Multi-state nexus: the four signals that trigger a state filing

Being incorporated in Delaware does not mean you only owe taxes in Delaware. It means your entity exists under Delaware law. The moment your company starts selling, hiring, or warehousing in another state, that state may have the right to require you to register, file an income tax return, collect sales tax, and pay its own franchise or business taxes. The legal threshold that triggers all of this is called nexus.

There are four signals that create nexus. Most founders cross at least one of them within the first 18 months of operating, and most cross it without realizing. The state notice — usually a back-tax assessment with penalty and interest — typically arrives 12 to 36 months later, by which point the bill has compounded.

Signal 1: Physical presence

The original nexus standard. If your company has a physical presence in a state — an office, a warehouse, inventory, equipment, a leased space, or even a single employee working from home — you have nexus there. This is the easiest trigger to recognize and the hardest to argue against.

Common physical-presence traps that catch startups: a single warehouse with stored inventory (including Amazon FBA), a co-working space rental, a server colocation, a trade-show booth held for more than a brief period, or a permanent leased mailbox at a business address. Even temporary presence — sending a salesperson into a state for a month — can be enough in some jurisdictions.

Signal 2: Economic nexus (the post-Wayfair rule)

The 2018 South Dakota v. Wayfair Supreme Court decision overturned the requirement that physical presence was necessary for sales tax nexus. After Wayfair, states could require any out-of-state seller above a certain revenue or transaction count to collect their sales tax. Forty-five states plus DC now have economic nexus rules — and the thresholds vary by an order of magnitude.

• California: $500,000 in California sales, no transaction threshold. The highest threshold in the US.
• New York: $500,000 in sales AND 100 separate transactions (both must be met).
• Texas: $500,000 in gross revenue from Texas sales, no transaction threshold.
• Massachusetts: $100,000 AND 100 transactions (the lowest combined threshold in any major market).
• Most other states: $100,000 in sales OR 200 transactions (either triggers nexus).

For SaaS companies, the calculation depends on whether the state classifies SaaS as a taxable service (about half do, with the count rising every year). For physical product companies, the threshold is straightforward — if you cross it, you collect.

Signal 3: Employee or contractor nexus

A remote employee creates instant nexus in their home state. One full-time worker working from a New York apartment makes a Delaware-incorporated C-Corp subject to New York income tax, New York payroll taxes, and New York unemployment insurance — even if the company has zero customers in New York.

Contractors are a gray area. A 1099 contractor performing work in a state can create nexus if the work is "regular and continuous" — a one-off freelance project usually does not, but a long-term contracted role often does. The bar for "regular and continuous" varies by state, but the safer assumption is: a contractor who works for you for more than three months in a single state probably triggers it.

For foreign-founder companies, this is the most counterintuitive trigger. Founders living abroad often hire one US employee — typically a remote engineer or a part-time accountant — and assume that since the company is "in" Delaware, the employee is also "in" Delaware. The state where the employee actually works disagrees. The company now files in two states minimum: the state of incorporation and the state of the employee.

Signal 4: Marketplace and fulfillment nexus

Selling through a marketplace (Amazon, Etsy, Walmart) or using a third-party fulfillment service (Amazon FBA, ShipBob, ShipMonk) creates nexus everywhere the marketplace or service operates. Amazon FBA, in particular, is famous for this — Amazon physically moves your inventory between fulfillment centers, often without notifying you, and your inventory’s physical location in 15 different states is enough to create nexus in each one.

Marketplace Facilitator laws (now in effect in 46 states) shift the sales-tax collection burden to the marketplace itself for the transactions they process — but the underlying nexus still exists for your entity. Income tax, business activity tax, and other state filings remain your responsibility even when the marketplace collects sales tax on your behalf.

How states find you

States have gotten dramatically more aggressive at nexus enforcement since 2020. The most common discovery channels: marketplace data (Amazon and Etsy share seller data with states under information-sharing agreements), payment processor data (Stripe and PayPal report seller-state breakdowns to states that ask), and tip-line audits triggered by competitor complaints. The "they will never find me" strategy is increasingly a losing one.

The typical timeline from threshold crossing to state notice is 12 to 36 months. The notice includes back taxes, penalties (often 25 percent or more), and interest (typically 6 to 18 percent annualized). A company that ignored California nexus for two years on $300,000 in California revenue can owe $30,000 to $60,000 in back sales tax alone before income tax is calculated.

The five-step nexus audit

1. Map your physical footprint. List every office, warehouse, inventory location, server colo, and leased space — and the state each one is in.
2. Map your revenue by state for the last 12 months. Stripe Tax and Avalara both export this view. Look at every state where you have either $100,000 OR 200 transactions, then check that state’s specific threshold.
3. Map your employees and long-term contractors by state of work. Not state of residence — state where the work happens. For remote workers these are usually the same; for traveling contractors they are not.
4. Check fulfillment and marketplace footprint. If you use Amazon FBA, pull the inventory locations report — your nexus map includes every state where FBA has stored your goods in the last 12 months.
5. Where you have nexus you have not registered, file a Voluntary Disclosure Agreement before the state finds you. Most states cap back-tax penalty exposure if you self-disclose; once they audit you, the cap is gone.

How Cherry handles nexus

Cherry watches the four nexus signals continuously — physical, economic, employee, and marketplace — by connecting to your bank, payroll, and ecommerce data. When any of them crosses a state threshold, Cherry surfaces the exposure before the state does, drafts the registration filing, and tracks ongoing obligations once you have registered. For Cherry’s foreign-founder cohort, this is the difference between learning about a state nexus from a notice with penalties already accruing and learning about it the week you crossed the line.