To address this evolution, tax laws had to change. So today, a business’s economic activity in a state counts just as much as its physical presence when it comes to the obligation to collect sales tax.

A company’s economic nexus by state is based on its economic activity within a state. This ranges from reaching a state-specific sales threshold or a specific number of transactions in a jurisdiction, irrespective of physical presence.

As of 2018, following the Supreme Court’s ruling in South Dakota v. Wayfair, the minimum annual transaction threshold for sales tax is $100K or 200 transactions. But each state has the freedom to create its own legislation and thresholds around that minimum. This means sales tax compliance gets tricky very quickly when it comes to your economic nexus thresholds.

Determine your sales tax nexus.

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How did South Dakota v. Wayfair change sales tax regulations?

South Dakota v. Wayfair saw the start of a new age … at least in terms of sales tax.

In January 2018, when the South Dakota tax authorities brought forward their case against Wayfair,, and Newegg, they couldn’t have foreseen the unprecedented ripple effect it would cause across the sales tax industry. It led to the start of tax legislation that considered the implications of the borderless digital landscape and the parameters of state economic nexus.

The defendants, Wayfair,, and Newegg, were three out-of-state vendors the state believed were exceeding local sales tax thresholds but were not collecting sales tax. And the US Supreme Court agreed with South Dakota.

The final ruling overturned the “physical presence” rule and held that a state could require out-of-state sellers to collect and remit sales taxes, even if they have no physical presence in that state.

This decision paved the way for states to tax remote sellers and digital companies (such as SaaS providers) that have no physical presence in the state.
Learn more about your physical presence nexus.

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Examples of economic nexus in action

Economic nexus is a concept that comes into play when a business and a state have a connection based on the annual sales revenue and/or transaction quantity, which crosses the threshold set by the state. If such a connection exists, the business will be required to register for sales tax and remit the same.

Economic nexus laws usually set a threshold for sales, transactions, or revenue generated in a state, which if exceeded, necessitates sales tax collection and remittance. For instance, a business that sells goods or services in a state and surpasses the state’s economic nexus threshold for sales or transactions must register for sales tax in that state and collect and remit sales tax.

Similarly, a business with a substantial annual revenue may have both physical presence nexus and economic nexus, sometimes in multiple states. Hence, it is crucial for a business to assess economic nexus thresholds in states where it conducts business, identify where thresholds have been met or will be met, register as a seller in each state with economic nexus, accurately collect state and local taxes, and finally, file and remit sales tax in those states.

Economic nexus rules by state

We told you that sales tax can get tricky, given that each state can make its own laws.

In general, economic nexus statutes necessitate a specific minimum amount of revenue to be linked to a particular state before the establishment of nexus. These thresholds can be based on either annual sales of products or services within the state, a certain dollar amount, or a specified number of sales transactions.

It is important to note that some states have both sales tax and income tax nexus thresholds, which may differ from each other.

But you don’t have to take our word for it. You can get a glimpse of the maze-like sales tax nexus requirements by state right here.


Once your annual sales cross $250,000 in Alabama, you need to start collecting sales tax.

New York

In New York, annual sales need to reach the $500,000 mark for sales tax compliance, but the number of transactions that trigger a nexus is only 100, meaning transaction volume may be the trigger here.


Illinois is a state that sticks to the minimum $100,000 threshold but allows up to 200 sales-tax-free transactions if the annual sales don’t cross the threshold.


Texas may offer the most leniency to out-of-state sellers with a sales threshold of $500,000 before sales tax compliance kicks in.

And these are just a few examples of state-specific economic nexus thresholds.

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