Physical presence remains a fully independent basis for taxpayers to establish sales and use tax nexus in a state due to their physical footprint
Rob Galloway (J.D., Editor; Checkpoint Catalyst)
The practical aftermath of South Dakota v. Wayfair, Inc. et al.,138 S. Ct. 2080 (2018) was swift and comprehensive: by 2021, every state had enacted or adopted economic sales tax nexus and marketplace seller nexus rules.
Despite this fundamental shift, physical presence remains a fully independent basis for taxpayers to establish sales and use tax nexus in a state due to their physical footprint. With the rise of economic nexus, many businesses have lost sight of common bases for establishing physical presence, including in-state remote workers, independent contractors, inventory, or other supply-chain relationships. Courts and state tax authorities continue to affirm physical presence as an alternative basis for establishing nexus, and historical cases remain instructive for understanding how courts evaluate the sufficiency of minimal in-state activities. Tax practitioners who advise multistate retailers must maintain a firm command of physical presence principles alongside the economic nexus framework. The lack of uniformity among states intensifies this challenge. The stakes are high: a 2024 Arizona case resulted in an $8 million assessment because third-party distributors created physical-presence nexus that the retailer overlooked. Since then, multiple state tax agencies have issued guidance continuing to stake out aggressive physical presence nexus policies.
Two Independent Roads: Physical Presence Nexus and Economic Nexus Are Alternative, Independent Paths to Nexus
The U.S. Supreme Court’s pre-Wayfair jurisprudence established a bright-line Commerce Clause nexus standard requiring a “physical presence” for sales and use tax collection obligations. (Quill Corp. v. North Dakota, 504 U.S. 298 (1992); National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois, 386 U.S. 753 (1967).) State legislatures also enacted click-through and affiliate nexus statutes, adopting easy-to-trigger physical presence nexus standards applied to a modern, and primarily digital, economy (e.g. “cookies,” or application downloads). While many states have repealed these provisions, some have maintained these laws even in the post-Wayfair era and they remain a potential nexus trigger for the unwary. Courts honed this physical presence nexus analysis in the decades before Wayfair to support substantial nexus for any in-state activity beyond the “slightest presence,” and where in-state activities are significantly associated with a retailer’s ability to establish or maintain a market for its products in the state. (See e.g.,National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois, 386 U.S. 753 (1967); Scripto, Inc. v. Carson, 362 U.S. 207 (1960).) The Court’s pre-Wayfair physical presence rule could be satisfied by having even a modest physical footprint, such as a sales representative or independent contractor operating in a state. (Standard Steel Co. v. Washington Revenue Dept., 419 U.S. 560, 562; and Orvis Co., Inc. v. Tax Appeals Tribunal of State of N.Y. , 654 N.E.2d 954, (June 14, 1995), cert. den’d116 S.Ct. 518 (Nov. 27, 1995).)
Tax practitioners must not lose sight of the fact that the Court in Wayfair supplemented the bright-line physical presence rule with an economic nexus rule—it did not replace it. Critically, the Court’s language was that of expansion, not substitution, of its prior physical presence jurisprudence.
The Court left open the question, however, of “how little is too little” in-state activity for purposes of physical presence. As an example, the Court noted that “a business with one salesperson in each [s]tate must collect sales taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website accessible in every [s]tate need not collect sales taxes on otherwise identical nationwide sales . . . a small company with diverse physical presence might be equally or more burdened by a compliance costs than a large remote seller.” (South Dakota v. Wayfair, Inc. et al., 138 S. Ct. 2080, 2093 (emphasis added).)
Courts continue to grapple with how Wayfair affects other Commerce Clause analyses and whether traditional physical presence standards retain their force as sufficient (though no longer necessary) bases for establishing nexus. As the Wayfair Court observed, “if some small businesses with only de minimis contacts seek relief from collection systems thought to be a burden, those entities may still do so under other theories. These issues are not before the Court . . . but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule (i.e., Quill’s physical presence requirement) that deprives States of vast revenues from major businesses.” (South Dakota v. Wayfair, Inc. et al. , 138 S. Ct. 2080, 2093.)
Physical Presence Litigation Continues: The Lessons of RockAuto, LLC v. Arizona Department of Revenue
An instructive – and sobering – recent entry in the physical presence jurisprudence is the 2024 Arizona Court of Appeals decision in RockAuto, LLC v. Arizona Department of Revenue (Dkt. Nos. No. 1 CA-TX 23-0002, (Az. Ct. App. Div. One, 04/02/2024)0. This case offers a well-developed, post-Wayfair physical presence analysis, with likely implications beyond Arizona.
RockAuto, an online auto-parts retailer based in Madison, Wisconsin, disputed the Arizona Department of Revenue’s assessment of sales tax for the audit period from April 1, 2013, through April 30, 2019. Since Arizona’s economic nexus rules did not become effective until October 1, 2019, this case turned entirely on whether the retailer had physical presence nexus in Arizona. The company maintained no inventory or physical locations in Arizona and did not have any office or employees in Arizona. However, it contracted with at least six in-state suppliers (i.e., independent contractors) that fulfilled customer orders.
Although Arizona’s tax court initially ruled in favor of the company, invalidating the state’s assessment, the Arizona Court of Appeals vacated the tax court’s ruling and held that the company had a substantial nexus with Arizona and was subject to Arizona transaction privilege tax on its sales to Arizona customers from 2013 to 2019. The court found that the company’s use of Arizona-based distributors to store inventory, fulfill customer orders, and make deliveries in Arizona established a physical presence and substantial nexus for the company even though it had no offices or employees located in the state.
The Court’s legal framework turned on whether the in-state independent contractors’ activities were “significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales,” a standard drawn from Tyler Pipe Industries, Inc. v. Washington Department of Revenue (483 U.S. 232, 250 (1987)). The court determined that the distributor’s activities were significantly associated with RockAuto’s ability to establish and maintain an in-state market by relying on the distributors to maintain inventory, ship orders to Arizona customers, accept returns, and use company promotional materials. Additionally, the Court noted that the company’s business model was designed to increase customer satisfaction by reducing shipping times and costs for customers, further helping to establish and maintain a market in the state.
From a jurisprudential standpoint, the significance of the case extends far beyond Arizona. This rare post-Wayfair physical presence analysis should remind multistate taxpayers that the vast history of physical presence jurisprudence generally still applies to state nexus determinations, in the absence of indications to the contrary from the state at issue.
Aggressive Post-Wayfair Physical Presence Nexus Guidance
Despite the relative scarcity of post-Wayfair case law, many state tax agencies continue to assert physical presence nexus broadly, sometimes through recent rulings or guidance. In its 2025 sales and use tax manual, for example, the South Carolina Department of Revenue takes the position that physical presence nexus-creating activities include: authorizing employees or third parties to install, deliver, service, or repair merchandise, or to provide training or technical assistance to customers; maintaining inventory in the state; or maintaining an in-state representative working from an in-home office in South Carolina. (South Carolina Sales and Use Tax Manual 2025 Edition, 09/01/2025.) The North Carolina and Pennsylvania tax agencies take similar approaches in post-Wayfair guidance concerning remote employees present in the state and performing in-state activities. (North Carolina Sales and Use Technical Bulletins, No.1, 01/01/2025; Telework Guidance, Pennsylvania Department of Revenue, 07/01/2021.)
Conversely, the Arizona Department of Revenue, issued COVID-era guidance suggesting back-office, non-sales related business activities (e.g. , bookkeeping, clerical work, etc.) are considered activities not significantly associated with a business’s ability to establish or maintain a market in the state, and therefore would not create a physical presence. (Remote Sellers and Marketplace Facilitators, Ariz. Dept. of Rev., 01/01/2021.) Thus, while RockAuto establishes that Arizona aggressively pursues nexus based on fulfillment performed in the state, the nexus implications of remote work in the state will vary depending on the employee’s activities, and a precise case-by-case analysis is required.
Physical Presence Nexus Risk in 2026 and Beyond
The RockAuto decision, read alongside the broader pattern of aggressive state guidance on physical presence, delivers a clear message entering 2026: physical presence nexus is not a legacy concept. It is a live, actively litigated, and expansively interpreted doctrine that operates independently of economic nexus and carries its own exposure risks. Businesses and tax practitioners must be prepared to conduct a full physical presence audit, not just an economic nexus analysis, of their in-state activity footprint. Third-party relationships and remote employee mobility present significant risk to retailers and, unlike economic nexus, physical presence nexus carries no sales volume threshold or small-seller safe harbor. In the wake of RockAuto, legislative efforts in Arizona to clarify the meaning of “physical presence” may produce statutory guidance that ripples into other states’ interpretive frameworks. Checkpoint Catalyst continues to monitor the legislative and judicial landscape closely to keep tax practitioners updated with the latest guidance as this area continues to evolve.
CoCounsel Templates and Checkpoint Resources
CoCounsel subscribers can generate a sales tax nexus risk assessment using the Evaluate Sales Tax Nexus Risk of Remote Employee in State Template. This Catalyst-authored prompt delivers comprehensive analysis of a state’s current physical presence nexus position based on expert Checkpoint commentary and the law itself. Fine-tune CoCounsel’s output to your needs with follow-up questions.
See real-world applications: Review sample risk assessments for states with aggressive nexus positions: North Carolina, Ohio, and Pennsylvania.
Additional nexus-relatedCoCounsel Templates:
Indicate Sales Tax Economic Nexus Threshold and Composition
Indicate State’s Approach to Economic Nexus for Corporate Net Income Tax Purposes
Indicate Approach to P.L. 86-272 and Internet Activities
Checkpoint subscribers can dive deeper into sales tax nexus with:
28 Nexus Assistant Charts: covering nuances of physical presence, economic nexus, and threshold computation.
Catalyst Topic #1050, Sales and Use Tax Nexus: providing in-depth state-by-state analysis as well as background context and insights.
State Explanations (23,120): providing state-specific nexus overviews.
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