If your business sells products online, has employees working from home in other states, or ships goods through a fulfillment network, you may already have tax obligations in states where you've never opened an office or filed a return. Most business owners don't find out until someone comes looking.
That's exactly what this article is designed to help you avoid.
The legal term for what triggers those obligations is "nexus." You don't need to know the legal definition to understand what it means in practice: once you cross a certain threshold of activity in a state, that state can require you to register, collect taxes, withhold from employee wages, file returns, or some combination of all of these. The threshold varies by state and by what you're doing there—and it's lower than most people expect.
Technically, nexus can exist at more than just the state level. Some cities and counties impose their own taxes and can establish their own connection with your business independently of the state. For the purposes of this article, we're focusing on state-level obligations, which is where most businesses encounter this issue first. If your business has significant activity in major metro areas with local tax structures, that's a separate layer worth reviewing with your advisor.
Two common ways businesses create state tax obligations are through physical presence or sales volume. Understanding both is the starting point for knowing where your business actually stands.
One important note: nexus isn't a single rule that works the same way for every type of tax. Sales tax, income tax, payroll withholding, gross receipts taxes, and registration requirements can each follow different standards—and those standards vary from state to state. This article is a general overview of the most common situations business owners encounter. It's not a substitute for a state-by-state analysis of your specific facts, and any situation that sounds familiar is worth reviewing with your advisor before drawing conclusions.
Physical presence: it's not just about having an office
Physical presence used to mean a store, warehouse, or office. Today it's considerably broader, and remote work is the main reason why.
Remote employees and contractors
In many states, a remote employee working from home can create state tax, payroll, or registration obligations. Depending on the state and the type of tax involved, a single employee may be enough to require your company to register, withhold payroll taxes, pay into that state's unemployment insurance fund, or file a business tax return--though the specific obligations vary and don't always apply together.
The same can apply to independent contractors. If someone is performing work on your behalf in another state—whether that's sales, installation, customer support, or consulting—their activity may be enough to create an obligation for your business there. What that obligation looks like depends on the state, the type of tax, and the nature of the work being performed.
This doesn't always mean a large tax bill. In many cases the first obligation is administrative: registering for payroll withholding or reviewing how wages should be reported. But assuming you're in the clear because you don't have an office there isn't a safe position to be in.
The payroll wrinkle: when two states want a share
Here's something that surprises a lot of employers. A handful of states--most notably New York—apply what's called a "convenience of the employer" rule. Under this rule, if your business is based in one of these states and an employee works remotely somewhere else, you may still be required to withhold your state's income tax on that employee's wages, even though the employee never set foot in your state.
In practice, this means the employer may owe withholding in two states for the same employee. A few other states have adopted narrower or reciprocal versions of this rule. If your business is headquartered in New York in particular, it's worth discussing this with your advisor before your next remote hire.
Inventory in fulfillment centers
This one catches a lot of product-based businesses off guard. If you use Amazon FBA or another third-party fulfillment network, your inventory may be stored in states you never chose. In many states, having inventory stored there--even inventory you didn't deliberately send there--may be enough to create a physical presence for sales tax or other state tax purposes, though the analysis differs by state and tax type.
Marketplace platforms often handle sales tax collection on your behalf, but that doesn't necessarily resolve every question. Registration requirements, gross receipts taxes, and other state obligations may still apply even when the platform is collecting the tax.
Economic nexus: when sales volume is enough
For sales tax purposes, before 2018, a state could only require you to collect if your business had a physical presence there: an office, warehouse, or employees. If you sold into a state entirely from the outside, that state generally couldn't force you to collect. The Supreme Court's decision in South Dakota v. Wayfair changed that. The Court ruled that states could require out-of-state sellers to collect sales tax based purely on the volume of sales made into the state—no physical presence required. That's what's meant by economic nexus: the connection is created by your sales activity alone, not by where your people or property are located. Every state with a statewide sales tax has now written that principle into law.
The threshold varies by state, but the most common is $100,000 in annual sales into the state. California and Texas use a higher threshold of $500,000. Once you cross a state's threshold, you're generally required to register and begin collecting—often with little runway before that obligation starts.
A few things worth knowing about how these thresholds work:
- Not all sales are counted the same way. Some states measure your threshold against gross sales, which can include sales that are technically exempt from tax. Selling $100,000 of exempt products into a state may still trigger a registration requirement in some places.
- Marketplace sales may count. If you sell through Amazon, Etsy, or a similar platform, those sales may count toward your threshold even when the platform is handling the tax collection. Assuming marketplace sales are invisible to the state is a mistake that has cost sellers significantly.
- Transaction volume thresholds are disappearing. Many states used to use a two-part test: dollar volume and transaction count (often 200 transactions). Most states have now dropped the transaction count and rely on the dollar threshold alone. This is actually simpler to track, but it does mean businesses with a modest number of high-value sales are more exposed than before.
Four situations that often require a closer look
Situation 1: The remote hire. An Illinois company hires an engineer who works from home in Tennessee. The engineer doesn't interact with clients. The company may now have Tennessee payroll registration and unemployment insurance obligations, and possibly a state business tax filing requirement. The answer depends on Tennessee's specific rules and the employee's role—but the question has to be asked.
Situation 2: The online seller approaching a threshold. An Oregon company sells specialty products nationwide. It has $85,000 in annual sales to California customers and $110,000 in sales to Colorado customers. As of 2026, California's threshold is $500,000, so no obligation there. But Colorado's threshold is $100,000, which the company has crossed. Colorado registration may now be required, even though the company has no employees, no office, and has never shipped directly to a Colorado warehouse.
Situation 3: The fulfillment center seller. A consumer goods company uses Amazon FBA. Amazon distributes inventory to fulfillment centers in eight states. The company only specifically requested storage in two of them. In several of the other six states, the presence of that inventory may create physical presence nexus. The platform handles sales tax, but that doesn't resolve the company's registration or income tax filing obligations in those states.
Situation 4: The multi-state contractor network. A service company based in Missouri uses independent contractors to perform on-site work in a dozen states. The company has never registered anywhere outside Missouri. Each state where those contractors regularly work on the company's behalf is a potential nexus jurisdiction, and the obligations in each state depend on what the contractors do there and how that state defines nexus for service businesses.
What to do
If any of these situations sound familiar, the starting point is an internal review, not a panic response. Most businesses find that their exposure is limited to a manageable number of states once they actually map it out.
That review should look at:
- Where your employees and regular contractors are located, and what payroll or registration obligations may follow
- Where your inventory is stored, including through any third-party or marketplace fulfillment arrangement
- Your sales volume by state for the current and prior year, including marketplace sales
- Whether those sales figures exceed any state's economic nexus threshold
- What kind of products or services you sell, since the rules differ for tangible goods, digital products, and services
If the review turns up past exposure, that's not necessarily a crisis. Most states offer voluntary disclosure programs that allow businesses to come into compliance with a limited lookback period and reduced or waived penalties. Coming forward voluntarily is almost always a better outcome than being identified in an audit.
The rules in this area have been changing quickly and continue to evolve in 2026. A one-time review is useful, but the real protection is building a habit of checking your footprint when you add employees in new locations, enter new sales channels, or see your revenue in a particular state start to climb.
We're here to help you work through it. If you'd like to talk through your specific situation, reach out to your accountant. We can help you figure out where things stand and what, if anything, needs to happen next.