Understand the Purpose and Scope of a Nexus Study
A proper nexus study is a disciplined, methodical evaluation of where a business has created sufficient connection to a state or locality to trigger tax registration, collection, remittance, and filing obligations. It is not a single checklist. It is a cross-functional assessment that combines legal analysis, data interrogation, and business process review. The objective is twofold: identify current exposure and implement forward-looking controls that prevent incremental risk. A well-constructed nexus study covers sales and use tax, income and franchise tax, gross receipts taxes, and other state and local obligations that can be implicated by routine operations.
Scope creep is a common and costly pitfall. Many organizations start by focusing exclusively on post-Wayfair sales tax thresholds and overlook income tax nexus, local taxes, marketplace facilitator regimes, and special industry rules. Moreover, seemingly minor operational details—such as sporadic in-person visits by employees or third parties—can upend conclusions. In a robust nexus study, the scope must be explicit: tax types covered, jurisdictions analyzed, entity and transaction boundaries, and the lookback period. The process must reflect that even “simple” retail or SaaS footprints often hide complex, jurisdiction-specific nuances that require experienced professional judgment.
Inventory the Company’s Footprint and Touchpoints
Begin with a granular inventory of all business touchpoints by state and locality. This includes property (owned and leased), inventory locations (including third-party fulfillment centers), employee and contractor presence, travel frequency and purpose, digital infrastructure, marketplace activity, vendor-managed inventory, installed equipment, and service or installation visits. The inventory should reconcile to general ledger accounts, payroll registers, CRM logs, ERP shipment data, HR location data, and travel expense records. A credible nexus study does not rely on memory or policy alone; it validates operational facts against objective data.
For remote-first organizations, the touchpoint inventory is particularly delicate. Home offices, co-working spaces, and equipment stored at employee residences can establish physical nexus even when the business has no formal office address in the state. Companies often underestimate incidental presence, such as short-term trade show booths, warranty services, or the placement of demonstration units at customer locations. Every footprint item should be dated, quantified, and tied to the nature of activities performed, because the timing and purpose of presence can change nexus outcomes across tax types.
Distinguish Physical Nexus from Economic Nexus
In most jurisdictions, physical presence still creates nexus for various taxes regardless of sales volume. Physical presence can include inventory stored by a third party, employee visits for sales or non-sales purposes, installation and training, or a server located in the state. Economic nexus, by contrast, does not depend on physical presence; it is triggered by exceeding quantitative thresholds, often measured by gross receipts, transaction counts, or number of customers. These regimes have proliferated post-Wayfair for sales tax and exist in various forms for income and franchise taxes.
Confusion arises because physical and economic nexus can coexist, and their thresholds, lookback windows, and effective dates differ by state. Moreover, some states apply special attribution rules, “click-through” or agency nexus standards, and marketplace facilitator statutes that layer on top of economic thresholds. A careful nexus study separately charts physical nexus facts and economic nexus calculations, then reconciles them by tax type. Treating them as interchangeable invites under-compliance in one state and over-compliance in another.
Assess the Protections and Limits of P.L. 86-272
For income tax purposes on the sale of tangible personal property, Public Law 86-272 can provide limited immunity if in-state activities are strictly limited to solicitation of orders that are approved and shipped from out of state. The protection is narrow. Non-sales activities—such as post-sale service, installation, credit approvals, returns processing, or technical support—can forfeit protection. Recent administrative guidance in several states interprets in-state internet activities and post-sale customer engagement in ways that can significantly narrow P.L. 86-272 immunity for modern business models, particularly those with interactive websites or apps.
The misconception that P.L. 86-272 shields all out-of-state sellers from income tax is pervasive and incorrect. The statute does not apply to services, digital goods, or sales other than tangible personal property, and it does not affect sales and use tax. Furthermore, what constitutes “solicitation” is often misunderstood. A rigorous nexus study catalogs all in-state activities by personnel and third parties, including whether employees handle complaints, conduct training, or perform implementation tasks. It also evaluates online functionalities that may be deemed unprotected business activities under evolving state positions.
Evaluate Employee and Contractor Activities
Human activity often creates nexus where revenue thresholds would not. The presence of a single employee making sales calls, supervising services, or performing customer success work can establish nexus for sales tax, income tax, or both, depending on the jurisdiction. The analysis must distinguish between protected “solicitation” and non-protected activities, determine the frequency and duration of visits, and evaluate whether individuals are employees, contractors, agents, or marketplace personnel. Expense reports, calendars, ticketing systems, and project records are essential evidence; self-reported summaries are not sufficient for a defensible study.
Hybrid work patterns complicate this further. An employee hired to work remotely who relocates or travels extensively can create trailing nexus in multiple states. Training sessions, installation projects, warranty repairs, and on-site meetings all carry different nexus implications. A robust study identifies each category of in-state activity, quantifies time spent, links it to revenue generated, and maps the activity to state-specific nexus standards. Without this rigor, businesses routinely understate exposure or, conversely, over-register and create avoidable filing burdens.
Analyze Marketplace, Affiliate, and Click-Through Nexus
Marketplace facilitator laws shift collection obligations to platforms in many states, but sellers remain responsible for monitoring nexus. A seller may still have income tax nexus or local tax obligations, and marketplace sales may or may not count toward economic thresholds, depending on state law. In addition, affiliate and “click-through” nexus rules attribute in-state activities of related parties or referral agents to the seller. Affiliate marketing, distribution partners, warranty service providers, and third-party installers can all create nexus even when the seller has no direct presence.
The subtlety here is documentation. Companies often assume the marketplace platform handles everything, then discover that certain products, jurisdictions, or time periods were never covered. A professional nexus study reconciles marketplace statements, facilitator certificates, and seller dashboards to the seller’s own transaction data. It also examines intercompany agreements, commission structures, and referral arrangements to determine whether agency or attribution nexus arises. Assumptions without legal and factual validation are dangerous in audits and can lead to multi-year assessments.
Quantify Economic Nexus Thresholds and Measurement Periods
Economic nexus thresholds vary widely by state and tax type. Common sales tax triggers include $100,000 in gross receipts or 200 separate transactions, but some states apply different dollar amounts, exclude certain sales, or have eliminated transaction-count tests. Gross receipts for income tax nexus may exclude returns and allowances or certain intercompany amounts. A credible study specifies in writing the precise calculation for each state: included and excluded sales, threshold amounts, effective dates, sourcing rules, and whether marketplace sales count. Ambiguity in measurement leads directly to compliance errors.
Equally important is the measurement period. Many states use the prior or current calendar year; others use a rolling 12-month period measured monthly or quarterly. Some require immediate registration upon crossing the threshold; others allow a grace period. Failing to track the measurement period can produce late registrations or premature filings. A best-practice approach employs a recurring process that recalculates thresholds monthly with audit-ready workpapers showing data sources, queries used, and reconciliations to financial statements. This level of formality is not excessive; it is necessary to withstand scrutiny.
Consider Income and Franchise Tax Nexus and Factor Presence
Income and franchise tax nexus analysis extends beyond sales thresholds. States increasingly assert nexus based on factor presence standards tied to property, payroll, or sales amounts within the state, even absent physical offices. Service providers and SaaS companies must analyze market-based sourcing and cost-of-performance rules to determine in-state receipts. In addition, pass-through entities face state-level filing and withholding obligations that can arise independently of corporate income tax standards.
Distinguishing filing obligation from tax liability is central. A company may have a filing requirement even if apportionment results in minimal tax. If P.L. 86-272 does not apply, non-sales activities or market-based sourcing can generate nexus and tax. The study should include a matrix of state-specific income tax nexus rules, factor presence thresholds, apportionment methodologies, and throwback or throwout provisions. Without this, organizations frequently omit required returns or misallocate receipts, leading to penalties that outweigh any tax savings realized by deferral.
Address Registration, Collection, and Filing Obligations
Once nexus is established, the operational burden begins. Registration must be timed and sequenced across jurisdictions, considering effective dates, prospective versus retroactive application, and whether to pursue voluntary disclosure. Sales tax collection engines must be configured with taxability, sourcing, product codes, and exemption certificate management that reflect each jurisdiction’s rules. Income and franchise filings require accurate apportionment data, consolidated or combined reporting analysis, and alignment with financial statement disclosures.
It is a misconception that registration alone cures past exposure. Many states expect back filings or will condition registration approvals on resolution of historical liabilities. Businesses should not begin collecting tax retroactively without a formal plan; doing so can create refund exposure or customer disputes. A defensible strategy includes a written compliance roadmap that documents registration dates, first collection periods, historical remediation steps, and internal owners accountable for ongoing filings. This is where a coordinated legal and accounting approach is essential to avoid inconsistent positions among tax types.
Build a Defensible Data Model and Audit Trail
Auditors will test how you know what you know. A nexus study must produce a durable data model that ties transaction-level details to jurisdictional conclusions. This includes lineage from source systems (ERP, billing, CRM, payroll) to standardized datasets, transformation logic, and final calculations. Documentation is evidence: maintain copies of threshold computations, employee location logs, contracts, marketplace facilitator certifications, exemption certificates, and correspondence with state agencies. Each conclusion in the study should be traceable to the facts and law on which it relies.
Data pitfalls are common. Businesses often discover that “ship-to” fields are unreliable, that tax calculation engines were misconfigured, or that product taxability mapping is inconsistent across systems. A professional approach involves reconciliation routines, exception reports, and periodic data quality checks. Build version-controlled workpapers and retain snapshots of datasets used for each period’s analysis. When a state requests support, being able to reproduce results with dated, consistent workpapers substantially improves credibility and reduces assessment risk.
Evaluate Remediation Options: Voluntary Disclosure and Amnesty
If the study uncovers past exposure, do not assume it is best to register and begin filing prospectively. In many states, voluntary disclosure agreements offer limited lookback periods, penalty abatement, and a structured path to compliance. The applicability varies by tax type and entity, and eligibility can be jeopardized by prior contacts with the state or public filings. A nuanced evaluation compares VDA terms, amnesty programs, materiality of exposure, and administrative feasibility. Timelines also matter; a pending audit or notice can foreclose favorable options.
Self-assessment without a formal agreement can be risky. Back-collecting sales tax from customers may be impractical or prohibited, while paying sales tax from company funds can be costly. Income tax positions may hinge on apportionment and P.L. 86-272 analyses that should be negotiated rather than assumed. A carefully sequenced remediation plan, developed with counsel, can reduce total cost and uncertainty. The plan should specify periods covered, taxes included, method of computation, supporting evidence, and responsible personnel for execution and subsequent compliance.
Analyze Product and Service Taxability with Precision
Even a perfect nexus analysis fails if taxability is wrong. Sales tax on tangible personal property is straightforward in name but complex in application, especially with bundled transactions, warranty and service agreements, installation, and shipping charges. Services, digital goods, SaaS, and information services are treated inconsistently across states, with frequent changes and industry-specific exemptions. A nexus study must be paired with a taxability review that maps SKUs and service codes to jurisdiction-specific tax outcomes and identifies exemption certificate requirements.
Misconceptions are common. Businesses often believe that digital products are not taxable or that shipping is always exempt, neither of which is generally correct. States impose unique rules on prewritten software, electronically delivered goods, custom development, data processing, and platform fees. Exemption certificates have formal requirements and renewal rules; missing or invalid certificates are fertile ground for assessments. The output of the taxability review should feed your tax engine configuration and be documented in a product-by-jurisdiction matrix that is updated as laws evolve.
Account for Local Taxes, Home Rule Jurisdictions, and Marketplace Variations
State-level analysis is not enough. Home rule cities and counties impose their own taxes and have separate registrations and audits, particularly in jurisdictions with independent administration. In some areas, marketplace facilitator collection does not relieve sellers of local obligations, or local thresholds differ from state thresholds. Freight terms, delivery by seller vehicles, and installation within city limits can trigger local nexus independent of state-level conclusions.
Local complexity requires operational coordination. Shipping addresses must map accurately to tax jurisdictions; ZIP codes are not sufficient. Your tax calculation process should utilize rooftop or geospatial mapping where feasible, and your nexus study should document where local registrations are required, which returns apply, and who is responsible for periodic filings. Failure to address local obligations often turns a “clean” state analysis into a costly audit surprise.
Incorporate Apportionment, Sourcing, and Special Industry Rules
Income and franchise tax outcomes depend heavily on sourcing rules and apportionment methods. Many states use single sales factor apportionment with market-based sourcing for services and intangibles, but definitions of “market” vary. For software and SaaS, some states look to user location, while others use billing address or benefit location. For product sales, throwback and throwout rules can reassign receipts when a company is not taxable in the destination state, increasing exposure where nexus is present.
Industry-specific rules add layers of complexity. Manufacturers, financial institutions, transportation companies, and technology providers each face specialized sourcing and nexus provisions. Intercompany transactions, cost-sharing arrangements, and license agreements can affect both nexus and apportionment. A complete nexus study therefore includes a written legal analysis of sourcing by revenue stream, a reconciliation to book revenue, and scenario testing for alternative positions. Without this, projections of tax liability and decisions about registration timing may be materially flawed.
Establish Ongoing Monitoring, Controls, and Governance
Nexus is dynamic. Employee relocations, new sales channels, acquisitions, product changes, and marketplace terms can shift obligations quickly. A one-time study is insufficient. Implement governance that assigns ownership for monthly threshold calculations, quarterly employee location attestations, periodic product taxability reviews, and annual legal updates. Embed controls into onboarding processes for employees and vendors so new activities are reviewed before they create unintended nexus.
Technology can help but does not replace professional judgment. Tax engines, ERP modules, and data warehouses must be configured and monitored. Establish key performance indicators such as exception rates in tax calculations, certificate deficiency counts, and timeliness of registrations after thresholds are crossed. Document decisions formally and retain approvals. When the facts or law change, update your nexus positions promptly and prospectively. This disciplined framework transforms the nexus study from a static report into an operational compliance program.
Prepare for Audits with a Proactive Defense File
Expect audits and plan for them. Build an audit-ready file that includes executive summaries of nexus conclusions, state-by-state fact matrices, economic threshold calculations with measurement periods, P.L. 86-272 analyses, and copies of registrations and correspondence. Include comprehensive support for marketplace facilitator coverage, exemption certificates, product taxability decisions, and apportionment methodologies. Consistency across tax types is vital; contradictory positions are often exposed during multi-tax audits.
Auditors focus on what is missing as much as what is present. If your study references employee activities, provide the underlying travel logs and project records. If you rely on facilitator collection, include platform statements and written confirmations. Prepare narratives that explain methodologies and changes over time. This proactive posture reduces the risk of estimated assessments, supports penalty abatement arguments, and shortens audit cycles, lowering the total cost of compliance.
Integrate Mergers, Acquisitions, and Entity Changes into Nexus Planning
Mergers, acquisitions, and reorganizations can instantly alter nexus footprints. Acquired entities may carry historical exposure, different taxability profiles, or registrations that have lapsed. Before closing, conduct a targeted nexus diligence review to identify required post-closing registrations, potential successor liability, and opportunities to resolve historical issues via voluntary disclosure. Alignment of product taxability codes, marketplace settings, and exemption certificate processes should be part of the integration plan, not an afterthought.
Post-transaction entity changes—such as consolidations, conversions, or new disregarded entity structures—affect filing methodologies and apportionment. States may require new registrations, updated powers of attorney, and revised group filings or combined reports. A disciplined nexus study process accommodates these transitions, ensuring that legal entity charts, FEINs, and registrations are synchronized and that prior positions remain defensible in light of the new structure.
Translate Nexus Conclusions into Practical, Day-One Actions
The value of a nexus study is realized only when it drives operational change. Convert conclusions into actionable tasks: register where required, configure tax engines with validated product mappings, update invoicing templates, train sales and customer success teams on tax-sensitive activities, and establish a cadence for threshold monitoring. Assign owners, deadlines, and success metrics. Where exposure exists, implement the chosen remediation path and document every step.
Clarity and discipline reduce risk. Provide leadership with a concise summary of obligations, costs, and timelines, but retain the detailed workpapers to defend decisions. Communicate with customers if collection practices will change, and coordinate with finance to update reserves and disclosures. In an environment where “simple” activities often have complex tax consequences, a structured, professionally led nexus study is not a luxury; it is a compliance necessity.
