NicoleD gave a great explanation about nexus and physical presence is
definitely required before a state can force you to collect sales tax on its
behalf. However the states have been pushing the envelope when it comes to
defining what physical presence is. Two areas that online sellers usually
have problems with are drop shipping, fulfillment centers and affiliates.
Some states assert that the activities of shipping and handling by a drop
shipper for you are enough to create a physical presence in that state. For
those of you who use Amazon for fulfillment services you may have been told
that your inventory may be stored at any one of their 13 warehouses. Anywhere
your inventory is stored is usually a nexus creating activity. Lastly, if you
have websites that link to you website and you pay them a fee or commission
for sales that happen as a result of that link then many state will consider
those websites to have created nexus for you. So while it is true that a
physical presence is necessary; the states definition could be vastly
different then yours.

If the Main Street Fairness, Market Place Fairness or any similar Act is
passed and becomes law then the physical presence requirement will probably
become a moot point for many who exceed the small business exemptions. In
these cases you would most probably have to charge sales tax everywhere.

Good point, NRiddle. Read more about States Making Inroads at Taxing Online Sales in this article from one of Business.gov's guest bloggers, Steven Roll.

Some states have pending legislation to start collecting tax revenue from internet sales; I would keep a keen eye on these developments. They basically want to be able to collect sales tax on items bought by residents via the internet. This will create a nightmare for online ecommerce sites so let's hope this doesn't happen.

If your business has a physical presence in a state, such as a store, office or warehouse, you must collect applicable state and local sales tax from your customers. If you do not have a presence in a particular state, you are not required to collect sales taxes. In legal terms, this physical presence is known as a 'nexus.' Each state defines nexus differently, but all agree that if you have store or office of some sort, a nexus exists. If you are uncertain, whether or not your business qualifies as a physical presence, contact your state's revenue agency. If you do not have a physical presence in a state, you are not required to collect sales taxes from customers in that state. For more information, read Collecting Sales Tax Over the Internet on Business.gov.