A nexus study is a formal review that determines whether your business has a tax obligation in a given state or jurisdiction. “Nexus” is the legal term for the connection between your business and a state that gives that state the right to require you to collect and remit taxes. The study maps out where those connections exist, when they were established, and how much potential tax exposure you’re carrying.
Why Nexus Matters for Your Business
Every state with a sales tax requires businesses that have nexus there to collect tax from customers and send it to the state. If you have nexus in a state and aren’t collecting, you’re accumulating liability with every sale. That liability doesn’t expire quickly, and states can look back several years when they catch up to you. A nexus study gives you a clear picture of where you stand before a state comes knocking.
The study also covers income tax obligations, which operate under different rules than sales tax. A business can have sales tax nexus in a state without having income tax nexus there, and vice versa. Understanding both layers is critical for businesses operating across state lines.
Physical Nexus Triggers
The most obvious way to create nexus is by having a physical presence in a state: a storefront, office, or warehouse. But the bar is much lower than most business owners realize. Any of the following activities can create a physical nexus connection:
- Remote employees. A single employee working from home in another state can trigger a tax obligation there.
- Inventory storage. If you use a third-party fulfillment service like Fulfillment by Amazon, your products may be stored in warehouses across dozens of states. Each one can create nexus. States including Arizona, California, Texas, Virginia, and many others explicitly treat FBA inventory as establishing nexus.
- Trade show attendance. In most states, attending a trade show where you take orders or make sales can trigger a collection obligation. Some states, like Georgia, require out-of-state vendors to collect sales tax on any orders taken during a trade show even when nexus isn’t otherwise established.
- Traveling salespeople. Sending sales reps into a state on a regular basis creates nexus, even if they never close a deal in person.
- Independent contractors. Using agents or contractors to solicit sales in a state creates nexus the same way using employees would.
These triggers apply when the activity is systematic or recurring. A one-time delivery usually won’t create nexus, but a pattern of activity will.
Economic Nexus After Wayfair
The 2018 Supreme Court decision in South Dakota v. Wayfair changed the landscape entirely. Before that ruling, a business generally needed a physical presence in a state to have sales tax nexus. Now, every state with a sales tax has adopted economic nexus rules, meaning you can owe sales tax in a state where you’ve never set foot.
Economic nexus kicks in when your sales into a state cross a certain threshold. Dollar thresholds range from $100,000 to $500,000, depending on the state. Many states also set a transaction threshold, typically 200 transactions per year, though this has been shifting. Alaska, Illinois, North Carolina, Utah, and Wyoming have all recently removed their transaction thresholds, leaving only the dollar amount as the trigger.
The composition of thresholds varies too. Some states count gross sales, others count only taxable sales, and still others look specifically at sales of physical goods. In states like New York and Connecticut, you must exceed both a dollar and a transaction threshold before nexus applies. In states like Washington and Wisconsin, only the dollar threshold matters. A nexus study sorts through all of these rules for every state where you do business.
How Sales Tax and Income Tax Nexus Differ
Sales tax nexus and income tax nexus are governed by different legal standards, and a nexus study should evaluate both. A federal law called Public Law 86-272, passed in 1959, provides a “safe harbor” for income tax. Under this law, a company can send salespeople into a state to solicit orders for physical goods without creating income tax nexus, as long as orders are approved and fulfilled outside the state.
Here’s a practical example: a company headquartered in Illinois sends employees into Wisconsin, Missouri, Indiana, and Ohio to sell office furniture. All orders ship from Illinois via a common carrier and are approved in Illinois. That company has sales tax nexus in all four states because its salespeople are physically present there. But it does not have income tax nexus in Wisconsin, Missouri, or Indiana because its activities fall within the safe harbor.
The safe harbor only applies to sales of physical products. If your business sells services, accepts orders within a state, delivers goods on company vehicles, or keeps inventory in a state, you’ve likely crossed the line into income tax nexus. This distinction is one of the most valuable things a nexus study clarifies.
What a Nexus Study Actually Examines
A nexus study typically starts with a comprehensive inventory of your business activities across all states. The tax professional conducting the study will need several categories of information from you: where your employees live and travel, where you store inventory or property, which states you ship into and how much revenue each generates, whether you attend trade shows or events in other states, and whether you use third-party contractors or affiliates in any jurisdiction.
The study then maps those activities against each state’s specific nexus rules, both physical and economic. Because every state has its own thresholds, definitions, and exceptions, the analysis is state by state. The final deliverable is a report showing which states you have nexus in, what type of nexus it is (sales tax, income tax, or both), and when the nexus was likely established. That “when” matters because it determines how far back your liability might extend.
What Happens When You Find Liability
If a nexus study reveals that you should have been collecting tax in a state but weren’t, you have options. The most common path is a Voluntary Disclosure Agreement, or VDA. Most states offer these programs specifically to encourage businesses to come into compliance on their own rather than waiting to be caught.
The benefits of a VDA can be substantial. Washington State’s program, for example, limits the look-back period to four years plus the current year, compared to seven years plus the current year if the state discovers you through an audit. Washington also waives up to 39% in combined penalties, including the 29% late payment penalty, the 5% unregistered business penalty, and the 5% assessment penalty for underpaid tax. Interest still applies at the statutory rate, but the penalty savings alone can be significant.
Most states offer similar programs with varying terms. The key advantage across all of them is a shorter look-back period and reduced or eliminated penalties. Filing a VDA before a state contacts you is essential, because once an audit or investigation begins, you typically lose access to the program.
Who Needs a Nexus Study
Any business selling into multiple states should consider a nexus study, but certain situations make it especially urgent. If you’ve recently started using a fulfillment service that stores inventory in multiple states, your nexus footprint may have expanded overnight. If you’ve hired remote employees in new states, each one is a potential trigger. If your e-commerce revenue has been growing steadily, you may have crossed economic nexus thresholds in states you’ve never thought about.
Businesses going through mergers, acquisitions, or major operational changes also benefit from a fresh study. The acquiring company inherits the target’s nexus profile, and any undisclosed liabilities become their problem. Running a nexus study during due diligence can prevent expensive surprises after the deal closes.
Most nexus studies are conducted by CPA firms or specialized state and local tax (SALT) consultants. The complexity and cost depend on the size of the business and the number of states involved, but for a mid-size company selling across many states, the study can take several weeks to complete. Given that uncollected sales tax liability accumulates with every transaction, the cost of the study is almost always small relative to the exposure it uncovers.