Online businesses do not have to register in every state. They have to register in each state where they’ve built a meaningful connection, either through a physical footprint or enough sales volume to cross that state’s threshold. That connection is called nexus, and it is the legal trigger for registration. If you have no employees, no inventory, and only modest sales in a state, you generally have no obligation there. But the thresholds are lower than many owners expect, and getting it wrong can mean back taxes, penalties, and losing the ability to sue in that state’s courts.
When Physical Presence Creates an Obligation
The clearest way to trigger registration in another state is to have something physically there. An office, a leased warehouse, employees, or stored inventory all count.
Inventory is the piece that catches e-commerce sellers off guard. If you use a third-party fulfillment service that distributes your products across warehouses in multiple states, you have created physical nexus in every one of those states, even if you have never visited.
A single remote employee can do it too. If someone on your payroll works from home in another state, you generally need to register as an employer and withhold state payroll taxes there, whether the worker is full-time or part-time. That employee’s presence can also trigger state income tax filing obligations for the business and, depending on the state, require foreign qualification of your entity. Distributed teams often create nexus that no one on the business side is tracking.
When Sales Volume Alone Creates an Obligation
Even without any physical presence, selling enough into a state can trigger a sales tax registration duty. The U.S. Supreme Court established this in its 2018 decision in South Dakota v. Wayfair, Inc., which overruled decades of precedent that had required physical presence before a state could compel sales tax collection.1Supreme Court of the United States. South Dakota v. Wayfair, Inc. Every state with a sales tax moved to adopt economic nexus rules after the ruling.
The most common threshold is $100,000 in sales into a state within a year. Roughly 38 states and the District of Columbia use that figure. A handful set the bar higher. Some states also include a transaction-count trigger, typically 200 separate transactions, but the trend is away from that measure. More than a dozen states that originally used a 200-transaction threshold, including South Dakota itself, have eliminated it. A business making thousands of small sales into those states will not trigger nexus unless total revenue crosses the dollar threshold.
Five states impose no state-level sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. You will not owe sales tax collection in those states no matter your volume, though Alaska allows local jurisdictions to levy their own sales taxes.
What Changes If You Sell Through a Marketplace
If you sell through a large online marketplace such as Amazon, eBay, Etsy, or Walmart Marketplace, the platform is almost certainly collecting and remitting sales tax on your behalf. Nearly every state with a sales tax has enacted marketplace facilitator laws that shift collection responsibility to the platform rather than the individual seller.2Streamlined Sales Tax Governing Board. Marketplace Facilitator State Guidance
This is the biggest compliance relief for small online sellers. If all of your sales run through a covered marketplace, the platform handles sales tax in the states where it is registered. You may still need to register and file returns in some states even when the marketplace collects, and you remain responsible for sales made through your own website or other non-marketplace channels. For sellers who operate exclusively through major platforms, though, the practical burden drops sharply.
Two Different Registrations to Keep Straight
When nexus exists, it can trigger two separate registrations that serve different purposes and go to different state agencies. Confusing them is common.
Foreign Qualification With the Secretary of State
Foreign qualification is the process of registering your LLC or corporation to legally operate in a state other than the one where it was formed. Your business is domestic in its formation state and foreign everywhere else. If your activities in another state cross from passive to active operations, the state expects you to file for authority to transact business there, typically through its Secretary of State.
The main practical benefit is legal standing. A business that has not qualified in a state where it is actively operating can be barred from filing lawsuits in that state’s courts, meaning you could not enforce a contract or collect a debt there.3Wolters Kluwer. Penalties for Foreign Corporations Transacting Business Without Authority Most states list activities that do not count as transacting business, such as maintaining a bank account or handling isolated transactions. The specifics vary.
Sales Tax Registration With the Department of Revenue
Sales tax registration is separate and goes through a state’s department of revenue or taxation. It gives you a permit to collect and remit sales tax on transactions with customers in that state. This registration is driven by economic nexus thresholds or physical presence, not by whether you have foreign-qualified your entity. You might owe sales tax registration in a state where you do not need foreign qualification, or the reverse.
State Income Tax and the P.L. 86-272 Shield
Sales tax gets the most attention, but state income tax is a separate exposure that surprises many online businesses. A growing number of states apply factor-based nexus standards for income tax, meaning that exceeding a set level of sales, payroll, or property in a state triggers a corporate income tax filing obligation. These thresholds are often higher than sales tax thresholds, commonly around $500,000, though some states set them as low as $100,000.
A federal statute, Public Law 86-272, protects some online sellers from state income tax. Under the law, a state cannot impose a net income tax on your business if your only activity there is soliciting orders for tangible personal property, and the orders are approved and shipped from outside the state.4Office of the Law Revision Counsel. United States Code Title 15 – 381 If you sell physical products online, take orders through your site, and ship from a single location, this law may shield you from income tax in states where you have no physical presence.
The protection has real limits. P.L. 86-272 does not cover services, digital goods, software subscriptions, or any intangible property.5Multistate Tax Commission. Statement on PL 86-272 SaaS, digital downloads, streaming content, and consulting are all outside the shield. Several states have also taken the position that common internet activities, such as placing tracking cookies on customers’ devices, providing post-sale support through chat, or accepting online job applications, go beyond mere solicitation and defeat the protection even for sellers of tangible goods. If your website does more than display products and take orders, the safe harbor may not apply.
What Happens If You Skip Registration
Operating in a state without required registration creates exposure on several fronts.
States can fine you for transacting business without authority. Some charge a flat penalty; others assess daily fines for each day you operated without registering. On top of the fines, you will owe all back taxes and fees you would have paid if properly registered, including franchise taxes and annual report fees, plus interest, calculated retroactively from the date the state determines you first had nexus.
The consequence that tends to matter most in practice is loss of court access. Every state bars unqualified foreign businesses from initiating or maintaining lawsuits in its courts.3Wolters Kluwer. Penalties for Foreign Corporations Transacting Business Without Authority If a customer in that state owes you money or a vendor breaches a contract, you cannot sue to enforce your rights until you qualify and pay all outstanding fees. A defendant you are trying to sue can raise your non-qualification as a defense and get the case dismissed. In some states, officers or directors may also face personal liability for the failure to register.
Fixing It: Voluntary Disclosure Agreements
If you discover you have had nexus in states where you have not been collecting sales tax or filing income tax returns, a voluntary disclosure agreement can significantly reduce the damage. Most states offer these programs, and the Multistate Tax Commission runs a centralized program that lets you approach multiple states through a single process at no charge.6Multistate Tax Commission. Multistate Voluntary Disclosure Program
The basic deal: you agree to register, file back returns for a limited lookback period (typically three to four years rather than the full period of non-compliance), and pay the tax owed plus interest. In exchange, the state waives penalties and does not pursue liability for periods before the lookback window. Eligibility is the catch. You must come forward before the state contacts you. If you have already received an inquiry, audit notice, or any communication from the state about the tax in question, you are disqualified from the program for that tax type. The earlier you act, the more options you have.