# Understanding Physical Nexus: The Key to Sales Tax Compliance

Canonical: https://trykintsugi.com/blog/understanding-physical-nexus
Published: 2023-05-13

Learn what physical nexus means, how it differs from economic nexus, and what businesses should do when their operations span multiple states.

Physical nexus is the tangible connection a business has to a state that can create an obligation to collect and remit sales tax. Understanding that connection is essential as operations expand across offices, employees, warehouses, fulfillment services, and trade shows.

## What creates physical nexus?

Physical nexus may result from:

- a store, office, or warehouse;
- employees or contractors working in the state;
- inventory stored in a third-party warehouse;
- trade shows or in-person services; or
- company property located in the state.

If a business has physical nexus, it may need to register, collect sales tax on taxable transactions, and remit the tax to the state.

## Why physical nexus matters

Failing to account for physical nexus can lead to:

1. financial penalties and fees;
2. an increased risk of an audit;
3. back taxes and interest; and
4. reputational or legal problems.

The amount of exposure depends on the state, the length of time the connection existed, the transactions involved, and whether returns were filed.

## How to determine whether you have physical nexus

Ask:

- Do you have a store, office, warehouse, or other operation there?
- Is inventory held in a fulfillment center there?
- Do employees or contractors work there, including remotely?
- Do sales representatives regularly operate there?

For example, an ecommerce business operating in California, storing inventory in Nevada, and employing sales representatives in Idaho may need to evaluate nexus in all three states.

## Physical versus economic nexus

Physical nexus comes from a tangible presence. Economic nexus comes from the volume of business conducted in a state, usually measured by revenue or transaction thresholds.

The 2018 *South Dakota v. Wayfair* decision expanded remote collection obligations by allowing economic nexus, but physical nexus remains an independent trigger. A business may have one, both, or neither type of nexus in a given state.

## Steps to stay compliant

### Register where required

Register for a sales tax permit in every state where the business has a collection obligation.

### Review business activity regularly

Revisit the analysis when hiring remote employees, expanding operations, moving inventory, attending events, or entering a new state.

### Determine product taxability

Not every product or service is taxable in every state. Review product classifications, exemptions, and sourcing rules before configuring collection.

### Use a connected compliance workflow

Nexus monitoring, rate calculation, filing, and record-keeping are easier to manage when transaction and operational data flow into one system.

Kintsugi helps businesses track nexus across jurisdictions, calculate accurate rates, and manage filings as their operations grow.