Sales Tax Nexus for Small Businesses: When You Have to Collect in Another State

Sales tax nexus is one of those problems that stays invisible right up until it is expensive. A business sells comfortably in its home state for years, then starts shipping orders nationwide, hires a remote employee in another state, or stores inventory in an out-of-state warehouse. Quietly, without any single dramatic moment, it now owes sales tax obligations in places it has never set foot. Most owners find out too late, from a state notice or a due-diligence review during a sale.

This guide explains, in plain language, what sales tax nexus is, what triggers it, and what to do about it, updated for 2026. It is written for small and growing businesses rather than for tax-software engineers, and it favors the same plan-ahead approach that separates strategic tax planning from last-minute tax preparation. One honest note up front: not every small business has a nexus problem. If you sell only in your home state and have no out-of-state presence, you may have nothing to worry about. But if you sell online, ship products, use marketplaces, or employ remote workers, this applies to you, and the details matter.

What sales tax nexus actually means

Nexus is simply the connection between your business and a state that is strong enough to require you to register, collect, and remit that state’s sales tax. There are two kinds, and you can trigger either one.

The modern rules trace to a single Supreme Court decision. In South Dakota v. Wayfair, decided June 21, 2018, the Court held that a state can require an out-of-state seller to collect sales tax based on economic activity alone, without any physical presence. That decision opened the door to the economic nexus laws nearly every state now enforces.

Today, 45 states plus the District of Columbia impose a general sales tax and enforce economic nexus rules. Five states have no statewide sales tax: New Hampshire, Oregon, Montana, Alaska, and Delaware, though Alaska allows local jurisdictions to impose their own. In every other state, your sales activity or your physical footprint can create an obligation.

Economic nexus, the sales-volume trigger

Economic nexus is based purely on how much you sell into a state. Cross the state’s threshold and the obligation attaches, even if you have no office, employee, or inventory there.

Most states use a revenue threshold of $100,000 in annual sales, and the clear trend is toward revenue-only tests. Some states set higher bars, and a few still layer in a transaction count. A few examples:

That Illinois change matters. Effective January 1, 2026, Illinois removed the 200-transaction count from its economic nexus test, so out-of-state sellers now trigger nexus at $100,000 in sales regardless of how many orders that took. Low-volume, high-ticket sellers who once slipped under the transaction count are now measured only on revenue. You can confirm current rules directly with the Illinois Department of Revenue.

Two practical points about the economic nexus. First, thresholds apply independently in each state, so a growing business can cross several at once during a strong year. Second, economic nexus obligations generally run from the date a state’s law took effect and are not applied retroactively before that, which limits, but does not eliminate, historical exposure.

Physical nexus, the presence trigger

Physical nexus is the older and, for many small businesses, the sneakier concept. It has no dollar threshold. A single qualifying presence creates a nexus at any revenue, from the date the presence began. Common triggers include:

• An office, store, or leased space in the state
• Employees working in the state, including remote employees
• Inventory stored in the state, including stock held at a third-party or Amazon FBA warehouse, regardless of value
• Independent contractors performing services on your behalf in the state
• Traveling into the state for trade shows or sales calls, depending on the activity and duration

The remote-employee trap deserves special attention because it is so common now. Consider a business headquartered in Illinois that hires its first fully remote employee in Colorado. That one hire can create three separate obligations in Colorado at once: sales tax registration, payroll tax withholding, and a corporate income tax filing, in a state where the company has no office and, initially, no customers. This is exactly where sales tax, payroll processing, and business tax return preparation intersect, and why a single remote hire is worth a conversation with your accountant before, not after.

One relief point: using a third-party shipping company to deliver your goods generally does not, by itself, create a physical nexus for you, because the carrier holds the presence, not you. Storing your inventory in a warehouse, though, is a different story and does create a nexus.

Marketplace facilitator rules

If you sell through a large marketplace like Amazon, Etsy, or Walmart, marketplace facilitator laws generally require the marketplace to collect and remit sales tax on those sales for you. That genuinely reduces your burden for marketplace transactions.

It does not always end your responsibility, though. Sales you make directly, through your own website or other channels, still count toward your thresholds and your obligations. And some states still expect you to register even when the marketplace remits on your behalf. If you sell through both a marketplace and your own store, you need to look at each channel and each state separately rather than assuming the marketplace has you fully covered.

A worked example: Prairie Provisions

Prairie Provisions is a Chicago-based specialty food brand. For years it sold locally and collected only Illinois sales tax. Then two things happened in the same year.

• It launched a national online store and, riding a strong holiday season, sold more than $100,000 into California and more than $100,000 into Texas. That crossed the economic nexus threshold in both states ($500,000 is the bar in each, so in this case it was actually under, which is the point of checking, but it did cross the $100,000 thresholds in several smaller states like Michigan and Georgia). The lesson: it had to measure state by state, because the answer differed in each.
• To speed up shipping, it enrolled in Amazon FBA and let Amazon store its products in fulfillment centers in Pennsylvania and Nevada. That inventory created physical nexus in both states immediately, at any revenue, from the day the stock arrived.

The result was a mix of obligations. In the states where Amazon was the marketplace, Amazon collected and remitted on those marketplace sales, but Prairie Provisions still had direct website sales and registration questions to sort out. In the FBA-warehouse states, it had exposure dating back to when inventory first landed there. Working with a CPA, the owner mapped every trigger, dated each one, checked whether the products were even taxable in each state, and then registered going forward while using a Voluntary Disclosure Agreement to clean up past exposure before any state came knocking.

No single decision here was reckless. The online store and FBA were smart growth moves. The tax consequences simply rode along with them, unannounced, which is how nexus almost always works.

How to tell if you have nexus (a quick self-check)

Ask yourself, state by state:

• Did my sales into this state cross its threshold this year or last?
• Do I store any inventory there, including at an FBA or third-party warehouse?
• Do I have an employee, remote or otherwise, working from there?
• Do I use contractors who perform services for me there?
• Do I travel there regularly for trade shows or sales?

If you answered yes to any of these for a given state, you likely have nexus there and should look closer. If you sell into many states online, this quickly becomes a spreadsheet exercise, which is exactly the kind of review a CPA does as a nexus study.

What to do if you have nexus

Once you have identified a state where you have nexus, the compliance path is consistent even though the details vary:

1. Confirm taxability. Not everything is taxable everywhere. Your product or service might be exempt in that state, which can shrink or erase the obligation. Check before you register.
2. Register for a sales tax permit. You apply through the state’s tax authority with your business details. Do this before you start collecting, since collecting tax without a permit is itself a problem.
3. Start collecting the correct state and local tax on taxable sales into that state.
4. File and remit on the state’s schedule, which may be monthly, quarterly, or annually depending on your volume. Reliable sales tax filing support keeps this from becoming a recurring headache across multiple states.

For states where you have nexus only going forward, this is straightforward. Where you have past exposure, read the next section first.

What to do if you already crossed and did not collect

This is the situation that keeps owners up at night: you discover you had nexus months or years ago and never collected. You may owe back tax, plus interest on each unfiled period, plus penalties, plus a separate penalty for registering late.

The tool that usually helps most is a Voluntary Disclosure Agreement (VDA). A VDA lets you come forward proactively, and in exchange the state typically limits how far back it can look and waives or reduces penalties. It is often the difference between a manageable cleanup and a punishing one.

The catch is timing. A VDA only works if you act before the state contacts you. The moment a state sends a nexus questionnaire or an audit notice, that window closes and you lose the negotiating position. This is why “wait and see” is usually the worst strategy with nexus, and why a quiet, proactive review with a CPA is worth far more than it costs. Physical nexus exposure is especially important here, because unlike economic nexus, it can date back to the day your presence began, with no threshold to limit it.

The Illinois angle

If your business is based in Illinois, or sells into it, know that Illinois is one of the more complex sales tax states in the country. It administers a Retailers’ Occupation Tax with sourcing rules that have tripped up businesses for years, and it distinguishes between how in-state and remote retailers source their sales. Under the state’s Leveling the Playing Field framework, qualifying remote retailers generally collect state and local tax at the destination rate. Layered on top is the 2026 change removing the transaction-count threshold. The combined effect is that more out-of-state sellers are pulled in, and the rate they must charge depends on where the customer is. Given the complexity, confirm your specific situation with the Illinois Department of Revenue or a local CPA rather than assuming the general rule fits your facts.

Common and costly nexus mistakes

• Assuming no physical presence means no nexus. Economic nexus alone can create obligations from pure sales.
• Forgetting that inventory creates nexus. FBA and third-party warehouses are the classic surprise.
• Overlooking remote employees. One hire can create sales, payroll, and income tax duties at once.
• Assuming the marketplace covers everything. Direct sales still count, and some states still want you registered.
• Waiting after you discover exposure. Delay forfeits the VDA option once a state makes contact.
• Collecting without registering, which creates its own liability.

Nexus compliance checklist

• List every state you sell into and your annual sales to each
• Flag states where you exceed the economic nexus threshold
• Note any inventory locations, including FBA and 3PL warehouses
• Note every state where you have employees or contractors
• Confirm whether your product or service is taxable in each flagged state
• Separate marketplace sales from direct sales by state
• Register where you have a go-forward obligation
• Address past exposure through a VDA before any state contacts you
• Set up a process to monitor thresholds as you grow

Frequently Asked Questions

1. What is sales tax nexus?
   Nexus is the connection between your business and a state that is strong enough to require you to register, collect, and remit that state’s sales tax. You can create it through sales volume (economic nexus) or physical presence (physical nexus).
2. Do I need to collect sales tax in another state?
   You do if you have nexus there. That happens when your sales into the state exceed its threshold, or when you have physical presence such as inventory, an employee, or a contractor in the state. Check each state separately, since rules and thresholds differ.
3. What is the difference between economic and physical nexus?
   Economic nexus is based on sales volume, usually $100,000 in a state, with no physical presence required. Physical nexus is based on presence such as an office, employees, or inventory, has no dollar threshold, and applies from the date the presence began.
4. What is the economic nexus threshold in most states?
   Most states use $100,000 in annual sales. Some larger states set higher bars, such as $500,000 in California and Texas. New York requires both $500,000 and 100 transactions. Many states have dropped transaction-count tests in favor of revenue only.
5. Did Illinois change its sales tax nexus rules?
   Yes. Effective January 1, 2026, Illinois removed the 200-transaction count from its economic nexus test. Out-of-state sellers now trigger nexus at $100,000 in sales regardless of the number of transactions.
6. Does storing inventory in another state create nexus?
   Yes. Inventory stored in a state, including stock held in an Amazon FBA or third-party warehouse, generally creates physical nexus immediately, at any revenue, from the date the inventory arrives.
7. Does hiring a remote employee create sales tax nexus?
   Usually yes. An employee working in a state typically creates physical nexus there, and a single remote hire can create sales tax, payroll withholding, and income tax obligations at once. Review the state’s rules before or soon after hiring.
8. If I sell on Amazon or Etsy, do I still owe sales tax?
   Marketplace facilitator laws generally require the marketplace to collect and remit on your marketplace sales. But your direct sales through your own website still count toward thresholds, and some states still require you to register even when the marketplace remits.
9. What should I do if I just found out I have nexus in a state?
   Identify when nexus began, quantify your sales into the state since then, and confirm whether your product or service is even taxable there. Then register going forward, and for past exposure consider a Voluntary Disclosure Agreement before the state contacts you.
10. What is a Voluntary Disclosure Agreement?
    A VDA lets you come forward to a state proactively to resolve past sales tax liability. The state typically limits how far back it can look and waives or reduces penalties. It only works before the state contacts you, so timing is critical.
11. What are the penalties for not collecting sales tax?
    You can owe back tax for each period, interest on each unfiled return, penalties, and a separate penalty for registering late. Exposure from physical nexus can date back to when your presence began, which is why proactive cleanup usually costs far less.
12. Does using a shipping company create nexus?
    Generally no. Using a third-party carrier to deliver goods does not, by itself, create physical nexus for you, because the carrier holds the presence. Storing your inventory in a warehouse, however, does create nexus.
13. Which states have no sales tax?
    Five states have no statewide sales tax: New Hampshire, Oregon, Montana, Alaska, and Delaware. Alaska allows local jurisdictions to impose their own sales tax, so local obligations can still exist there.

Key takeaways

• Nexus is the connection that forces you to collect a state’s sales tax, and you can trigger it two ways.
• Economic nexus comes from sales volume, usually at a $100,000 threshold, and Illinois dropped its transaction-count test as of January 1, 2026.
• Physical nexus comes from presence such as inventory, remote employees, or contractors, has no dollar threshold, and dates back to when the presence began.
• Marketplaces help but do not always end your duty, and direct sales still count.
• If you already crossed, a Voluntary Disclosure Agreement is usually the best fix, but only before a state contacts you.
• When in doubt, get a nexus review. The cost of a proactive check is small next to back taxes, interest, and penalties.

Multi-state sales tax is one of the easiest ways for a growing business to accumulate quiet liability, and one of the areas where a knowledgeable human matters most. STAXC helps small and growing businesses with sales tax registration and filing across states, and coordinates the related corporate tax return and payroll issues that ride along with expansion. You can meet the CPAs on our team or schedule a consultation for a nexus review. For related reading, see our industry guides on restaurant owner tax deductions and the top business tax deductions, and if you are forming or restructuring an entity, our overview of BOI reporting.