What Is Economic Nexus?
Economic nexus refers to the legal standard that determines when out-of-state businesses must collect and remit sales tax based on their economic activity in a state, rather than physical presence.
This concept has transformed tax compliance since the 2018 South Dakota v. Wayfair Supreme Court decision.
Key Thresholds That Trigger Compliance:
Sales volume: Typically 100,000−500,000 annually
Transaction count: Often 200+ separate transactions
State-specific variations: 45+ states have unique rules
How Economic Activity Creates Tax Obligations?
The Compliance Process:
Monitor sales across all states
Compare activity against thresholds
Register with tax authorities
Collect and remit appropriate taxes
File returns as required
Why This Matters for Businesses?
Critical Impacts:
- Expands tax collection responsibilities
- Affects pricing strategies and profitability
- Requires robust tracking systems
- Increases compliance complexity
Industries Most Affected:
Ecommerce retailers
SaaS providers
Marketplace facilitators
Dropshipping businesses
State-by-State Variations
| State | Sales Threshold | Transaction Threshold | Effective Date |
|---|---|---|---|
| California | $500,000 | N/A | 4/1/2019 |
| New York | $500,000 | 100+ transactions | 6/21/2018 |
| Texas | $500,000 | N/A | 10/1/2019 |
| Florida | $100,000 | N/A | 7/1/2021 |
Best Practices for Compliance
5 Essential Steps:
Implement tracking software to monitor sales
Consult tax professionals for complex situations
Automate tax calculations at checkout
Maintain detailed records of all transactions
Stay updated on legislative changes
FAQs
Yes, in many states:
Digital products often included
Some professional services exempt
Rules vary significantly
Generally:
Platforms often handle tax collection
Sellers may still need to register
Exceptions exist in some states
Potential consequences:
Back taxes plus penalties
Interest charges
Legal action in severe cases
Limited options:
Some states exempt certain products
Very small sellers may qualify
No universal small business exemption
