What is the Economic Nexus?

Economic nexus is a sales tax connection based on a business’s sales or other economic activity in a state, even without a physical presence there. Once a seller meets a state’s threshold, it may need to register and collect sales or use tax on qualifying sales into that state.

How Does the Economic Nexus Work?

Economic nexus allows states to impose sales tax collection obligations on qualifying remote sellers based on their economic activities rather than solely on their physical locations.

In 2018, the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. overturned the physical-presence requirement established under earlier Commerce Clause precedent for state sales tax collection obligations.

The Wayfair decision did not establish a nationwide sales threshold. Instead, it removed the constitutional barrier that had prevented states from requiring sales tax collection solely because a seller lacked physical presence.

States determine their own economic nexus requirements, subject to constitutional limitations.

A remote seller may therefore establish economic nexus through online, telephone, mail-order, or other qualifying sales into a state, even without operating a physical business location there.

What Triggers Economic Nexus for Sales Tax?

Economic nexus is generally triggered when a remote seller's qualifying economic activity reaches a state's statutory threshold. For sales tax purposes, states commonly evaluate the value of sales, the number of transactions, or both.

States generally assess qualifying sales delivered or sourced into their jurisdiction. The relevant calculation depends on the state's rules, not simply the seller's headquarters location.

Sales Revenue & Transaction Thresholds

An economic nexus threshold is the level of economic activity that establishes a tax connection under a state's rules. Threshold amounts, qualifying transactions, and measurement periods vary by jurisdiction.

Sales revenue thresholds: California generally requires total combined sales of tangible personal property delivered into the state by a retailer and its related persons to exceed $500,000 during the current or preceding calendar year.
Transaction thresholds: Some states also count qualifying sales transactions. New York's remote-seller presumption generally requires both more than $500,000 in qualifying gross receipts and more than 100 sales during the immediately preceding four sales tax quarters.
Measurement periods: States may evaluate a calendar year, previous year, rolling 12-month period, or specified sales tax quarters.
Qualifying sales: Gross sales, retail sales, and taxable sales are not always interchangeable. Depending on the jurisdiction, exempt sales and sales for resale may contribute toward economic nexus thresholds.

Threshold wording matters. A requirement to exceed $500,000 differs from a requirement to reach $500,000 or more. Likewise, an AND test requires multiple conditions to be satisfied, whereas an OR test may be met by satisfying either condition.

State requirements also change. Effective January 1, 2026, Illinois eliminated its former 200-transaction threshold for remote retailers and marketplace facilitators. Its applicable economic nexus test now uses $100,000 or more in cumulative qualifying gross receipts during the relevant lookback period.

For the current rules, consult the California Department of Tax and Fee Administration, New York Department of Taxation and Finance, and Illinois Department of Revenue's 2026 bulletin.

For a broader understanding of how nexus requirements affect businesses operating across state lines, see our guide to state and multistate tax planning for CPAs.

Do Marketplace Sales Count Toward Economic Nexus?

Marketplace-facilitated sales may count toward a seller's economic nexus threshold even when the marketplace collects and remits sales tax. Whether they count depends on the applicable state's laws.

A marketplace facilitator, such as Amazon when facilitating third-party transactions, may be treated as the retailer responsible for collecting tax on those sales.

A business selling through its own Shopify-powered online store generally remains responsible for evaluating its direct-sales tax obligations. Using an e-commerce platform does not automatically transfer sales tax responsibilities to that platform.

In California, marketplace-facilitated sales generally count toward a seller’s $500,000 economic nexus threshold along with qualifying direct sales. However, a registered marketplace facilitator is generally responsible for collecting and remitting tax on the facilitated transactions.

By contrast, in Illinois, sales made through a registered marketplace generally do not count toward a marketplace seller’s $100,000 economic nexus threshold. A seller should therefore distinguish between sales that count toward nexus and sales for which it must separately collect tax.

Economic Nexus vs. Physical Nexus: What's the Difference?

Economic nexus is based on sufficient economic activity within a state, while physical nexus generally results from a business's physical presence or qualifying in-state activities.

Factor	Economic Nexus	Physical Nexus
Basis	Qualifying economic activity	Physical presence or in-state activities
Physical location required?	No	Generally involves physical presence
Common trigger	State sales or transaction threshold	Office, employees, warehouse, or inventory
Example	Remote seller exceeds a state's sales threshold	Retailer maintains inventory in another state

A business can establish both forms of nexus in the same state. For example, a retailer may maintain a warehouse in one state while exceeding the economic nexus threshold in another.

California's use tax collection guidance identifies physical presence and economic activity as separate ways a retailer may be considered engaged in business in the state.

What is an Example of Economic Nexus?

Consider a Florida-based online retailer that sells tangible personal property to California customers but has no office, warehouse, employees, or other physical presence in California.

During the current calendar year, the retailer makes $510,000 in qualifying sales delivered to California. Assume there are no related-party complications and that the sales satisfy California's applicable threshold calculation rules.

Because the retailer's qualifying sales exceed California's $500,000 threshold, it establishes economic nexus and generally becomes subject to California’s registration and sales and use tax collection requirements.

However, not every transaction is necessarily taxable. For example, qualifying sales for resale may contribute toward the economic nexus threshold without being subject to tax when the seller has the required documentation.

What Happens When a Business Establishes an Economic Nexus?

Once a business establishes economic nexus, it must determine when registration, collection, and reporting obligations begin under the applicable state rules.

The process generally involves four steps:

Confirm the nexus determination. Review qualifying sales and transaction records against the state's threshold and measurement period.
Determine the effective date. Identify when registration and tax collection must begin. These dates may differ from the date the business first crosses the threshold.
Register with the state tax authority. Obtain the required sales tax permit, certificate, or other registration.
Collect, report, and remit applicable tax. Apply the appropriate tax to taxable transactions and comply with the state's filing and payment requirements.

For example, New York generally requires qualifying remote sellers that subsequently meet its economic nexus thresholds to apply for registration within 30 days after reaching them and begin collecting tax 20 days thereafter.

Crossing an economic nexus threshold does not automatically make every earlier sale retroactively subject to a seller's collection obligation. Any liability for prior periods depends on the applicable state law and whether the business had another basis for nexus.

See the New York Department of Taxation and Finance's remote-seller registration guidance for registration and collection timing.

Economic Nexus FAQs

Does Economic Nexus Apply to Services and SaaS Businesses?

Yes. Economic nexus can apply to service providers and SaaS businesses, depending on state law and the nature of their sales.

Can a Business Have an Economic Nexus in Multiple States?

Yes. A business may establish an economic nexus in multiple states when its activities satisfy each state's requirements. Thresholds, measurement periods, and registration rules must be evaluated separately.

Does Economic Nexus Apply to State Income Taxes?

Yes. Economic nexus can also establish state income or franchise tax obligations. These standards differ from the sales tax nexus.

Does Economic Nexus End When Sales Fall Below the Threshold?

Not automatically. State rules govern when obligations end. New York allows qualifying remote sellers to file a final return and stop collecting tax when they no longer meet its thresholds and have no other sales tax nexus.

Can a Business Have an Economic Nexus Without Making Taxable Sales?

Yes. Some states count exempt or resale transactions toward their thresholds. California includes qualifying sales for resale, even though those transactions are generally not taxable. Registration requirements depend on the seller's activities.