Economic nexus, and what to do if you have been collecting without registering

Nexus is the whole concept

Nexus is the connection between your business and a state that gives the state authority to make you collect its sales tax. It used to require physical presence. Since the Supreme Court's decision in South Dakota v. Wayfair in June 2018, states may also assert it on economic activity alone.

So a seller with no office, no staff and no stock in a state can be required to register there, collect tax from its residents, file returns on that state's schedule and answer to its revenue department, purely on the volume of business done into it.

This is a state-level tax, not a federal one. There are more than forty separate regimes with their own thresholds, their own definitions of what is taxable, their own filing frequencies and their own forms. Nothing about being outside the United States exempts you from any of them.

How thresholds work

Each state sets its own threshold, usually as an amount of sales into the state over a measuring period, and sometimes with a separate transaction count. The most common dollar test is $100,000, several of the largest states sit considerably higher, and at least one requires both the dollar test and the transaction count to be met before nexus attaches.

States have been actively adjusting these since 2018, and the clear direction of travel is towards a dollar test alone. A number of states that once had a 200-transaction rule have repealed it. That is good news and it is also a trap, because a repeal is prospective and does not tidy up the period when the rule applied to you.

The measuring period differs too. Some states look at the previous calendar year, others at a rolling twelve months, others at the current year to date. That difference decides when you crossed, which decides when registration was due, which decides how far back the exposure runs.

What that looks like on a real set of numbers

The lesson in the example below is not the specific figures, which have to be checked state by state. It is that revenue is only one of three ways to acquire an obligation, and the other two catch people who are confident they are under the limits.

Why digital products are the difficult case

Software, SaaS and digital goods are treated inconsistently across the country. Some states tax software as a service, some tax only downloaded software, some exempt both, some tax digital goods and not the service that delivers them, and a few draw the line at whether the customer is a business or a consumer.

There is no federal definition to fall back on and no trend towards one. Two states with identical dollar thresholds can reach opposite answers on the same subscription, and both answers are correct in their own jurisdiction.

This is why a rule of thumb is worse than useless here. A nexus study that maps your actual revenue and order counts against each state's threshold, and then against that state's treatment of your specific product, is the only thing that produces an answer you can defend. It is also the only thing that tells you where you do not owe, which is usually most places and is worth knowing with confidence.

Marketplace facilitator rules

If you sell through a marketplace, the marketplace is generally required to collect and remit the tax on those sales. That is a genuine simplification and it is regularly over-read.

It does not automatically clear your obligations. Direct sales through your own site still count toward your own thresholds. Some states include marketplace sales in the threshold calculation even though the marketplace remits the tax on them, which can put you over the line on volume you never touched. And some states still expect a return from you showing those sales, with the tax reported as collected by the facilitator.

The practical consequence is that a seller running both channels needs the marketplace reports as well as their own, and needs to know which states count which. Reading only your own checkout data will understate where you stand.

Registering is three jobs, not one

Founders tend to treat registration as the finish line. It is closer to the starting line, and the ongoing work is the part that gets abandoned.

Registration itself takes days to weeks depending on the state, and some ask for information a non-resident owner has to gather. Collection means the tax has to be configured correctly at checkout, at the right rate for the right address, including local rates in states that have them. Filing means a return on the frequency the state assigns you, which is often monthly at first, and which is due whether or not you made a sale in that period.

A zero return still has to be filed. Missing them is how a business that registered properly ends up with penalties anyway, and it is the single most common way a compliant registration turns back into a problem.

If you have been collecting without registering

Tax you collected and did not remit is money you are holding on a state's behalf. This is the version of the problem states treat least sympathetically, it is often outside any statute of limitations because no return was ever filed, and it does not improve with time.

Most states run a voluntary disclosure programme, and the Multistate Tax Commission runs one that lets you approach many states at once through a single application. Coming forward before a state contacts you typically limits how far back it looks, commonly to three or four years, and abates penalties, leaving tax and interest. Both of those advantages disappear the moment an assessment or a nexus questionnaire lands, and a questionnaire counts as contact.

So the sequence is: work out where you actually owe, quantify it honestly, then approach those states. Registering forward without addressing the back period is the worst of both worlds. It leaves the historic exposure sitting there with your name and your new registration number attached to it.

What to do this week if you are unsure

None of this needs to be solved at once, and the first three steps cost nothing but time.

• Pull twenty-four months of sales by state, with both revenue and order counts, from every channel including marketplaces.
• Find out where your inventory has physically been, including third-party warehouses you never chose.
• Check whether your checkout has been collecting tax anywhere, and whether any of it has been remitted.
• Only then look at thresholds, because you cannot test against a threshold with numbers you have not assembled.

Before you act on this

This is general information, not advice for your particular situation. Thresholds, forms and deadlines change, several of the rules described here differ by state and by the year in question, and the figures above were checked on the date at the top of this page rather than today. Confirm the current position before you rely on any of it.

If you want the version that applies to your entity specifically, send us the details and we will tell you what you actually owe and when.