Economic nexus happens when a business reaches a certain amount of sales or transactions in a state, even if it does not have a physical presence there. Each state sets its own threshold, which could be a minimum sales amount, a number of transactions, or both. These rules differ by state. For instance, a state might require businesses to collect sales tax once they make gross sales of $100,000.
If a business exceeds the economic nexus threshold in a state, it may need to register there and handle sales tax by collecting, remitting, and reporting it.
Next, let’s understand the economic nexus requirements for foreign sellers selling in the United States.
If your business is based outside the U.S. and you sell products or services to customers in the U.S. without any physical presence, you might assume that you do not have to collect or remit sales tax. However, under economic nexus rules adopted by most states, a sales tax obligation can arise solely from the volume or value of sales made into a state. As a result, foreign businesses may be required to register for sales tax, collect sales tax from customers, and file sales tax returns, even without employees, offices, or inventory in the state.
The U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair established this economic nexus standard. The case originated in South Dakota and effectively overturned the physical presence rule from prior precedent. As a result, every state with a sales tax now has economic nexus requirements.
The concept has become more relevant with the growth of e-commerce and online sales, as foreign businesses can have a significant economic impact on a state without a physical presence. Meeting the economic nexus status usually occurs after you’ve passed a specific transaction or revenue threshold.
In most states, these thresholds are based on the past 12 months of activity, and the requirements and deadlines for registering with the state to pay tax also vary. These rules are established under each state’s sales tax laws and regulations rather than by any uniform rule from the U.S. Supreme Court. As a result, foreign businesses should review the specific requirements of each state in which they make sales.
For instance, California imposes sales tax obligations on retailers with over $500,000 in sales in the state, even without a physical presence.
Once you establish economic nexus in a state, you generally incur ongoing filing and compliance obligations. This means you should register for a sales tax permit, collect and remit sales/use tax on taxable sales in that state, and file periodic returns, as required by the state’s rules.
However, there may be scenarios in which the foreign seller meets the economic threshold in one year but not in another. So does that mean the foreign seller should stop fulfilling sales tax obligations for the year in which they fall below the threshold? The answer may vary depending on the particular state’s
For example, many states impose “trailing nexus” rules. This requires you to maintain registration and file returns for the remainder of the current year and the following year (or similar periods) even if you fall below the threshold afterward. This means that you generally cannot simply stop filing the next year if sales drop below requirements.
A clear example of trailing nexus is in Washington state.
According to Washington’s rules, if a business meets the economic nexus threshold in the current or prior calendar year, it has nexus for that entire calendar year and the full following calendar year. This may apply even if sales drop to zero or the business ceases the activities that created the nexus.
Instead, you may often be required to remain registered and continue filing. You may do so until you formally request cancellation after satisfying the state’s trailing period and confirming there is no ongoing nexus in the state.
Rules vary significantly by state, so consulting the state’s tax authority or a tax professional is essential to avoid penalties for non-filing.
Hence, Foreign companies that have activity within the U.S. ‒ whether in the form of physical presence or economic presence ‒ should closely review the implications of the U.S. sales tax system.
Let’s take a look at the economic nexus threshold requirements for each state within the United States, as outlined in the following table.
| Sr. No. | State | Threshold | Exempt Sales Included | Marketplace Facilitator Sales Included | Evaluation Period |
|---|---|---|---|---|---|
| 1 | Alabama | $250,000 in sales | Yes | Yes | Previous calendar year |
| 2 | Alaska | Varies by local jurisdiction | Yes | Yes | Varies |
| 3 | Arizona | $100,000 in sales | Yes | Yes | Current or previous calendar year |
| 4 | Arkansas | $100,000 or 200 transactions | Yes | Yes | Current or previous calendar year |
| 5 | California | $500,000 in sales | Yes | Yes | Current or previous calendar year |
| 6 | Colorado | $100,000 in sales | Yes | Yes | Current or previous calendar year |
| 7 | Connecticut | $100,000 and 200 transactions | Yes | Yes | Current or previous calendar year |
| 8 | Delaware | No sales tax | N/A | N/A | N/A |
| 9 | Florida | $100,000 in sales | Yes | Yes | Previous calendar year |
| 10 | Georgia | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 11 | Hawaii | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 12 | Idaho | $100,000 in sales | Yes | Yes | Previous calendar year |
| 13 | Illinois | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 14 | Indiana | $100,000 in sales | Yes | Yes | Previous calendar year |
| 15 | Iowa | $100,000 in sales | Yes | Yes | Previous calendar year |
| 16 | Kansas | $100,000 in sales | Yes | Yes | Previous calendar year |
| 17 | Kentucky | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 18 | Louisiana | $100,000 in sales | Yes | Yes | Previous calendar year |
| 19 | Maine | $100,000 in sales | Yes | Yes | Previous calendar year |
| 20 | Maryland | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 21 | Massachusetts | $100,000 in sales | Yes | Yes | Previous calendar year |
| 22 | Michigan | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 23 | Minnesota | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 24 | Mississippi | $250,000 in sales | Yes | Yes | Previous calendar year |
| 25 | Missouri | $100,000 in sales | Yes | Yes | Previous calendar year |
| 26 | Montana | No sales tax | N/A | N/A | N/A |
| 27 | Nebraska | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 28 | Nevada | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 29 | New Hampshire | No sales tax | N/A | N/A | N/A |
| 30 | New Jersey | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 31 | New Mexico | $100,000 in sales | Yes | Yes | Previous calendar year |
| 32 | New York | $500,000 and 100 transactions | Yes | Yes | Previous calendar year |
| 33 | North Carolina | $100,000 in sales | Yes | Yes | Previous calendar year |
| 34 | North Dakota | $100,000 in sales | Yes | Yes | Previous calendar year |
| 35 | Ohio | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 36 | Oklahoma | $100,000 in sales | Yes | Yes | Previous calendar year |
| 37 | Oregon | No sales tax | N/A | N/A | N/A |
| 38 | Pennsylvania | $100,000 in sales | Yes | Yes | Previous calendar year |
| 39 | Rhode Island | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 40 | South Carolina | $100,000 in sales | Yes | Yes | Previous calendar year |
| 41 | South Dakota | $100,000 in sales | Yes | Yes | Previous calendar year |
| 42 | Tennessee | $100,000 in sales | Yes | Yes | Previous calendar year |
| 43 | Texas | $500,000 in sales | Yes | Yes | Previous calendar year |
| 44 | Utah | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 45 | Vermont | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 46 | Virginia | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 47 | Washington | $100,000 in sales | Yes | Yes | Previous calendar year |
| 48 | West Virginia | $100,000 or 200 transactions | Yes | Yes | Previous calendar year |
| 49 | Wisconsin | $100,000 in sales | Yes | Yes | Previous calendar year |
| 50 | Wyoming | $100,000 in sales | Yes | Yes | Previous calendar year |
Foreign companies that remotely sell goods or services in the U.S. should revisit the table above to determine whether they meet the economic nexus threshold in any particular state.
Next, let’s understand the sales tax complexities that may arise during cross-border transactions