What Is the Difference Between Economic Nexus and Physical Nexus?
Short answer
Physical nexus is created by a tangible presence in a state — like an office, employees, or inventory — while economic nexus is created purely by crossing a state's sales revenue or transaction-count threshold, even with zero physical presence, following the Supreme Court's 2018 *South Dakota v. Wayfair* decision.
Last reviewed June 1, 2026
Before and after Wayfair
Before 2018, states generally could only require a business to collect sales tax if it had physical presence there. The Supreme Court’s South Dakota v. Wayfair decision changed that, allowing states to impose economic nexus standards based on sales volume or transaction count alone. Every state with a sales tax has since adopted some form of economic nexus threshold, though the specific dollar and transaction-count thresholds differ state by state.
Why both still matter
Physical nexus didn’t go away — it’s simply no longer the only path to a filing obligation. A company can have physical nexus in its home state, and separately trigger economic nexus in a dozen other states purely through e-commerce sales volume, without ever setting foot in them. Both types of nexus need to be tracked, because they can create obligations independently of each other.
Why this trips up growing companies
Economic nexus thresholds are calculated per state and reset (or are evaluated) on a rolling basis, so a company can cross a threshold mid-year without any change in how or where it operates — just growth in sales. A periodic nexus review, part of VPTax’s Sales & Indirect Tax service, is what catches this before a state does.