What is Nexus? US Tax Compliance Explained

Expanding into the US opens new doors for UK businesses, but also introduces a tax complication that doesn’t exist at home: nexus. Unlike the UK’s centralised tax system, where businesses deal solely with HMRC, the US operates on a state-by-state basis. Each state sets its own tax rules, meaning your business could owe taxes in multiple locations without ever setting foot there.

Nexus determines when a business is legally required to collect sales tax or pay state income tax. You don’t need a physical presence; simply exceeding a sales threshold in a state can be enough to trigger tax obligations. Many UK businesses expand into the US without realising where they’ve established nexus, only to face unexpected tax bills, back payments, and fines.

The challenge? Each state has different rules. Get it wrong, and you risk penalties or compliance nightmares. Get it right, and you’ll protect your profits and avoid unnecessary headaches.

This guide breaks down the different types of nexus, key state tax rules, and how to stay compliant so your US expansion runs smoothly.

Types of Nexus and Their Implications

The US operates under a federal system where each state sets its own tax laws. But in addition to state taxes, businesses must also comply with federal tax obligations, including corporate income tax filings with the IRS (Internal Revenue Service). While federal tax applies across the US, state-specific tax laws vary significantly, making compliance a multi-layered challenge. This means that, as a foreign business owner, you need to determine where you owe taxes and why.

Even minimal activity in a state, like storing products in a warehouse or surpassing a sales threshold, can create nexus, triggering the need to register, collect, and remit taxes. Here’s how different types of nexus impact tax obligations for UK businesses entering the US market:

Physical Nexus: A Presence That Creates Tax Obligations

A business establishes physical nexus if it has an office, warehouse, employees, or inventory in a state. However, even without a full-time US base, UK companies can trigger tax obligations by:

Employing a remote worker in a state
Storing goods in third-party warehouses (e.g., Amazon fulfilment centres)
Attending trade shows or conducting in-person sales events

Once physical nexus is established, businesses must register for sales tax and comply with state tax laws.

Economic Nexus: When Sales Volume Creates Tax Liability

A company doesn’t need a physical presence to owe taxes. Many states enforce economic nexus laws, meaning if your business exceeds a revenue or transaction threshold, it must collect sales tax.

Common Thresholds: $100,000 in sales or 200 transactions in a state
Applies to: E-commerce sellers, SaaS providers, and service businesses
State-specific Rules: Some states have lower thresholds or extra conditions

Since thresholds apply per state, UK businesses selling across the US may have nexus in multiple locations at once.

Sales Tax Nexus: Where and When You Must Collect Tax

If a business has nexus, it must register for a sales tax permit, collect tax from customers, and file returns in the affected states. However, sales tax laws vary widely:

No Sales Tax States: Delaware, Montana, New Hampshire, Oregon
High-complexity States: Some states, such as Colorado and Louisiana, allow local governments to set additional taxes
Risk of Non-compliance: Failing to collect sales tax can lead to back taxes, fines, and penalties

To stay compliant, businesses need a system for tracking sales tax obligations across different states.

Income Tax Nexus: When Revenue Alone Creates Tax Liability

Beyond sales tax, some states require businesses to pay corporate income tax if they earn revenue within their borders. This applies even if a company has no physical presence.

Triggers for Income Tax Nexus:

Selling services or digital products to US customers
Licensing software, patents, or intellectual property
Generating significant revenue from a specific state

Unlike sales tax, which is passed on to customers, income tax is a direct business expense. Companies must assess their exposure early to avoid unexpected tax bills.

Get in touch today for your free consultation and take the guesswork out of US tax compliance.

State-by-State Considerations: Key Markets for UK Businesses

Nexus laws aren’t uniform across the US. Some states enforce tax compliance aggressively, while others offer more flexibility. For UK businesses, understanding how each key market handles sales and income tax is essential to avoiding costly missteps.

California: Rigorous Enforcement and Far-Reaching Rules

California takes nexus enforcement seriously. Businesses that exceed $500,000 in annual sales in the state must register for sales tax, even if they have no physical presence. Strict auditing practices and complex local tax rates make compliance particularly challenging. Tech companies and e-commerce brands selling into California should monitor their sales closely to avoid unintentional violations.

New York: High Taxes and Heavy Scrutiny

Costly. New York’s tax structure is one of the most onerous in the US, with high corporate tax rates and a reputation for rigorous enforcement. The state applies both economic and physical nexus rules, meaning businesses that sell into New York or operate remotely within its borders must navigate additional compliance layers. Service providers should also be aware of extra reporting requirements, especially if they generate significant revenue from New York clients.

Texas: No Income Tax, but a Labyrinth of Sales Tax Rules

Texas attracts businesses with its lack of corporate income tax, but that doesn’t mean it’s tax-free. The state has intricate sales tax laws, requiring companies with economic nexus (over $500,000 in sales) to collect and remit tax. Unlike some states, Texas also taxes certain services, meaning UK businesses offering digital products or consultancy should confirm whether their offerings are taxable.

Florida: Tourism, Remote Sellers, and Unexpected Tax Triggers

Florida’s economy thrives on tourism and retail, making sales tax compliance particularly important. In 2021, the state adopted economic nexus rules requiring businesses with $100,000+ in annual sales to collect sales tax. Remote sellers, e-commerce brands, and companies with seasonal peaks in sales volume should pay special attention to fluctuating obligations.

Delaware: Incorporation Haven, but Not a Tax-Free Zone

Delaware is often chosen for US incorporation due to its business-friendly legal system, but that doesn’t exempt companies from tax obligations. While the state has no sales tax, businesses with income nexus may still owe Delaware corporate taxes. UK businesses incorporating here should ensure they remain compliant with tax rules in any other states where they generate revenue.

Other States to Watch

Washington: No income tax, but strict sales tax enforcement.
Illinois: Economic nexus starts at $100,000 or 200 transactions, plus local tax variations.
Colorado: Requires out-of-state sellers to notify customers of use tax obligations if they don’t collect sales tax.

As each state has its own tax policies, what works in one market may not apply elsewhere. Some states, like California and New York, are known for aggressive tax enforcement and frequent audits, making compliance more complex. If you’re looking to expand into the US, assess your exposure carefully and seek expert guidance before scaling operations.

How UK Businesses Trigger Nexus in the US

Nexus isn’t always obvious. And, as such, many UK companies enter the US market without realising they’ve triggered tax obligations. Ignoring these triggers can lead to back taxes, penalties, and unnecessary compliance headaches.

This list covers the most common ways UK businesses establish nexus, but it is by no means exhaustive. Given the complexity of US state tax laws, any business activity in the US should be evaluated for potential tax exposure.

Selling Products or Services to US Customers

If your business sells physical goods, digital products, or services to US customers, it may be liable for state sales tax. Many states enforce economic nexus laws, meaning businesses must collect and remit sales tax once they surpass a sales volume or transaction threshold; often $100,000 in sales or 200 transactions in a single state.

For e-commerce brands, SaaS companies, and service providers, crossing these thresholds can create tax obligations in multiple states without ever setting up a physical presence.

Employing Staff, Contractors, or Sales Representatives

Hiring any US-based personnel (yes, even a single remote employee) can trigger physical nexus. This applies to:

Full-time employees
Independent contractors
Commission-based sales reps

Some states also impose additional employer obligations, such as payroll tax and workers’ compensation requirements. Companies expanding into the US must carefully consider where they hire to avoid unexpected tax exposure.

Using Third-Party Fulfilment Centres

A business doesn’t need its own warehouse to trigger nexus. Many states consider inventory stored in fulfilment centres as a physical presence. This is particularly relevant for:

E-commerce businesses using Amazon FBA
Companies working with third-party logistics (3PL) providers
Brands using dropshipping warehouses

If stock is stored in a fulfilment centre within a state, the company may be required to register, collect, and remit sales tax there.

Other Ways Your UK Business Could Trigger Nexus

Beyond these major triggers, several other activities can also create tax obligations:

Owning or Leasing Property: Any office, warehouse, or even a co-working space may create nexus.
Targeted Marketing: Running state-specific ad campaigns or using US-based influencers may be considered nexus in some states.
Attending Trade Shows or Sales Events: Selling products or taking orders at in-person events may create a temporary nexus.
Drop Shipping: If a US-based supplier ships products on your behalf, some states may require tax registration.
Affiliate Relationships: Paying US-based affiliates or partners to drive sales can create affiliate nexus in certain states.

Remember: even minor activities (e.g. storing inventory in the US or hiring a contractor) can create tax exposure. One of the most common US expansion mistakes is assuming that tax obligations only apply if a business has a physical office or US entity. Getting expert advice early is essential to avoiding compliance issues.

Get in touch today for your free consultation and take the guesswork out of US tax compliance.

Compliance Strategies: How to Manage Your Nexus Obligations

Managing multi-state tax compliance is a little like driving through London’s Congestion Charge Zone: each area has different rules, fees, and exemptions. Some zones charge only on weekdays, others at peak hours, and failing to pay on time leads to steep fines. Now imagine every city in the UK implementing the same system!

In the US, establishing nexus is only half the battle. Each state enforces nexus laws differently, requiring businesses to track obligations, register in the right places, and file taxes on schedule to avoid financial penalties, back payments, or even legal action.

Determining If You Have Nexus

First, you need to assess where your business has nexus. This can be done through:

State Revenue Thresholds: Tracking sales and transaction volumes in each state.
Physical Presence Tests: Checking for employees, inventory, or property in the US.
Sales Tax Automation Tools: Platforms like Avalara and TaxJar can help monitor nexus triggers.
Professional Guidance: Consulting a US tax expert ensures accurate assessments.

Many businesses realise too late that they’ve triggered tax obligations months, even years, prior. Early evaluation prevents costly surprises.

Registering for State Tax Compliance

Once your business confirms nexus in a state, you must register for a sales tax permit before collecting tax from your customers. Each state has its own registration process, but as a general rule:

Applications are submitted via the state’s Department of Revenue website.
Some states require additional business entity registration before issuing a permit.
Registration timelines vary; some states approve within days, while others take weeks.

Without a valid permit, collecting sales tax is illegal, and failure to register can result in fines and backdated tax liabilities.

Collecting and Remitting Sales Tax

Once registered, your business must accurately collect and remit sales tax. Key best practices include:

Using automated tax software to calculate the correct tax rate per state.
Implementing sales tax at checkout to ensure customers are charged correctly.
Setting up a filing schedule based on the state’s remittance frequency (monthly, quarterly, or annually).

Sales tax laws are not uniform, and some states have local tax add-ons, requiring additional reporting. Businesses operating in multiple states should use automated solutions to avoid calculation errors.

Understanding Exemptions and Deductions

Not all sales are taxable. Some businesses qualify for exemptions based on the type of product or customer. Common exemptions include:

Resale Exemptions: If selling to another business that will resell the product.
Non-taxable Goods: Some states exclude digital goods, groceries, or services.
Non-profit or Government Sales: Sales to tax-exempt organisations.

Claiming legitimate exemptions reduces tax liabilities, but businesses must keep detailed records to justify claims in case of an audit.

Keeping Accurate Records

Every state has audit rights, meaning tax authorities can request documentation to verify compliance. Poor record-keeping can result in fines and interest charges, even if the business intended to comply.

Best practices for audit-proofing include:

Maintaining sales tax reports for each state.
Keeping customer exemption certificates on file.
Retaining tax filings and payment confirmations for at least four years.

Accurate records ensure businesses are prepared for audits and disputes, reducing financial risk.

Working with Tax Professionals and Using the ConnectaVerse

Tax compliance is complex and time-consuming, especially for UK businesses unfamiliar with US tax laws. Rather than handling everything in-house, companies can work with tax experts or use platforms like the ConnectaVerse to connect with vetted local specialists.

The right support can:

Ensure businesses register correctly and meet all compliance requirements.
Reduce tax liabilities through proper structuring and exemptions.
Prevent penalties and back taxes by maintaining accurate records.

Tax mistakes are avoidable. The key is early planning, smart automation, and expert guidance.

The Future of Nexus: Trends and Policy Changes

Tax nexus in the US is constantly evolving. For UK businesses eyeing US expansion, staying abreast of these developments is crucial to avoiding compliance risks and managing tax obligations effectively. With the rise of digital taxation, ongoing legal shifts, and potential federal intervention, companies must stay ahead of the curve.

The Impact of Wayfair v. South Dakota (2018) on Economic Nexus Enforcement

In 2018, the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. marked a pivotal shift in sales tax enforcement. Prior to this ruling, businesses were only required to collect sales tax if they had a physical presence in the state. The Wayfair decision overturned this precedent, allowing states to mandate sales tax collection based on economic activity—specifically, the volume of sales or number of transactions—regardless of physical presence.

This ruling has significant implications for UK businesses selling to US customers. Even without a physical footprint, surpassing certain sales thresholds can trigger tax obligations in multiple states. Consequently, companies must vigilantly monitor their sales data and understand each state's specific nexus criteria to ensure compliance.

Growing Focus on Digital Taxation and Global Regulatory Shifts

Globally, there's an increasing emphasis on taxing digital services and e-commerce. Countries are collaborating to establish frameworks that ensure digital businesses contribute their fair share of taxes, reflecting a broader trend towards global compliance. The Organisation for Economic Co-operation and Development (OECD) has been at the forefront, proposing measures to address the challenges of digital taxation.

For UK businesses, this means navigating not only US state tax laws but also international regulations that may impact their operations. Staying informed about these developments is essential to mitigate risks and capitalise on opportunities in the evolving tax landscape.

Potential Federal Intervention: Will the US Ever Simplify State Tax Rules?

The US tax system is notoriously fragmented. Each state sets its own tax laws, creating a maze of compliance requirements. This has led to growing calls for federal intervention to streamline tax rules, particularly for businesses operating in multiple states.

Several legislative efforts, including the Mobile Workforce State Income Tax Simplification Act, aim to create more uniform tax standards. However, resistance from states that rely on independent tax policies has slowed progress. While reforms may happen eventually, businesses should not expect simplification in the near future.

How Technology Is Shaping Tax Compliance for International Businesses

Tax software is transforming compliance. Automated platforms like Avalara and TaxJar help businesses track sales, calculate tax rates, and manage multi-state filings. AI-powered solutions also flag nexus triggers in real time, reducing the risk of missed tax obligations.

Adopting smart tax technology is essential for UK businesses operating in the US. These tools not only save time and reduce errors but also ensure companies remain compliant as regulations continue to evolve.

Staying Ahead of Change

Nexus rules aren’t static. They shift. As legal precedents, global tax frameworks, and technology shape the future of compliance, UK businesses must remain proactive, informed, and adaptable. The best strategy? Monitor thresholds, use automation, and seek expert advice to navigate the complex US tax landscape.

Navigating Nexus: Next Steps

Understanding nexus is the difference between a seamless US launch and an unexpected tax bill. With each state enforcing its own rules, even a single hire, warehouse, or surge in sales can trigger compliance obligations. Miss the signs, and you could face back taxes, fines, or registration headaches down the line.

Planning ahead is crucial. Identifying where you have nexus, registering before it’s too late, and implementing a smart tax strategy will keep your expansion on track. As regulations shift, staying ahead of state tax laws isn’t just about compliance, it’s about protecting your bottom line and setting up for long-term success in international expansion.

The ConnectaVerse platform makes getting expert guidance on US tax compliance easy. Whether you need to determine your nexus status, register in the right states, or connect with vetted tax professionals, we help you cut through complexity and move forward confidently.