Understanding Physical Nexus: The Key to Sales Tax Compliance

As state regulations continue to evolve, businesses face increasing challenges in maintaining compliance with sales tax laws. One critical concept every company must grasp is “nexus.”

While the term might sound daunting, it simply refers to the connection—physical or economic—a business has to a particular state, determining its obligation to collect and remit sales tax.

In this guide, we’ll focus on physical nexus—what it means, why it’s vital for businesses, and how companies can stay ahead of compliance challenges with cutting-edge solutions like Kintsugi.

What is Physical Nexus?

Physical nexus is established when a business has a tangible presence in a specific state. This presence can include:

• A brick-and-mortar store, office, or warehouse.
• Employees or contractors operating within the state.
• Inventory stored in third-party warehouses, like those provided by fulfillment services.
• Activities such as attending trade shows or providing in-person services in the state.

If your business has physical nexus in a state, you’re legally required to collect sales tax on transactions made there and remit it to the appropriate tax authorities.

Physical nexus was formally recognized in the 1992 U.S. Supreme Court case Quill Corp v. North Dakota. This ruling set the precedent that a business needed a physical presence in a state to be compelled to collect sales tax. However, subsequent rulings, like the 2018 South Dakota v. Wayfair decision, have expanded the scope to include economic nexus—a topic we’ll touch on later.

Why Physical Nexus Matters

Failing to comply with physical nexus laws can have severe consequences for businesses, including:

1. Financial Penalties and Fees

Non-compliance results in fines and penalties, which vary depending on the unpaid tax amount. States without sales tax, like Alaska or Oregon, are exceptions, but even they may have local tax requirements.

2. Risk of Audits

Ignoring nexus obligations increases the likelihood of audits by state tax authorities, disrupting operations and creating legal exposure.

3. Back Taxes with Interest

Businesses found non-compliant must pay retroactive taxes, often with interest that accrues from the original due date.

4. Reputational and Legal Risks

Tax non-compliance can tarnish a company’s reputation, limiting future growth opportunities. In some cases, it may even lead to lawsuits.

How to Determine if You Have Physical Nexus

To assess whether your business has physical nexus, consider these questions:

• Do you have physical operations in a state?
  This includes stores, offices, or warehouses.

• Do you store inventory in third-party warehouses?
  Services like Fulfillment by Amazon can trigger nexus in states where your inventory is stored.

• Do you have employees or contractors in other states?
  Even remote employees can create nexus.

For instance, if your e-commerce business operates out of California, stores inventory in Nevada, and employs sales reps in Idaho, you likely have nexus in all three states.

Physical Nexus vs. Economic Nexus

While physical nexus refers to a tangible presence, economic nexus stems from the volume of business conducted in a state. States typically set thresholds, such as $100,000 in annual sales or 200 transactions per year, to establish economic nexus.

It’s essential to track both types of nexus to avoid unexpected penalties. Businesses can trigger one or both types simultaneously, complicating compliance efforts.

Steps to Stay Compliant

Navigating sales tax compliance can be overwhelming, but following these steps can simplify the process:

1. Register for Sales Tax
   Ensure your business is registered in every state where you have nexus.

2. Regularly Review Business Activities
   Monitor changes in your operations, such as expanding to new states or hiring remote employees, which could trigger nexus.

3. Leverage Kintsugi Intelligence
   Kintsugi’s state-of-the-art tools automate sales tax compliance, from tracking nexus across jurisdictions to calculating accurate tax rates and filing returns. With Kintsugi, businesses eliminate manual errors and gain peace of mind knowing they’re always compliant.

Why Kintsugi Stands Out

Unlike traditional tax providers, Kintsugi offers a revolutionary approach, leveraging AI-driven insights to simplify complex tax scenarios. From assessing nexus to recovering overpaid taxes and automating filings, Kintsugi is the trusted partner for businesses scaling across states and countries.

Companies like Italic have already benefited significantly—recovering over $200,000 in overpaid taxes within the first month of switching to Kintsugi. Whether you’re a SaaS company, an e-commerce brand, or a service provider, Kintsugi is the ultimate solution for streamlining sales tax compliance.

Stay Ahead with Kintsugi

As regulations become more complex, businesses need reliable, intelligent tools to stay compliant. Kintsugi offers unparalleled accuracy, efficiency, and support, empowering companies to focus on growth while leaving sales tax compliance to the experts. Explore how Kintsugi can transform your tax operations today.