You just hired your first remote employee in Texas. But here’s something that might not have crossed your mind during the onboarding paperwork: that new hire may have just triggered a sales tax obligation for your business in an entirely new state.
The short answer? Yes, hiring employees in another state almost always creates physical nexus, which means you’re likely required to collect and remit sales tax there.
This isn’t a technicality or an edge case. It’s one of the most common ways growing businesses unknowingly expand their sales tax obligations across multiple states. With remote work now the norm rather than the exception, more companies are triggering nexus in multiple states without realizing it until an audit notice arrives.
Let’s look at exactly how physical nexus works, the five most common triggers and what distinguishes physical nexus from economic nexus. We will examine how courts and states view remote workers, whether independent contractors create the same risk as traditional Wage and Tax Statement (W-2) employees and what steps to take once you trigger nexus in a new state. We also cover specific rules in high-risk states like California, Texas, New York and Florida.
What Is Physical Nexus?
Physical nexus is the connection between your business and a state that gives that state the legal authority to require you to collect and remit sales tax. Think of it as stepping over a state border to make a sale. Once you have enough of a physical presence in a state, you’re no longer just doing business into that state. You’re doing business in that state, which means you must register for a permit and collect tax on taxable items.
States can only tax businesses that have a tangible presence within their borders. If you have people, property or activities happening within a state’s borders, you have nexus.
Here’s a simple way to think about it: physical nexus is about being there in some tangible way. It’s your employee working from a home office in Denver. It’s your inventory sitting in a warehouse in New Jersey. It’s your sales rep attending a trade show in Atlanta.
The threshold for establishing presence is often lower than businesses expect. You don’t need a storefront or a regional headquarters. A single employee, even one working remotely from their kitchen table, can be enough to establish nexus in most states.
Once you’ve established physical nexus, you’re generally required to register with that state, collect sales tax on items like physical goods or software subscriptions and file returns going forward. The obligation doesn’t go away just because you didn’t know about it.
The Five Most Common Physical Nexus Triggers
Physical nexus doesn’t happen by accident, but it does happen without businesses realizing it. Here are the five most common ways companies trigger physical nexus in new states.
Employees Working in the State
Employees working in a new state catch most growing businesses off guard. When you have an employee working in a state, whether they’re in a company office or working from home, you’ve almost certainly established physical nexus there.
It doesn’t matter if that employee never interacts with customers. It doesn’t matter if they’re in marketing, engineering or HR. Having a person perform work on your behalf establishes nexus in most states.
Remote work has amplified this issue. In the past, most employees worked where the company was headquartered or at established regional offices. Now, employees scatter across the country, and each one potentially represents a new nexus obligation.
Inventory Stored in the State
If you have products stored in a state, you have physical nexus there. This includes:
- Inventory in your own warehouse or distribution center
- Products stored at a third-party logistics (3PL) facility
- Goods held at Fulfillment by Amazon (FBA) warehouses or similar fulfillment centers
- Consignment inventory at retail locations
The FBA scenario trips up a lot of ecommerce sellers. When you use Fulfillment by Amazon, your inventory gets distributed across multiple warehouses in different states. You may not choose where your products go, but you’re still responsible for the nexus those products create.
Office Space or Property
Owning or leasing property in a state creates physical nexus. This includes:
- Corporate offices
- Retail locations
- Warehouses you operate directly
- Even a small co-working space membership in some interpretations
The property doesn’t need to be substantial. A dedicated desk at a shared office space could be enough to establish presence, depending on how the state interprets its nexus rules.
Independent Contractors and Sales Representatives
This one gets complicated, and we’ll dig into it more later. But the short version: contractors and sales reps who perform certain activities on your behalf can create nexus, even though they’re not W-2 employees.
States look at what these individuals are doing. If they’re soliciting sales, delivering products, providing installation services or performing other activities that go beyond mere order-taking, they may be creating nexus for your business.
Trade Shows and Temporary Presence
Attending trade shows, conferences or other events where you’re soliciting business can trigger nexus. The rules vary significantly by state:
- Some states have specific protections that allow a certain number of days of presence before nexus kicks in
- Others consider any sales activity at a trade show to be nexus-creating
- A few states have specific exemptions for trade show attendance
The key factor is usually whether you’re actively soliciting sales or just attending for educational purposes. If you’re taking orders, demonstrating products or meeting with potential customers, you’re likely creating nexus.
How Out-of-State Hires Trigger Nexus
Let’s address the question directly: yes, hiring an employee in another state creates sales tax nexus in nearly every situation.
States apply this rule consistently across the board: when you have a W-2 employee performing work in a state, that state considers you to have physical presence there. Full stop.
It doesn’t matter what the employee does. Your new hire could be:
- A software developer who never talks to customers
- A customer service representative working from home
- A regional sales manager covering a territory
- An executive who happens to live in a different state
A developer writing code in their basement creates the same tax obligation as a sales rep closing deals. What matters is that you have a person, on your payroll, physically located in that state.
Why This Matters More Now Than Ever
The shift to remote work makes this a constant issue. Consider this scenario:
You’re a Software as a Service (SaaS) company headquartered in Oregon (no state sales tax). You hire a talented product manager who lives in California. You’ve just triggered nexus in California, one of the most complex sales tax jurisdictions in the country.
Or maybe you’re based in Texas and your best candidate for a senior engineering role happens to live in New York. You now have nexus in New York.
Companies used to tightly control where their employees lived. Today, your next great hire could live anywhere. Hiring them means taking on their state’s tax requirements.
The Timing Question
Nexus typically begins on the date the employee starts working in the state. There’s no grace period, no minimum number of hours and no threshold of sales that needs to be reached first.
This is different from economic nexus, which requires you to exceed certain sales or transaction thresholds before obligations kick in. With physical nexus through employees, the obligation begins immediately.
That means if you hired someone in a new state last month and haven’t registered yet, you may already be accumulating liability.
What About Temporary Assignments?
Some states have provisions for temporary employee presence. If an employee is in a state for a short-term project or training, you might not trigger nexus. But these rules vary widely:
- Some states use a specific day threshold (often 10–15 days per year)
- Others look at whether the presence is “regular and systematic”
- A few have no temporary presence exception at all
If you’re sending employees to other states temporarily, you’ll need to check each state’s specific rules. Don’t assume that a short visit is automatically safe.
Remote Workers and Nexus: What the Courts and States Have Said
Remote employees creating nexus is an urgent issue for growing businesses. Here’s how courts and state tax authorities have approached the issue.
The Legal Foundation
Historically, a business needed physical presence in a state before that state could require sales tax collection. While economic nexus now exists as an alternative path based on sales volume, physical nexus remains fully in effect. Tax authorities consistently maintain that employees working in a state establish sufficient physical presence. This applies whether the employee works from a company facility or from home.
State Positions on Remote Workers
States have been clear and consistent: remote employees create nexus. Here’s how several major states have addressed the question:
California: Franchise Tax Board guidelines explicitly include any representative, agent, salesperson, canvasser, independent contractor or solicitor operating in the state as creating nexus. Remote employees clearly fall within this definition.
New York: Department of Taxation and Finance has long held that employees working from home in New York create nexus for their out-of-state employers. The state has issued guidance confirming this position multiple times.
Texas: Comptroller guidelines state that any employee performing services in the state establishes nexus, regardless of whether they work from a company office or remotely.
Florida: Department of Revenue takes the same position, treating remote employees as creating physical presence just as effectively as employees working from a Florida office.
The COVID-19 Temporary Relief (And Its End)
During the early months of the COVID-19 pandemic, some states offered temporary relief for businesses whose employees were suddenly working remotely due to public health orders. The theory was that businesses shouldn’t be penalized for circumstances beyond their control.
States have let that relief expire. States have returned to their standard positions: if your employee is working in their state, you have nexus there. The temporary nature of pandemic-related remote work has given way to permanent remote arrangements, and states expect businesses to comply accordingly.
The Practical Reality
Assume that any W-2 employee working in a state creates nexus there. While there may be edge cases or specific state provisions that apply to your situation, the safe assumption is that nexus exists.
This is one area where being proactive matters. Discovering nexus obligations after the fact, especially during an audit, is significantly more expensive and stressful than addressing them upfront.
Independent Contractors vs. W-2 Employees: Does It Matter for Nexus?
Here’s where things get nuanced. The short answer is: yes, it matters, but not in the way many businesses hope.
The Common Misconception
Many business owners assume that using independent contractors instead of W-2 employees avoids nexus issues. The thinking goes: “They’re not my employees, so they can’t create nexus for my business.”
This is incorrect, or at least incomplete.
What Actually Determines Nexus
States don’t just look at employment classification. They look at what activities are being performed on your behalf. The question isn’t “Is this person an employee?” It’s “Is this person creating physical presence for your business?”
Activities that typically create nexus, regardless of worker classification:
- Soliciting sales or taking orders
- Delivering products
- Installing or servicing equipment
- Providing training or support to customers
- Maintaining inventory
- Collecting payments
If your independent contractor is doing any of these things in a state, they may be creating nexus for you.
When Contractors Don’t Create Nexus
Contractors are less likely to create nexus when:
- They perform services that are purely administrative and don’t involve customer contact
- They work on projects that don’t involve soliciting or facilitating sales
- Their activities are limited and infrequent
But it depends on your specific situation. A contractor who occasionally helps with a customer implementation might not create nexus. A contractor who regularly visits customers to provide support almost certainly does.
The Safe Harbor Question
Some states offer specific protections for independent contractors who only solicit sales and do nothing else. But these protections are narrower than many businesses realize, and they don’t apply to sales tax in the same way they apply to income tax.
The Bottom Line
Don’t assume that using contractors instead of employees solves your nexus concerns. If you have people performing activities in a state on your behalf, whether they’re W-2 employees or 1099 contractors, you need to evaluate whether those activities create nexus.
When in doubt, treat contractor activities the same way you treat employee activities.
Physical Nexus vs. Economic Nexus: Key Differences
Understanding the distinction between physical and economic nexus is essential for managing your sales tax obligations. These are two separate paths to the same destination: an obligation to collect and remit sales tax.
Physical Nexus: Presence-Based
Physical nexus is triggered by having a tangible presence in a state. As we’ve discussed, this includes:
- Employees (including remote workers)
- Inventory or property
- Offices or facilities
- Contractors performing certain activities
- Trade show attendance
The key characteristic of physical nexus is that it’s about being there in some physical way. Once you have that presence, nexus exists regardless of how much you sell into the state.
Economic Nexus: Sales-Based
Economic nexus is triggered by exceeding sales thresholds in a state, even without any physical presence. All states with a sales tax have adopted economic nexus standards.
Typical thresholds include:
- $100,000 in sales into the state, OR
- 200 transactions with customers in the state
Some states have different thresholds, and a few have eliminated the transaction count entirely. But the principle is the same: sell enough into a state, and you have nexus there.
How They Work Together
Here’s what many businesses miss: physical and economic nexus aren’t either/or. They’re both/and.
You can have physical nexus in a state without meeting economic nexus thresholds. If you have one employee in California but only $50,000 in California sales, you still have nexus through that employee.
You can have economic nexus without any physical presence. If you sell $150,000 into Texas from your Oregon headquarters with no employees or property in Texas, you have economic nexus there.
And you can have both. Many growing businesses have physical nexus in some states and economic nexus in others, and both types in a few.
Why This Matters for Remote Employee Situations
When you hire a remote employee in a new state, you trigger physical nexus immediately. You don’t need to wait until you’ve exceeded economic nexus thresholds. The obligation to register, collect and remit begins right away.
Many businesses track their sales volume obsessively but completely overlook the physical presence they create simply by hiring a remote worker.
A Practical Framework
Think of it this way:
- Physical nexus is about where your people and property are
- Economic nexus is about where your customers are
You need to track both. A complete nexus analysis considers all your employees, contractors, inventory and property locations alongside your sales data by state.
What to Do Once You’ve Triggered Nexus in a New State
Discovering that you have nexus in a new state can feel overwhelming. Follow these steps to address the issue.
Assess Your Exposure
Before you do anything else, understand what you’re dealing with. Ask yourself:
- When did nexus begin? (The date your employee started, when inventory arrived, etc.)
- How much have you sold into this state since nexus began?
- What’s the average sales tax rate in this state?
- Are your products or services even taxable there?
This last question matters more than you might think. Not everything is taxable everywhere. SaaS products, for example, are taxable in some states and exempt in others. If your sales aren’t taxable in the state where you’ve triggered nexus, your exposure may be minimal.
Determine Taxability
Once you know you have nexus, you need to understand what you’re selling and whether it’s taxable in that state. This involves:
- Identifying the correct tax classification for your products or services
- Understanding any exemptions that might apply
- Determining whether your customers qualify for any exemptions (resellers, nonprofits, government entities)
Taxability rules vary significantly by state. What’s taxable in Texas might be exempt in California. Getting this right is essential before you start collecting.
Evaluate Your Options
Depending on your situation, you have several paths forward:
Register and begin collecting going forward. This is the simplest approach. You register with the state, start collecting sales tax on future sales and file returns going forward. This doesn’t address past liability, but it prevents future exposure from accumulating.
Consider a Voluntary Disclosure Agreement (VDA). If you have significant past exposure, a VDA might make sense. These agreements allow you to come forward voluntarily, typically in exchange for limiting the historical period the state can audit and waived penalties. States offer VDAs because they’d rather have compliant taxpayers than chase down non-filers.
Consult with an expert. This is one area where professional guidance pays for itself. The right approach depends on your specific situation, including how much exposure you have, how long nexus has existed and your risk tolerance.
Register with the State
Once you’ve decided on your approach, you’ll need to register for a sales tax permit. This typically involves:
- Completing the state’s registration application
- Providing information about your business structure, locations and expected sales
- Receiving your permit number and schedule for how often you must file
Some states allow online registration that takes minutes. Others require paper applications and take weeks. Plan accordingly.
Set Up Collection and Remittance
With your permit in hand, you need to actually collect and remit tax. This means:
- Configuring your billing or ecommerce system to charge the correct rates
- Tracking taxable and exempt sales separately
- Filing returns on schedule (monthly, quarterly or annually depending on your volume)
- Remitting the tax you’ve collected
This is where many businesses benefit from sales tax automation software. Manual compliance across multiple states becomes unmanageable quickly.
Maintain Ongoing Compliance
Nexus isn’t a one-time event. Once you’re registered in a state, you have ongoing obligations:
- File returns even in periods with no sales (returns showing no sales tax collected)
- Keep records of all transactions and exemption certificates
- Monitor rate changes and update your systems accordingly
- Track any changes to your nexus status (new employees, closed locations, etc.)
State-Specific Considerations: California, Texas, New York and Florida
Not all states are created equal when it comes to sales tax complexity. These four states pose significant risks for remote employers.
California
California presents specific compliance hurdles:
District taxes add complexity. California has state, county and district-level taxes that combine for rates varying significantly by location. You need to charge the correct combined rate based on where your customer is located.
Broad nexus standards. California broadly defines what activities establish a physical presence. Any representative, agent or contractor operating in the state can create nexus.
SaaS and digital goods. California generally doesn’t tax SaaS or digital goods, which can reduce exposure for technology companies. But the rules have nuances, and bundled offerings can change the analysis.
High audit activity. California’s tax authority is well-funded and active. If you have nexus there and aren’t compliant, the risk of discovery is higher than in many other states.
Texas
Texas is the second-largest economy in the country, making it a common state for remote hires and a significant source of sales tax exposure.
Data processing services are taxable. Unlike many states, Texas taxes data processing services, which can include certain SaaS products. This catches technology companies off guard.
Local taxes matter. Texas has state and local sales taxes, with combined rates reaching over 8% in many areas. You need to charge the correct local rate based on the delivery location.
Straightforward registration. Texas has a relatively simple registration process, and the Comptroller’s office is generally responsive to questions.
New York
New York has some of the most complex sales tax rules in the country.
SaaS is taxable. New York taxes prewritten software, including SaaS delivered electronically. If you’re selling software to New York customers, you likely have taxable sales.
Information services may be taxable. New York taxes certain information services, which can include data subscriptions, research services and similar offerings.
Aggressive enforcement. New York actively pursues non-compliant businesses, particularly those with clear nexus indicators like employees in the state.
High combined rates. New York City’s combined rate exceeds 8%, and other areas of the state have similarly high rates.
Florida
Florida attracts a massive influx of remote workers, making it an increasingly common location for remote employees.
No income tax, but sales tax applies. Florida doesn’t have a state income tax, which attracts residents and remote workers. But it does have sales tax, and your remote employee there creates nexus.
Communication services tax. Florida has a separate tax on telecommunications and related services. This is in addition to regular sales tax.
Recent changes to digital goods. Florida has been updating its treatment of digital goods and services. If you’re selling digital products, verify current taxability rules.
Hurricane and disaster provisions. Florida occasionally offers filing relief during declared emergencies. If you’re registered there, watch for announcements that might affect your filing deadlines.
When to Get Expert Help
Sales tax compliance is manageable for many businesses, but there are situations where professional guidance makes a significant difference.
Signs You Should Talk to an Expert
A sales tax professional can help when:
- You’ve discovered nexus in multiple new states and aren’t sure where to start
- You have significant past exposure and are weighing VDA options
- Your products or services have complex taxability questions
- You’ve received an audit notice or questionnaire from a state
- You’re preparing for a funding round or acquisition and need to clean up compliance
- Your team is overwhelmed trying to manage spreadsheets and deadlines
What a Consultation Can Provide
During a consultation, you will:
- Understand your current tax obligations across all states
- Identify which states represent the highest risk
- Determine the taxability of your products or services
- Evaluate whether VDAs make sense for past exposure
- Create a prioritized plan for coming into compliance
- Understand the realistic timeline and costs involved
The Value of Getting It Right
Fixing sales tax problems before an auditor finds them is less expensive than dealing with them after. States typically waive or reduce penalties for voluntary disclosure. They don’t offer the same treatment when they discover non-compliance through an audit.
Beyond the financial considerations, there’s peace of mind. Resolving your sales tax compliance allows you to operate your business confidently.
If you’re feeling uncertain about your compliance status, you’re not alone. Many growing businesses find themselves in exactly this position. There’s a clear path forward, and expert guidance is available.
Your Next Step: Get Clarity on Your Tax Obligations
Hiring remote employees is a sign your business is growing. But as you’ve seen throughout this guide, each new hire in a new state can quietly expand your sales tax obligations in ways that compound over time.
The math is straightforward: a single remote employee in a new state can quickly generate thousands of dollars in unrecognized tax liability, plus penalties and interest. Fortunately, mapping your employee locations and determining product taxability right now stops this exposure from growing. This is fixable. Businesses address these situations every day. The key is understanding exactly where you stand before deciding how to move forward.
To secure your compliance, take these specific actions:
- Map your current employee locations. Every state where you have a W-2 employee is a state where you likely have physical nexus.
- Identify when each nexus trigger began. The start date of each employee determines how far back your potential exposure extends.
- Determine taxability in each state. Your products or services may not be taxable everywhere, which could significantly reduce your actual exposure.
- Evaluate your options. Registering going forward, Voluntary Disclosure Agreements or a combination approach might make sense depending on your situation.
If you’re looking at this list and feeling uncertain about where to start, that’s completely normal. Sales tax compliance sits at the intersection of legal requirements, state-specific rules and business strategy. Will your next remote hire trigger an audit, or will you have the compliance systems in place to support your growing team?
Curious what your next best step is? Schedule a free “What’s Next” call and talk through your specific situation with a real sales tax expert. No pressure, no commitment. Just clarity on where you stand and what makes sense for your business.
Schedule your free What’s Next consultation
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