If you're running a growing business, you've probably heard the term "nexus" thrown around in conversations about sales tax. If you’re new to collecting and filing sales tax, you might be wondering: What exactly does that mean, and why should I care?

Let's start with the basics. Physical nexus is one of the primary ways your business can create a sales tax obligation in a state. It refers to any substantial physical presence or connection your business has in a particular jurisdiction—and it's not just about having a storefront.

Beyond Brick and Mortar

When most people think "physical presence," they picture a retail store, office building, or warehouse. And yes, those definitely create physical nexus. But here's where it gets tricky: physical nexus extends far beyond traditional locations.

Your business might have physical nexus in a state if you have:

• Employees working remotely: If you have a single employee working from their home in Colorado, you likely have physical nexus in Colorado.

• Trade show attendance: Exhibiting at a conference or trade show, even for just a few days.

• Inventory stored in warehouses: Including third-party fulfillment centers.

• Sales representatives or contractors: Even if they're working from home.

• Company property: Equipment, servers, or other assets physically located in the state.

• Drop shipping arrangements: In some states, if your vendor ships directly to customers there.

The key word here is "substantial." A business trip where your CEO attends a meeting probably won't create nexus. But regular, ongoing physical presence typically will.

Why Physical Nexus Matters

Physical nexus determines where you're required to register for a sales tax permit, collect sales tax from customers, and file sales tax returns. Miss this, and you could face:

• Audit exposure

• Back taxes owed 

• Penalties and interest

If you’re an experienced controller, you’re probably familiar with just how messy sales tax can get. But for new founders who are scaling for the first time, hiring their first remote employees, and more, this is your sign to reinvent your compliance strategy. 

The Pre-Wayfair World

Before we go further, here's a quick history lesson: physical nexus used to be the only way to create a sales tax obligation. Then came 2018's Wayfair decision, which introduced economic nexus—the idea that you can trigger sales tax obligations based purely on sales volume, even without any physical presence. But physical nexus didn't go away. It's still very much alive and remains one of the primary triggers for sales tax obligations.

How Much Physical Presence Triggers Nexus?

This is where things get state-specific, but generally speaking: it doesn't take much.

Most states work with the idea that any physical presence, no matter how minimal, creates nexus. Hire one remote employee in Texas? You've got physical nexus in Texas. Store inventory in a New Jersey fulfillment center? That's physical nexus in New Jersey.

Some states provide limited exceptions for trade shows and temporary events (often called "nexus amnesty" periods), but these vary widely. You can't count on them.

Physical Nexus vs. Economic Nexus: What's the Difference?

Since we mentioned economic nexus, let's clarify the difference:

Physical nexus = You have a physical presence in the state (employee, office, inventory, etc.)

Economic nexus = You exceed a state's sales or transaction threshold, typically $100,000 in sales or 200 transactions per year

You can have one, both, or neither in any given state. And yes, if you have physical nexus, you still need to monitor economic nexus thresholds in other states where you're selling.

What To Do If You Have Physical Nexus

If you've realized while reading this that you have physical nexus in states where you're not currently registered, don't panic. Here's what to do:

1. Identify all states where you have physical nexus Make a list. Include every state where you have employees, offices, inventory, or any other physical presence.

2. Register for sales tax permits Each state where you have nexus requires registration before you start collecting tax.

3. Determine what's taxable Not everything is taxable in every state. Research each state's rules or work with a sales tax solution to understand what you need to collect on.

4. Start collecting (and remitting) sales tax Once registered, you'll need to collect appropriate sales tax on taxable transactions and file returns on your assigned schedule.

5. Consider voluntary disclosure If you've had nexus for a while but haven't been collecting, many states offer voluntary disclosure programs that can limit lookback periods and waive some penalties.

The Remote Work Complication

The rise of remote work has made physical nexus exponentially more complicated. In 2020, suddenly companies that previously had nexus in one or two states found themselves with nexus in ten, fifteen, or twenty states as employees relocated.

If you're hiring remote workers, always consider the sales tax implications before you extend the offer. Each new state where you employ someone is a new compliance obligation—and it's far easier to factor this into your planning than to scramble after the fact.

The Bottom Line

Physical nexus isn't going anywhere. While economic nexus gets a lot of attention these days, physical nexus remains a critical compliance trigger—and often a more straightforward one to identify.

The good news is that once you know where you have physical nexus, you can take the right steps to get compliant and stay compliant. The right sales tax automation tool can simplify the process, freeing up time and saving you money. 

Ready to identify where your business has physical nexus? Kintsugi's sales tax platform helps you track your nexus footprint automatically as your business grows.