Economic nexus in the United States is a legal standard that U.S. states use to determine whether a business has a substantial connection with the state, thereby imposing the obligation to collect and remit sales tax. Unlike the traditional physical presence requirement, economic nexus is established through the volume or value of a business's economic activity within a state, such as reaching a certain threshold of sales or number of transactions.
The concept became central to U.S. state taxation following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require out-of-state or remote sellers to collect sales tax based solely on economic activity, even in the absence of physical presence. The ruling overturned decades of precedent, most notably the Quill Corp. v. North Dakota ruling, enabling states to expand tax compliance obligations to out-of-state or remote sellers, particularly those engaged in the e-commerce industry.
Since the decision, most U.S. states have enacted economic nexus laws, which have transformed sales tax compliance for businesses operating across state lines.
History
Background Before 2018, the authority of U.S. states to require businesses to collect sales tax was primarily governed by the North Dakota Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. In that case, the Court reaffirmed the principle that a business must have a physical presence, which may be established by having an office, warehouses, or employees, in a state before the state could impose tax collection obligations. This physical presence, also known as the physical nexus, was rooted in the Commerce Clause of the U.S. Constitution, which limits state regulation of interstate commerce.
The Quill decision limited state tax enforcement, particularly as remote commerce and online sales began to grow rapidly in the early 2000s. States argued that the rule created a tax loophole, allowing out-of-state or remote sellers to avoid collecting, reporting, and remitting sales tax even when they generated substantial sales within the state. This situation placed brick-and-mortar businesses at a disadvantage and led to growing concern about lost tax revenue.
South Dakota v. Wayfair The legal framework surrounding state sales tax collection changed dramatically with the 2018 Supreme Court’s ruling in South Dakota v. Wayfair, Inc. The State of South Dakota enacted a law requiring out-of-state sellers to collect and remit sales tax if they exceeded specific economic thresholds set at $100,000 in sales or 200 transactions annually in the state, regardless of physical presence.
The Supreme Court upheld South Dakota’s law, ruling that the physical presence requirement established in Quill was “outdated and artificial.” The Court reasoned that the substantial economic and technological changes in commerce justified a shift in legal standards. It concluded that a seller’s economic and virtual contacts with a state could constitute a sufficient nexus under the Commerce Clause. In its ruling, the Supreme Court noted that “states were losing between $694 million and $3 billion per year in sales tax revenues as a result of the physical presence rule”.
State-by-State Economic Nexus Threshold Overview StateDate When the Economic Nexus Regulations Were IntroducedCurrent Economic Nexus ThresholdMeasurement PeriodSales Included in the Threshold Registration Deadline Upon Exceeding the ThresholdLegislative ChangesAlabama1 October 2018$250,000 and specified activitiesPrevious calendar yearRetail sales
Marketplace sales are excluded from the threshold for individual sellers1 January following the year in which the threshold is exceededAlaskaThe Alaska Remote Seller Sales Tax Commission has passed its “Remote Seller Sales Tax Code & Common Definitions,” which applies to local municipalities in Alaska that choose to adopt it.$100,000Previous calendar yearGross sales
Marketplace sales are included towards the threshold for individual sellers.The first day of the month following 30 days from adoption by the city or boroughAlaska removed its 200-transaction threshold, effective 1 January 2025.Arizona1 October 2019$100,000Previous or current calendar yearGross sales
Marketplace sales are excluded from the threshold for individual sellersThe first day of the month that starts at least thirty days after the threshold is metIn 2019, the threshold was set to $200,000, which was later decreased in 2020 to $150,000. In 2021, the current $100,000 threshold was defined.Arkansas1 July 2019$100,000 or 200 or more separate transactionsPrevious or current calendar yearTaxable sales
Marketplace sales are excluded from the threshold for individual sellersNext transaction after meeting the thresholdCalifornia1 April 2019$500,000Preceding or current calendar yearGross sales of tangible personal property
Marketplace sales are included towards the threshold for individual sellersThe day sellers exceed the thresholdOn 25 April 2019, California removed its 200 transactions threshold and raised its sales threshold from $100,000Colorado1 December 2018, with a grace period through 31 May 2019$100,000Previous or current calendar yearRetail sales
Marketplace sales are excluded from the threshold for individual sellersOn the 20th day after the retailer exceeded the threshold On 14 April 2019, Colorado removed its 200 transactions threshold Connecticut1 December 2018$100,000 and 200 transactions12-month period ending on September 30Retail sales
Marketplace sales are included towards the threshold for individual sellersOctober 1 of the year in which sellers crossed the thresholdOn 1 July 2019, Connecticut decreased its dollar threshold from $250,000 to $100,000, keeping the number of transactions the sameDistrict of Columbia1 January 2019$100,000 or 200 or more separate retail salesPrevious or current calendar yearRetail sales
Marketplace sales are included towards the threshold for individual sellersNext transaction after exceeding the thresholdFlorida1 July 2021$100,000Previous calendar yearTaxable sales
Marketplace sales are excluded from the threshold for individual sellersThe first of the following calendar year after sellers meet the thresholdGeorgia1 January 2019$100,000 or 200 or more salesPrevious or current calendar yearRetail sales of tangible personal property delivered electronically or physically, whether taxable or exempt
Marketplace sales are excluded from the threshold for individual sellersNext transaction after exceeding the thresholdBetween 1 January 2019 and 1 January 2020, the threshold was $250,000 or 200 or more sales. On 1 January 2020, Georgia decreased their sales threshold to $100,000 and kept the 200 transactions threshold unchangedHawaii1 July 2018$100,000 or 200 or more separate transactionsCurrent or immediately preceding calendar yearGross sales
Marketplace sales are included towards the threshold for individual sellersThe first of the month following the month in which the threshold is metIdaho1 June 2019$100,000Previous or current calendar yearGross sales
Marketplace sales are included towards the threshold for individual sellersNot specified by the StateIllinois1 October 2018$100,000 or 200 or more separate transactionsPreceding 12-month periodRetail sales
Marketplace sales are excluded from the threshold for individual sellersRetailers must determine every quarter whether they meet the criteria for the preceding 12-month periodFrom 1 January 2026, Illinois will remove its 200 transactions thresholdIndiana1 October 2018$100,000The calendar year in which the retail transaction is made or for the calendar year preceding the calendar year in which the retail transaction is madeGross sales
Marketplace sales excluded from the threshold for individual sellersNext transaction after exceeding the thresholdIowa1 January 2019$100,000Current or immediately preceding calendar yearGross sales
Marketplace sales are included towards the threshold for individual sellersThe first day of the following calendar month that starts at least 30 days from the day the remote seller first exceeded the thresholdOn 1 July 2019, Iowa removed its 200-transaction thresholdKansas1 July 2021$100,000Current or immediately preceding calendar yearGross sales
Marketplace sales are included towards the threshold for individual sellersNext transaction after exceeding the thresholdKansas originally introduced the economic nexus rules applicable to out-of-state or remote sellers in 2019. The initial legislation did not state a threshold. Therefore, any remote seller selling tangible goods or services into the state had to register and begin collecting tax by 1 October 2019Kentucky1 October 2018$100,000 or 200 or more separate transactionsPrevious or current calendar yearGross sales
Marketplace sales are included towards the threshold for individual sellersThe first of the month following 60 days after the threshold is meLouisiana1 July 2020$100,000Previous or current calendar yearRetail sales
Marketplace sales are excluded from the threshold for individual sellersWithin 30 days of exceeding the thresholdOn 1 August 2023, Louisiana removed its 200 transactions thresholdMaine1 July 2018$100,000Previous or current calendar yearGross sales
Marketplace sales are excluded from the threshold for individual sellers and do not include marketplace sales on returns if reported by the marketplaceThe first day of the following calendar month that starts at least 30 days from the day the remote seller first exceeded the thresholdOn 1 January 2022, Maine removed its 200 transactions threshold,Maryland1 October 2018$100,000 or 200 or more separate transactionsPrevious or current calendar yearGross sales
Marketplace sales included towards the threshold for individual sellersFirst day of the month following the month in which the threshold is metMassachusetts1 October 2017$100,000Previous or current calendar yearGross sales
Marketplace sales are excluded from the threshold for individual sellers if the marketplace facilitator is collectingFirst day of the first month that starts two months after the month in which the remote retailer exceeded the thresholdOn 1 October 2019, Massachusetts removed its 100 transactions threshold and decreased the $500,000 threshold to $100,000Michigan1 October 2018$100,000 or 200 or more separate transactionsPrevious calendar yearGross sales
Marketplace sales are included towards the threshold for individual sellers1 January of the year following the year in which the threshold is exceededMinnesota1 October 2018$100,000 or 200 or more retail salesThe 12 months ending on the last day of the most recently completed calendar quarterRetail sales
Marketplace sales are included towards the threshold for individual sellersThe first day of the calendar month occurring no later than 60 days after the threshold is exceededOn 1 October 2019, Minnesota changed its previous threshold set at $100,000 and 10 sales or 100 transactionsMississippi1 September 2018$250,000The prior twelve-month periodGross sales
Marketplace sales are excluded from the threshold for individual sellersNext transaction after exceeding the thresholdMissouri1 January 2023$100,000Previous calendar yearTaxable sales of tangible personal property
Marketplace sales are included towards the threshold for individual sellersNo later than 3 months following the close of the quarter in which the threshold was exceededNebraska1 April 2019$100,000 or 200 or more separate transactionsPrevious or current calendar yearRetail sales
Marketplace sales are included towards the threshold for individual sellersThe first day of the second calendar month in which the threshold was exceededNevada1 November 2018$100,000 or 200 or more separate transactionsPrevious or current calendar yearRetail sales