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One of the biggest misunderstandings entrepreneurs face when starting or expanding a business is the concept of nexus — particularly how it applies to sales taxes and income taxes.
With online platforms like Wix, Shopify, and WordPress, businesses are now reaching customers across the country. However, understanding where and when you owe taxes is crucial to staying compliant and avoiding costly mistakes.
Each state has its own unique approach to defining nexus, so it’s important to review the specific laws in each state where you operate or have sales.
What is Nexus?
Nexus refers to the connection between a taxing authority (such as a state) and a business that gives the state the legal right to impose tax obligations.
This connection can arise through:
- Physical presence (like owning property or having employees)
- Economic presence (like meeting sales thresholds through online or remote transactions)
Why does nexus matter? Once nexus is established, the state can legally request business information and, if applicable, require you to register, collect, and remit taxes.
Understanding Sales Tax Nexus
Sales tax nexus is created when your business establishes a sufficient connection to a state generally requiring a company to register for sales tax within that state (whether collection is actually applicable or not). This connection can occur through:
Direct Nexus:
- Sending employees into the state
- Owning or leasing property in the state
- Performing services physically in the state
Indirect Nexus:
- Using independent contractors or agents to solicit sales or provide services
- Utilizing third parties that act similarly to employees
Remote / Online Nexus (Economic Nexus):
- Making remote or online sales into a state
- Triggered based on the number of transactions and/or total sales value (e.g., $100,000 or 200 transactions)
Important:
Having nexus does not automatically mean you must collect sales tax.
Your obligation depends on:
- What you sell (taxable products vs. exempt services)
- Who you sell to (consumers vs. wholesalers with resale certificates)
- Thresholds met under state law
Understanding Income Tax Nexus
Income tax nexus determines whether a business must file an income tax return in a state based on certain business activities.
Prior to 1959, any small physical presence could trigger an income tax filing. To address this burden, Congress passed Public Law 86-272, which protects certain businesses from income tax obligations in states where they have minimal activities.
Protected Activities (Do NOT create income tax nexus):
- Soliciting sales of tangible personal property (not services)
- Providing ancillary services related to those sales
- Displaying samples without transferring ownership
- Accepting and fulfilling orders outside of the state
Unprotected Activities (Create income tax nexus):
- Selling services (rather than goods)
- Providing services in-state
- Accepting orders or payments in the state
- Delivering goods using company vehicles
- Repossessing property in the state
- Holding inventory within the state
Note:
Public Law 86-272 does not protect businesses from gross receipts taxes, franchise taxes, or margin taxes imposed by some states as these are not considered “income” based taxes.
Other State-Level Business Taxes to Consider
Even if you’re protected under federal law from income tax, you may still be subject to other business taxes, such as:
- Franchise Taxes (e.g., Texas Margin Tax)
- Gross Receipts Taxes (e.g., Ohio Commercial Activity Tax)
- Business & Occupation Taxes (e.g., Washington B&O Tax)
These taxes are typically based on gross receipts or business presence (net asset value) rather than net income.
Final Thoughts
Tax compliance is complicated. Nexus standards differ dramatically from state to state, and misunderstandings can lead to unexpected liabilities. Furthermore, if you are in multiple states, apportionment will also be a factor. If your business operates or sells in multiple states—or if you’re an investor in businesses that do—you should consult a qualified tax advisor to ensure you’re fully compliant.
Disclaimer: The information provided herein is intended solely for informational purposes and no person(s) or other third-party may rely upon it as financial, tax, or legal advice or use it for any other purposes. As a result, Royal Financial, and any affiliates, assume no responsibility whatsoever to readers, or any other persons for that matter, as a result of the information contained herein.