You didn’t open an office in Ohio. You don’t have a single employee in Colorado. And yet, somehow, you owe those states a tax registration. This happens more often than most business owners realize, and the triggers are almost never the obvious ones.
What does “nexus” actually mean in plain terms?
Nexus is the legal connection between your business and a state that gives that state the right to tax you. Think of it as a threshold — once you cross it, the state can require you to register, collect sales tax, file returns, and sometimes pay income or franchise taxes. The tricky part is that each state draws that line differently. What creates nexus in Georgia may not create it in Wyoming, and the rules have shifted significantly since the U.S. Supreme Court’s 2018 South Dakota v. Wayfair decision expanded states’ reach to online sellers.
Before Wayfair, physical presence was the main test. After it, simply selling enough into a state — even from your couch in Naples, Florida — can trigger registration obligations. That ruling opened the door to what tax professionals call “economic nexus,” and it caught thousands of small businesses completely off guard.
Can selling online really create a registration requirement in states I’ve never visited?
Yes, and this is the most common surprise for e-commerce businesses and service providers alike. Most states now set an economic nexus threshold at $100,000 in sales or 200 transactions into their state in a calendar year. Cross either number, and you’re required to register for sales tax collection — period. A Fort Lauderdale retailer selling custom apparel on Shopify, for example, might hit the Texas threshold in March without realizing it until they get a compliance notice in November.
Some states are more aggressive than others. California’s threshold is $500,000 in sales, which sounds generous, but its income tax nexus rules are separate and can kick in at much lower activity levels. Meanwhile, states like Pennsylvania and Washington have broad definitions of what counts as a taxable sale. The practical move is to track your sales by state every quarter, not just at year-end.
What about employees working remotely — does that trigger anything?
Absolutely, and this is the one that blindsided the most businesses during and after the pandemic. If you have a single employee — or even an independent contractor doing consistent work — in another state, you likely have physical nexus there. That means payroll tax registration, unemployment insurance registration, and potentially income tax withholding obligations, all in a state you never intended to operate in. A Naples-based marketing agency that hired a remote graphic designer in Tennessee, for instance, would need to register for Tennessee payroll taxes from day one of that hire.
The same logic applies to salespeople. If your sales rep lives in North Carolina and makes calls from home on your behalf, North Carolina considers your business to have a physical presence there. Some states even extend this to temporary workers attending a trade show or a single client meeting. The IRS and state revenue agencies have been coordinating data more aggressively since 2020, which means these situations surface faster than they used to.
Does storing inventory somewhere create unexpected tax registration?
It does, and this one catches Amazon FBA sellers constantly. When you use Amazon’s Fulfillment by Amazon program, Amazon decides where your inventory gets warehoused across its fulfillment network. You might be a company in Broward County with no intention of doing business in Kansas — but if Amazon stores your products in a Kansas warehouse, you have physical nexus in Kansas. That creates a sales tax registration and collection obligation you never saw coming.
The same applies to third-party logistics (3PL) providers. Any time your products physically sit in a warehouse in another state — even temporarily — most states treat that as sufficient nexus. If you use a fulfillment center in Ohio, register in Ohio. If you move that relationship to a Nevada facility, your Ohio nexus may end, but Nevada’s begins. Keeping track of where your inventory lives is not just a logistics question; it’s a tax compliance question.
What about affiliate relationships and referral partners?
Several states have what’s called “click-through nexus” or “affiliate nexus” rules. If you pay a commission to a website, blogger, or referral partner based in another state, and that partner drives customers to you, some states consider that enough of a business connection to require registration. New York was one of the first states to adopt this rule, and it’s been litigated extensively. Illinois, California, and North Carolina have similar provisions.
The thresholds vary — New York’s rule historically applied when annual sales through affiliates exceeded $10,000. It’s worth reviewing your affiliate agreements and checking whether any of your partners are based in states with these rules. For businesses running affiliate programs, this isn’t a theoretical risk; it’s a real one that state auditors actively look for.
How do I find out if I’ve already crossed a threshold somewhere?
Start with your sales data. Pull a report from your payment processor, e-commerce platform, or accounting software that breaks down revenue by the customer’s shipping or billing state, going back at least two years. Then compare those numbers against each state’s current economic nexus thresholds. The Streamlined Sales Tax Governing Board maintains a database that covers member states’ rules, which is a useful starting point for the 24 states that have standardized their sales tax laws.
For payroll and income tax nexus, the analysis is different — it depends on where your people are, where your contracts are performed, and in some states, where your customers are located. A CPA who specializes in multi-state taxation is worth the consultation fee here. Getting a voluntary disclosure agreement (VDA) through a state’s revenue department is often available if you self-report before they find you, and it typically reduces or eliminates back penalties.
What’s the actual cost of missing a registration?
It compounds fast. Most states charge a penalty of 5% to 25% of the unpaid tax for failure to register and file, plus interest that accrues monthly — often at 8% to 12% annually. Some states assess a flat penalty per unfiled return on top of that. If you’ve been selling into California for three years without registering, you could owe three years of uncollected sales tax, plus penalties, plus interest, before you’ve paid a dollar of the actual underlying tax. For a business doing $500,000 a year in California sales, that exposure adds up to a serious number quickly.
Beyond the financial hit, there are operational consequences. States can revoke your authority to do business, which creates problems if you ever want to bid on contracts, apply for licenses, or sell the company. Buyers in acquisitions routinely run multi-state tax compliance checks, and undisclosed nexus liabilities are among the most common deal complications in small business transactions. Registering proactively is almost always cheaper than being found.
What should I do right now if I think I have a problem?
Don’t wait for a notice. Most states offer voluntary disclosure programs that let you come forward, pay what you owe for a limited lookback period (usually three to four years instead of the full statute of limitations), and avoid the harshest penalties. The Multistate Tax Commission runs a national VDA program that lets eligible businesses file in multiple states simultaneously, which saves time and legal fees.
The practical steps: audit your sales by state for the last three years, identify where you have employees or contractors, find out where your inventory has been stored, and review any affiliate or referral arrangements. Then talk to a multi-state tax professional before you register anywhere — the order of operations matters, and a voluntary disclosure handled correctly can wipe out years of back penalties that an unsolicited audit would not.
