Physical Nexus vs Economic Nexus — Why Sellers Still Get Both

Most recent sales tax conversations focus on economic nexus — the post-Wayfair revenue threshold that triggers collection obligation. But physical nexus never went away. For many sellers, physical nexus creates registration obligations BEFORE economic thresholds are crossed. Here's the distinction and why it matters.

Physical nexus — the old rule

Before 2018, physical nexus was the only way to trigger sales tax collection. Physical nexus requires some physical presence in the state:

An office, warehouse, or store.
Employees or W-2 staff located in the state.
Independent contractors soliciting business.
Inventory stored in the state (including Amazon FBA warehouses).
Trade show attendance (varies by state — usually 3+ days triggers).
Drop-shipped inventory or 3PL fulfillment.
Delivery with your own trucks beyond common carrier.

Economic nexus — the new rule

Economic nexus came from the 2018 Wayfair decision. It triggers registration once a remote seller crosses a state's revenue or transaction threshold, regardless of any physical presence. Thresholds range from $100,000 to $500,000, sometimes with a transaction count element.

The interaction

A seller can have BOTH physical and economic nexus in the same state. The analysis:

Physical nexus alone = register regardless of revenue.
Economic nexus alone = register when you cross the threshold.
Both = register the same way, but physical nexus usually triggers first in practice.
Neither = no registration required.

Common scenarios

FBA seller with $80K to California. Amazon stores your inventory in a CA fulfillment center = physical nexus. You register in CA even though you're below the $500K economic threshold.
Shopify-only seller with $200K to Texas. No physical presence in TX. Below the $500K TX threshold. No registration needed yet.
SaaS company with a remote employee in Florida. Physical nexus via employee = register regardless of how much FL revenue you have (though taxability of SaaS in FL is separately questionable).
Wholesaler with 3PL in Nevada. 3PL inventory in NV = physical nexus. Register even if you have no direct customers in NV.

How audits treat the two

Auditors generally look for physical nexus first (harder to hide — they check your customer list, vendor list, and ask about warehouses). Then they check your revenue against each state's economic threshold. Physical nexus tends to have deeper lookback periods in audits because it's been law for decades.