Physical nexus is a substantial physical presence or connection a business has in a state. It is one of the primary ways a business can create a sales tax obligation, and it extends beyond a storefront or office.
What can create physical nexus?
A business may have physical nexus through:
- employees working remotely in the state;
- inventory stored in a warehouse or third-party fulfillment center;
- sales representatives or contractors operating there;
- equipment, servers, or other company property;
- attending or exhibiting at a trade show; or
- drop-shipping arrangements, depending on state rules.
The details are state-specific. A brief business trip may not create the same connection as a regular, ongoing presence, and temporary-event exceptions vary by jurisdiction.
Why physical nexus matters
Physical nexus can require a business to register for a sales tax permit, collect tax from customers, and file returns. Missing the obligation can lead to audits, back taxes, penalties, and interest.
Physical nexus existed before the 2018 South Dakota v. Wayfair decision, when physical presence was the primary standard for remote collection. Economic nexus expanded the framework to include sales-volume thresholds, but it did not replace physical nexus.
How much presence is enough?
The answer depends on the state, but businesses should not assume that a large facility is required. One remote employee, inventory in a fulfillment center, or a recurring in-state activity may be enough.
Some states provide limited exceptions for trade shows or temporary events. These exceptions are not uniform, so confirm the rules before relying on them.
Physical versus economic nexus
Physical nexus comes from a tangible connection such as an employee, office, inventory, or property. Economic nexus comes from exceeding a state’s sales or transaction threshold.
A business can have physical nexus, economic nexus, both, or neither in a state. Physical nexus in one state does not remove the need to monitor economic activity in other states.
What to do if you have physical nexus
- List every state where the business has employees, offices, inventory, property, or another physical connection.
- Register for a sales tax permit in each state where required.
- Determine which products and services are taxable there.
- Configure collection, begin remitting, and file returns on the assigned schedule.
- If the business has historical exposure, evaluate voluntary disclosure or another resolution path with a qualified tax advisor.
Remote work and fulfillment complications
Remote work can expand a company’s physical footprint when employees relocate or are hired in new states. Third-party fulfillment can do the same when inventory is stored across multiple warehouses.
Review the sales tax implications when hiring in a new state, changing fulfillment providers, opening an office, or storing company property outside the home state.
Kintsugi helps businesses track their nexus footprint, monitor obligations, calculate tax, and manage filing workflows as their operations grow.
