ahead to minimize those liabilities.

Unfortunately, establishing nexus is not as simple as having an office and employees in a particular state. Rather, states have adapted to changing work environments and found new ways to collect tax revenue from out-of-state businesses based on a broad range of measurements. Further complicating compliance is the varied methods different states require out-of-state businesses to apportion or allocate a portion of their taxable income to a particular state.

Physical Presence Nexus

The oldest form of nexus relies on a company’s physical presence in a particular state. This may include owning a brick-and-mortar business, leasing office or warehouse space, owning property, storing inventory or having employees in those jurisdictions. For example, the growth of a remote workforce started during the pandemic and continuing today in many hybrid work environments, can create a substantial nexus and trigger a reporting requirement as well as income, sales and employment tax liabilities. When the business is a pass-through entity, such as an S corporation, LLC or partnership, the filing requirement may also extend to its individual owners and members.

The rules for meeting physical nexus vary from state to state. They can sometimes be triggered when a company sends employees to another state for a limited time, such as meeting with sales prospects, attending trade shows and conferences, or even delivering products out of state using company-owned trucks.

Economic Nexus

The Supreme Court introduced the concept of economic nexus in its 2018 decision in South Dakota v. Wayfair, basing SALT obligations on a business’s “economic activity” or sales volume in a particular state, regardless of whether that business has a physical presence in that jurisdiction. Generally, the existence of nexus means a company has enough activity in a state to create a tax filing requirement.

Today, 45 states have enacted economic nexus statutes, requiring out-of-state businesses to collect and remit sales tax when their sales revenue or transaction volume in those jurisdictions meets specific thresholds. For example, approximately 20 states have a $100,000 economic nexus sales revenue threshold, meaning businesses without a physical presence in those jurisdictions will trigger a state sales tax obligation when their sales exceed $100,000. An equal number of states require out-of-state businesses to collect and remit sales tax when those companies’ in-state sales revenue exceeds $100,000 and/or they complete 200,000 or more transactions within their borders over a year. In California, New York and Texas, economic nexus is established when a business’s annual sales reach $500,000, which can be an easy target to hit considering the high number of people living and working in those states.

Economic nexus compliance can become a tedious and time-consuming burden that requires a deep analysis of a business’s economic activity and sales volume across multiple states. However, it can also provide businesses with a unique planning opportunity to create a sufficient nexus in a state that could potentially reduce their taxable sales and minimize their tax liabilities.

Click-Through Nexus

Approximately 20 states have click-through nexus laws that levy taxes on out-of-state businesses that have relationships with third-party sellers or referral sources in those jurisdictions. This includes circumstances when an out-of-state business pays commissions or referral fees to an in-state third party for referring a certain amount of sales above specified thresholds through website links. For example, consider an influencer in New York who promotes a particular product on their social media. When a follower in Florida clicks on the link and purchases the product at a local Florida retailer, New York state can claim that the influencer in New York generated the sale and require the Florida retailer to collect and remit sales tax when its sales in New York exceed a certain threshold. For New York, that sales cap is $10,000.

Failure to account for Nexus compliance can result in a prolonged sales tax audit with significant penalties and interest imposed on underreported amounts and irreparable damage to a business. The good news is that there are several strategies companies can employ to make this process easier. The first is a nexus study conducted by experienced CPAs who can sort through a business’s sales activities to identify all the jurisdictions where a company’s connections may trigger tax filing obligations. This data should be monitored regularly to ensure the business does not cross a threshold that can create a new tax obligation.

With this information, businesses may also identify instances when they previously underreported their state sales tax obligations or failed to register to collect and remit sales tax in some jurisdictions. Under these circumstances, companies can abate penalties by filing past returns, availing themselves of a state’s voluntary disclosure program or taking an offer in compromise that allows them to settle their tax debt for less than the full amount owed.

About the Author: Karen A. Lake, CPA, is a state and local tax (SALT) specialist and a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she helps individuals and businesses navigate complex federal, state and local tax laws, credits and incentives. She can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.