Economic nexus

What is economic nexus?

Economic nexus is the level of business activity in a state that creates a tax filing obligation there, even without a physical office. Most states set thresholds based on revenue, transaction counts, or payroll in that state. Cross the threshold and you owe registration, filings, and sometimes tax. For service firms selling to clients across state lines, economic nexus is the reason a single out-of-state client can quietly create a new compliance obligation.

Thresholds that catch service firms off guard

Many states use a dollar threshold somewhere between $100,000 and $500,000 of receipts sourced to that state. Others add payroll or property tests. A consulting firm billing one large client in another state can exceed the threshold in a single year. Thresholds apply per state, per tax type, and the income tax rules often differ from sales tax rules. One review will not cover you forever either, because client mix changes every year.

What to do once you cross

Register with the state, then determine which taxes actually apply. Income or franchise tax is common. Many professional services are exempt from sales tax, but not all states agree, and some tax specific services like data processing or information services. If you crossed the threshold in prior years and never filed, voluntary disclosure programs can limit penalties and lookback periods. Ask your accountant for a nexus review annually, not once.