Business nexus is the threshold of activity that triggers legal obligations in a jurisdiction. However, the term "business registration nexus" is commonly used to refer to tax registration requirements, which require businesses to register for sales tax, income tax, or employment taxes based on economic thresholds (such as $100,000 in sales) or physical presence activities.
This is distinct from foreign registration nexus (SOS nexus), which determines when out-of-state businesses must register with the Secretary of State to legally "transact business" in a jurisdiction. While both types of nexus often overlap—activities that trigger tax obligations frequently also constitute "doing business" for entity registration purposes—they operate independently with different triggers, deadlines, and consequences.
In this article, we focus on tax registration nexus, explaining when your business activities trigger tax registration obligations across the US.
Business nexus operates across three distinct categories, each with independent triggers, obligations, and consequences. Many compliance problems stem from businesses treating nexus as a single concept rather than understanding these separate but interconnected requirements.
Tax nexus determines when businesses must register for and pay various state taxes, including sales tax, income tax, and employment taxes. Each tax type operates independently with separate thresholds, agencies, and compliance requirements.
Secretary of State nexus, also known as foreign registration nexus, determines when out-of-state businesses must register with state Secretary of State offices before conducting business. This creates legal authorization to operate within the jurisdiction.
SOS nexus typically relies on qualitative assessments of business activities rather than specific revenue thresholds. Common triggers include maintaining offices or employees, owning property, conducting ongoing business operations, or participating in state-specific licensing programs.
Regulatory nexus encompasses industry-specific licensing, permitting, and compliance requirements that vary significantly by business type and jurisdiction. Examples include professional licensing for healthcare providers, environmental permits for manufacturers, and financial services regulatory compliance.
These three nexus types operate independently. Businesses can have tax obligations without Secretary of State registration requirements, SOS registration requirements without all tax obligations, or regulatory compliance needs independent of other nexus types.
Prevalent misconceptions about nexus create compliance gaps that expose businesses to penalties, audit risk, and operational disruption. Understanding these misconceptions prevents costly mistakes and enables strategic compliance planning.
Many businesses assume that crossing one nexus threshold creates obligations for all tax types within a state. In reality, each tax type has independent thresholds and triggers that operate separately. Sales tax nexus doesn't automatically create income tax nexus, and employment tax nexus doesn't guarantee sales tax obligations.
For example, a software company with remote employees in California might have employment tax nexus (immediate upon hiring) and income tax nexus (from substantial economic activity) without sales tax nexus if their software subscriptions are non-taxable in California.
Businesses believe they can avoid nexus obligations by operating remotely without physical presence in target states. However, economic nexus has fundamentally changed this landscape. The Supreme Court's Wayfair decision eliminated physical presence requirements for sales tax, and many states have extended economic nexus concepts to income tax and other obligations.
States now capture remote businesses through revenue thresholds, transaction counts, and business activity measures that don't require physical presence. Digital businesses, e-commerce operations, and service providers can establish nexus purely through customer relationships and revenue generation.
Businesses often assume their incorporation or formation state controls their compliance obligations across all jurisdictions.
Each state applies its own nexus standards independent of where the business was formed. Delaware incorporation doesn't protect against California income tax nexus, and Nevada LLC formation doesn't prevent Texas franchise tax obligations.
Business activities in each state determine obligations within that jurisdiction. A Delaware corporation with operations in 10 states faces potential compliance obligations in all 10 states, regardless of its Delaware incorporation benefits.
Businesses assume economic nexus thresholds are standardized across states, making compliance planning straightforward. In reality, significant variations exist across jurisdictions in threshold amounts, calculation methods, and look-back periods. Economic nexus ranges from $100,000 to $500,000+ in sales, with some states using transaction counts while others focus purely on revenue.
Common threshold variations:
States use different measurement periods (current year, previous year, rolling 12 months) and include different types of transactions in threshold calculations.
Unprofitable businesses believe they don't have compliance obligations until they achieve profitability. However, that’s not the case. Revenue activity and business operations create obligations regardless of profitability. Many nexus triggers focus on gross receipts, business activities, or operational presence rather than net income or profitability.
Sales tax, gross receipts tax, and employment tax focus on business activity levels, not profitability. A growing startup losing money might still trigger multiple compliance obligations.
Additionally, many states impose minimum taxes or filing obligations regardless of profitability, particularly for businesses that have established nexus through other activities.
Businesses assume nexus obligations begin immediately when economic thresholds are crossed. But timing varies significantly by state and tax type, with different lookback periods, registration deadlines, and obligation start dates creating complex compliance coordination challenges.
Common timing variations:
Effective nexus management requires understanding fundamental principles that guide strategic compliance planning and operational decision-making across multiple jurisdictions.
What's the difference between physical and economic nexus?
Physical nexus is created through tangible business presence like offices, employees, inventory, or property within a state. Economic nexus is established through revenue thresholds or business activity levels without requiring physical presence. Many states now use both standards, meaning businesses can establish nexus through either physical activities or economic thresholds.
Can I have nexus for one tax type but not others in the same state?
Yes, each tax type operates independently with separate triggers and thresholds. You might have employment tax nexus from hiring remote workers without meeting sales tax thresholds, or sales tax nexus from economic activity without triggering income tax obligations. Monitor each tax type separately to avoid unnecessary registrations.
How do remote employees affect my nexus obligations?
Remote employees working from their home addresses typically create an immediate physical presence nexus in their work states, establishing obligations for employment taxes and potentially other tax types. This includes withholding taxes, unemployment insurance, and potentially income tax nexus if their activities generate substantial business activity.
Discern provides comprehensive nexus compliance solutions, including foreign registration automation, registered agent services across all 51 jurisdictions, and compliance tracking that ensures your business maintains proper standing across all nexus types without administrative burden.
Ready to take the compliance burden off your hands? Book a demo with Discern today.
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