What is Nexus Test?

How it works

"Nexus" describes the minimum connection a business must have with a jurisdiction before that jurisdiction can require it to register, collect taxes, or file returns. Two main contexts:

US state tax

US states tax businesses based on nexus — physical presence, economic activity, or property within the state's borders. The Constitution (via the Commerce Clause and Due Process) limits how thin the connection can be before state tax kicks in.

Three main nexus types in US state tax:

1. Physical nexus — office, warehouse, employee, inventory in the state.
2. Click-through nexus — affiliate marketing arrangements with in-state parties (post-2008 state laws).
3. Economic nexus — sales volume above a state-defined threshold, even with zero physical presence. Established by South Dakota v. Wayfair, Inc. (2018, US Supreme Court), overturning the prior physical-presence requirement of Quill Corp v. North Dakota (1992).

Most US states adopted economic nexus thresholds after Wayfair, typically:

• $100,000 in sales OR 200 separate transactions annually (varies by state).
• Some states use only the dollar threshold; some use only transaction counts.
• Marketplaces (Amazon, eBay, Shopify) typically collect on behalf of small sellers — but the seller still needs to monitor their own nexus exposure.

OECD BEPS nexus (IP regimes)

BEPS Action 5 introduced the modified nexus approach for preferential IP regimes. To qualify for reduced tax on IP income (patent box, etc.), the income must arise from R&D conducted in the country granting the regime. Income from acquired or outsourced IP is excluded proportionally.

Implemented across most EU countries' patent box regimes from 2016-2018. Pre-2016 IP regimes that allowed acquired IP without local R&D were phased out under EU and OECD pressure.

US state nexus in practice

For non-resident US LLC owners selling to US customers:

• Federal level: no US trade or business unless physical presence + active activity in the US (typically). See ECI.
• State level: economic nexus can trigger sales-tax registration even without federal income tax exposure. Wayfair thresholds apply.

Two separate analyses, different outcomes possible. A non-resident SaaS founder selling $200k/year to California customers typically:

• Federal income tax: $0 (no US trade or business under federal rules).
• California sales tax: must register, collect, and remit California sales tax on sales to California customers (post-Wayfair economic nexus).

Other state-tax types (income tax, gross receipts tax, franchise tax) have their own nexus thresholds.

Examples

• French SaaS founder's Wyoming LLC selling to US customers. $250k/year revenue split across 30 US states. Several states crossed: California ($90k), Texas ($55k), New York ($40k), Florida ($35k), others smaller. California, Texas, NY, FL economic nexus triggered. Must register and collect sales tax in those states (specific thresholds vary).
• EU R&D company seeking patent box benefit in Ireland. Post-BEPS Action 5, Irish patent box requires R&D conducted in Ireland. Acquired IP licensed from a related party doesn't qualify for the reduced rate. The company moves R&D function to Dublin to access the regime.

Common mistakes

• Confusing federal income-tax nexus with state sales-tax nexus. Different tests entirely. A non-resident may be safe on federal but trip multiple state sales-tax obligations.
• Ignoring Wayfair after 2018. Pre-Wayfair guides describing physical-presence-only nexus are obsolete.
• Manual sales-tax tracking at scale. Beyond 5-6 states, automation is essentially required to remain compliant.
• Missing the BEPS nexus angle on IP. Pre-BEPS patent boxes that allowed acquired IP have been replaced — verify current eligibility before banking on the regime.