Nexus Explained: When You Owe Sales Tax in Another State

Direct answer: You may have a sales tax obligation in another state when your business has enough physical or economic presence there to create nexus. The U.S. Small Business Administration describes nexus as a business’s physical or economic presence in a state that may require it to collect applicable state and local sales tax. Physical presence is no longer the only basis for an obligation: the U.S. Supreme Court rejected the rule that a seller must be physically present before a state may impose a sales-tax collection duty.

There is no single nationwide test to apply. Most states use different nexus standards, and not every state or locality imposes sales tax. Review each destination jurisdiction separately, considering your business activities, sales, property, marketplace transactions, and the dates on which relevant events occurred.

How Physical and Economic Nexus Affect Sellers

Nexus analysis generally begins with two questions: what is your business doing in the state, and how much business is connected to that state? These questions address physical and economic presence, but the applicable state’s rules determine the result.

Scenario 1: Your business has property or activities in a state

Suppose an online retailer located in one state places assets or controlled property in Arizona or conducts ongoing business activities there. Arizona says that assets or controlled property in the state, taxable business activity, or ongoing in-state business activities can create physical nexus. Once a seller has physical nexus in Arizona, the state’s remote-seller thresholds do not apply to that seller.

This is an Arizona-specific example, not a universal list of physical-nexus triggers. If people, inventory, equipment, offices, or other business resources connect your company to another state, investigate that state’s physical-presence rules rather than assuming a remote-seller threshold will protect you. Businesses evaluating personnel arrangements can also review whether working from home in one state may create sales tax nexus in another.

Scenario 2: You make substantial remote sales without physical presence

A seller can face a collection obligation even if it has no store, office, or other physical location in the customer’s state. Economic-nexus laws examine sales connected with a state according to that state’s standards.

For example, Iowa requires a remote seller to collect Iowa sales tax when it has at least $100,000 in gross revenue from Iowa sales. Iowa’s calculation includes gross revenue from Iowa sales that are exempt, wholesale, for resale, or facilitated through a marketplace. That calculation is specific to Iowa and should not be used as a default formula for another state.

For a comparison showing why geography and sales patterns both matter, see sales tax nexus for small states and online sellers.

Scenario 3: You sell through a marketplace and your own website

Marketplace sales require a transaction-by-transaction and state-by-state review. In Iowa, a marketplace facilitator must collect Iowa sales tax on taxable facilitated sales regardless of the marketplace seller’s location or sales volume. Arizona similarly assigns responsibility for facilitated sales to the marketplace facilitator, while qualifying remote sellers must license and report their own direct sales.

These examples do not establish a nationwide marketplace rule. A seller should separate marketplace sales from direct sales in its records, identify who handled collection on each transaction, and verify whether facilitated sales count toward the seller’s nexus threshold in the state being reviewed.

What to Check in Each State

A useful nexus review is broader than comparing total revenue with a threshold. The following table organizes the questions that should be answered for every state into which the business sells.

Do not substitute one state’s revenue figure, registration process, deadline, or marketplace treatment for another’s. For a broader framework, consult sales tax registration requirements by state and then confirm the details for every jurisdiction relevant to your business.

A Practical State-by-State Review Process

1. Build a destination-state list. Start with every state in which the business has customers, property, controlled assets, personnel, or ongoing activities. Keep physical connections separate from sales totals so neither category is overlooked.
2. Separate sales by channel and category. Distinguish direct website, phone, invoice, and marketplace sales. Within those channels, retain enough detail to identify gross sales and categories such as exempt, resale, wholesale, and marketplace-facilitated transactions.
3. Apply the correct state rule. For each destination, determine whether a physical connection creates nexus. If the business is purely remote, apply that state’s economic-nexus standard and its own rules for which transactions enter the calculation.
4. Determine when the obligation begins. Record when a physical activity started or when the applicable economic threshold was first exceeded. Then apply the jurisdiction’s collection-start rule rather than assuming collection begins immediately or at the start of the next year.
5. Review marketplace and direct sales independently. Confirm which party collects on facilitated transactions and whether the seller has separate responsibilities for sales made outside the marketplace.
6. Follow the applicable registration and reporting instructions. Use the registration method accepted by the relevant jurisdiction and preserve confirmation records, effective dates, account details, and subsequent correspondence.

Iowa illustrates why dates require careful treatment. An Iowa remote seller that did not exceed the threshold in the prior year but first exceeds it during the current year must begin collecting on the first day of the next calendar month beginning at least 30 days after the threshold was exceeded. That timing applies to the specified Iowa situation and should not be projected onto another state.

Iowa retailers may also register for Iowa and other participating states through the online Streamlined Sales Tax Registration System. That system covers participating states; it is not a nationwide registration that automatically handles every jurisdiction.

Common Nexus Review Problems

Looking only for physical locations: A company may incorrectly stop its review after confirming that it has no store or office in a state. Economic presence can support a collection obligation even without physical presence.

Using one threshold nationwide: A seller may adopt a familiar state’s revenue figure as a general rule. State standards differ, so each destination must be tested independently.

Counting only taxable direct sales: This can produce an incomplete threshold calculation. Iowa, for example, includes exempt, wholesale, resale, and marketplace-facilitated sales in gross revenue for its economic-nexus threshold.

Assuming a marketplace resolves every obligation: A facilitator may collect on marketplace transactions while the seller remains responsible for evaluating direct sales. The seller must also determine how the relevant state treats marketplace sales when calculating nexus.

Applying a threshold to known physical activity: A remote-seller threshold may not control when physical nexus already exists. Arizona expressly states that its remote-seller thresholds do not apply after physical nexus exists.

Ignoring the trigger date: Annual sales totals alone do not reveal when collection should begin. Track the date a threshold is crossed and apply the state’s particular start rule.

Decision Checklist Before Registering

• Have you listed every state connected to your customers, property, controlled assets, personnel, or recurring business activities?
• Have you checked physical-presence and economic-nexus rules separately?
• Are sales totals organized by destination state rather than only by the seller’s home location?
• Does the threshold calculation use the transaction categories required by that state?
• Have direct and marketplace sales been separated?
• Do you know who collected tax on each marketplace transaction?
• Have you identified when the relevant physical activity began or economic threshold was crossed?
• Have you confirmed the state’s collection-start rule rather than assuming a date?
• Have you checked the applicable registration method and reporting instructions?
• Will you repeat the review as sales channels, business activities, property locations, or destination-state totals change?

The central lesson is that nexus is not a single national revenue test. Determine where the business has physical or economic presence, apply each destination jurisdiction’s rules, document the relevant dates and transaction categories, and address marketplace and direct sales separately.