State Tax Nexus for Manufacturers: Triggers & Compliance

Selling into a new state is good news. It can also mean you now owe that state a tax return, and nobody told you.

That connection is called nexus. Since the Supreme Court's 2018 decision in South Dakota v. Wayfair, you can have it without a building, an employee or a single visit. For a manufacturer shipping across state lines, it's worth knowing where you stand before a state asks.

This is general information, not tax advice. Nexus rules differ by state and by tax, so work with your CPA on your own situation.

What Is State Tax Nexus, and Why Do Manufacturers Need to Understand It?

Nexus is the connection between your business and a state that lets the state require you to file, collect or pay its taxes. If you have nexus, the state can make you register. If you don't, it generally can't.

For a long time, sales tax nexus meant physical presence. A plant, a warehouse or an employee in the state. A manufacturer in Texas shipping to customers in Oklahoma and Louisiana usually didn't think about either state.

Wayfair changed that on June 21, 2018. The Court upheld a South Dakota law that required out-of-state sellers to collect sales tax if they had more than $100,000 of sales into the state or more than 200 separate transactions. Every state with a sales tax followed with its own version.

So the question is no longer just "where are our buildings?" It's also "where are our customers, people, inventory and receipts?" For many manufacturers, that list is longer than they expect.

What Are the Two Types of Nexus Manufacturers Need to Know?

There are two kinds, and you can have both in the same state.

Physical nexus comes from being there. For a manufacturer, that usually means:

• A plant, warehouse or office you own or lease
• Employees working in the state, including remote employees working from home
• Inventory stored in the state, including at a third-party warehouse or a marketplace fulfillment center
• Equipment or vehicles regularly used there, such as installation or service crews

Economic nexus comes from sales into the state. Each state sets its own threshold. $100,000 of sales is the most common sales tax threshold. A few large states set it higher. Texas, California and New York use $500,000, and New York also requires more than 100 sales.

Many states have dropped the 200-transaction test since 2018, including South Dakota itself in 2023. Some still use it. That matters if you sell lots of small orders, like replacement parts.

Thresholds also differ in what they count. Texas, for example, counts both taxable and nontaxable sales into the state, including sales for resale. So a manufacturer that sells only to distributors can still cross the line.

Which Activities Trigger Nexus for Manufacturers?

Here are the situations I'd look at first. Each one can create nexus in some states, and the details differ from state to state.

• Inventory at a 3PL or fulfillment center. If your goods sit in a warehouse in another state, that's usually physical presence, even if you didn't pick the location.
• Remote employees. A salesperson or engineer working from home in another state can create nexus for income tax and sales tax, and almost always a payroll withholding obligation.
• Installation, repair and field service. Sending techs to install or service equipment at a customer site goes beyond selling and can create nexus.
• Trade shows and sales visits. Some states have specific rules for trade shows. Others don't. Regular in-person selling is riskier than an occasional booth.
• Drop shipments. When you ship directly to a distributor's customer, the sales tax question can land on you, depending on the state and who holds the resale certificate.
• Licensing. Licensing patents, trademarks or processes to companies in other states can create income tax nexus in some states.

The rules aren't uniform, and that's the hard part. You need to look state by state, and you need to look at each tax separately.

What Taxes Are Actually at Stake?

Sales tax gets the attention. It's not the only one.

Sales and use tax. If you have nexus, you register, collect tax on taxable sales and file returns. Many of your sales may be exempt, since sales for resale and many manufacturing inputs are often exempt. But exempt sales usually still need a valid certificate on file, and they may still count toward the threshold.

State income and franchise tax. Many states also have economic nexus standards for income or franchise tax. If you have nexus, you apportion part of your income to the state and file there.

There's an important federal protection here. Public Law 86-272 (15 U.S.C. 381) bars a state from imposing a net income tax when your only activity in the state is soliciting orders for tangible personal property, with orders approved and shipped from outside the state. That covers a lot of manufacturers selling goods. But it only applies to net income taxes. It doesn't protect you from sales tax, and it doesn't help once your people do more than solicit, such as installing or repairing.

Texas franchise tax. For Dallas-Fort Worth manufacturers, this one matters. Texas's franchise tax is based on margin, not net income. An out-of-state company has nexus for the franchise tax if it has $500,000 or more of gross receipts from business in Texas. For 2026 and 2027 reports, the no-tax-due threshold is $2.65 million of annualized total revenue. The rate is 0.75% for most businesses and 0.375% for retailers and wholesalers. Reports are due May 15. Even under the threshold, you still file a Public Information Report or Ownership Information Report.

Payroll tax. An employee working in another state usually means registering for withholding and unemployment tax there.

Property tax. Inventory or equipment kept in another state can be subject to its property tax. Our post on manufacturing property tax covers how that works.

I see companies fix the sales tax side and miss the income or franchise tax filing. Both matter.

If your books don't make this visible, getting from bookkeeping to CFO-level insight is usually where these gaps get found.

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How Do You Conduct a Nexus Review for Your Manufacturing Business?

You can't fix what you haven't mapped. A nexus review is a structured look at every state where you might owe something. This is how I'd run it.

Step 1: Map your physical footprint. List every state where you have a facility, inventory (including at a 3PL), employees (including remote), contractors acting for you, or equipment. Check payroll records and the fixed asset register, not just memory.

Step 2: Pull sales by state. Run revenue and invoice count by ship-to state for the last two to three years. Include sales for resale and exempt sales. Compare each state to its current thresholds.

Step 3: Review your channels. If you sell through distributors, marketplaces or drop shipments, document where goods ship and who holds inventory. Read the distribution agreements.

Step 4: Sort by tax type. For each state, note sales tax, income or franchise tax, payroll tax and property tax separately. This is the step where your CPA earns their fee.

Step 5: Rank by exposure. Put the largest states first. High sales, mostly taxable sales and long periods of exposure come first.

Step 6: Decide how to come forward. Many states offer voluntary disclosure agreements. You register, pay back tax for a limited period and usually get penalties waived. The Multistate Tax Commission's National Nexus Program publishes lookback periods for participating states. Three years is the most common, and Texas uses four. A state will rarely give you those terms after it has already contacted you.

Here's an illustrative example of the money involved. Say you had $400,000 a year of taxable sales into a state with a 6% rate for three years and never collected. That's $72,000 of tax ($400,000 x 6% x 3), before interest and penalties. You can't go back and collect it from customers easily. It usually comes out of your cash.

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If you sell in multiple states and aren't sure your books show where you might have nexus, we can help you map it and work through it with your CPA. That's part of our manufacturing tax strategy work.

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How Do You Stay Compliant Once You've Registered?

Finding nexus is the first step. Staying compliant is ongoing work, and that's where most companies slip.

• Register before you collect. Collecting tax without a permit creates its own problems.
• Use sales tax software if you file in many states. Tools like Avalara or TaxJar connect to most accounting systems and ERPs. For a few states, a well-kept spreadsheet may be enough. For a dozen, it isn't.
• Keep exemption certificates current. Resale and manufacturing exemption certificates should be collected before the sale, stored by customer and checked for expiration. In an audit, a missing certificate usually means you owe the tax.
• Check thresholds every quarter. A state you were under last year can cross the line this year as sales grow.
• File every return, even zero returns. Many states require a return even when no tax is due, and late filing brings penalties.
• Put it in the close. Reconcile sales tax collected to the liability account and to the returns each month.

Good financial controls make this routine instead of heroic. A clear month-end close with sales tax on the checklist is the simplest version.

What Is the Cost of Getting It Wrong?

The tax itself is only part of it. Interest runs from the original due date, and failure-to-file and failure-to-pay penalties add on top.

The bigger issue is time. If you never filed in a state, the statute of limitations often never starts. So exposure can go back to when nexus began, not just three or four years. A voluntary disclosure usually caps that, which is the main reason to come forward first.

It also comes up when you sell the business or bring in a lender or investor. Buyers look for unfiled states in diligence. If they find exposure, they'll usually ask for an escrow or a lower price. I'd rather you clean it up on your schedule than theirs.

Our post on sales and use tax in manufacturing covers the sales tax side in more detail.

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How Accounovation Helps Manufacturers Stay Ahead of Multi-State Tax Obligations

We're not your tax preparer. We're the finance team that keeps the books right, so your CPA has what they need. On nexus, that means sales by state reports, a clean list of where you have people and inventory, sales tax reconciled every month, and exemption certificates organized.

When a new state shows up, we flag it and bring it to your CPA. You can see how we split the work on our CPA coordination page. If you want help with the monthly side, that's part of our outsourced controller work. Happy to jump on a call if helpful.

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Frequently Asked Questions

Does storing inventory at a 3PL or Amazon create nexus?

Usually, yes. Many states treat inventory stored in the state as physical presence, even if a third party chose the location. Review your fulfillment arrangements with your CPA.

What is the economic nexus threshold for sales tax?

It depends on the state. $100,000 of sales is the most common, while Texas, California and New York use $500,000, and some states also have a transaction count.

Does Public Law 86-272 protect me from all state taxes?

No. It only limits net income taxes, and only when your in-state activity is soliciting orders for goods that are approved and shipped from outside the state. It doesn't cover sales tax.

How far back can a state go for unpaid taxes?

If you never filed, often all the way back to when nexus began. A voluntary disclosure agreement usually limits it to a set lookback, most often three years, and four in Texas under the Multistate Tax Commission program.

What is the Texas franchise tax no-tax-due threshold for 2026?

$2.65 million of annualized total revenue for 2026 and 2027 reports. You still file a Public Information Report or Ownership Information Report even if no tax is due.