Your Guide to Economic Nexus

Not sure what economic nexus is? Wondering how it affects you as a business owner? What does economic nexus have to do with sales tax?

This guide is going to answer all of your questions about the economic nexus and the laws that pertain to your specific business type.

What are economic nexus laws?

Economic nexus laws are laws requiring you to pay taxes in the states where your business has a significant economic presence.

For example, if you operate an eCommerce store that sells products in California, then California requires that you pay sales tax on all of your sales that are delivered to California customers. You can create nexus by offering free shipping or storage so long as it’s a benefit of using your online store.

In general, you’ll have a significant economic presence if more than 50 percent of your sales come from customers in one state or within a single metropolitan area of a state. There are also several other factors that determine whether or not you’ll be required to pay taxes on all of your sales made.

On the other hand, you may have a physical nexus in a state if your business is based or located there even if you do not make any sales there. A good example of this would be an online retailer that has its servers and warehouses in California yet has no actual “sales” made from California customers.

How to avoid being taxed by the state of California?

If you’re selling products in California, then you’re required to pay sales tax.

Your best bet is to register your business as a California seller using the California State Board of Equalization’s online registration system. You’ll be required to pay an annual fee of $800 but it would save you from having to make quarterly payments otherwise.

What should you know about sales tax for online retailers?

Because of the “physical presence” requirement, you don’t have to pay taxes if your business is located outside California or has no physical storefront.

If you do have a physical location in the state of California, then you’re required to charge sales tax on all online purchases.

The difference between “economic presence” and “physical presence” in regards to taxation?

Economic presence is when your business has more than $500,000 in sales or more than 200 transactions delivered into the state.

Physical presence occurs when you have a physical storefront, warehouse, office space, server farm, etc. in the state where taxes are being collected from. You would have a physical presence if your company does not meet the economic presence threshold.

Why it’s important to understand what type of company you’re operating as?

When filing taxes in California, the Franchise Tax Board will assign your business an entity type based on how your business is registered with the Secretary of State. This entity type will determine how often you’re required to pay taxes, what you need to file, etc.

Why it’s important to understand what type of company you’re operating as

If your business is registered as an LLC or other type of partnership, then your business will be treated as a pass-through entity and will not be taxed on California sales. You’ll instead receive a K-1 tax form that designates your share of net profits in your business.

If you’re operating as an S-corp, then you’ll be required to file a 100X tax form in addition to your K-1’s. You’ll also be subject to 100% of your income being taxed instead of just your salary.

And lastly, if your business is registered as a sole proprietorship, then your business will be taxed on all of its income. This means that you’ll have to pay taxes every quarter and you’ll be responsible for paying the full amount of taxes owed, not just your personal income tax rate.


Economic nexus is a complicated matter but it’s nevertheless the responsibility of online retailers to understand what is expected of them when delivering products to California customers.

Related Stories