The advent of economic nexus changed everything when it comes to sales tax compliance for online retailers. These days, due to the South Dakota v. Wayfair Supreme Court ruling, a state can require an e-commerce business to collect sales tax just because that business makes sales in that state.
Here at TaxJar, as states began to pass economic nexus laws, we began to notice that mid- to high-volume sellers found themselves with sales tax liability in more states very suddenly.
It’s simple to look at a single state and determine what creates economic nexus for a business. For example, in Virginia, businesses with sales of $100,000 or more or at least 200 individual sales transactions into the state if in the previous or current calendar year have economic nexus.
It’s more difficult to see how economic nexus laws affect e-commerce businesses in aggregate.
Curious to understand how exposed e-commerce businesses are, TaxJar’s Vice President of Sales, Matthew Grattan, dove into the data and built an Economic Nexus Impact Analysis.
Here are some of the key results TaxJar found.
A note on methodology: We used US Census data to determine the percentage of annual US retail sales by state, then crunched that based on each state’s economic nexus law. Economic nexus laws vary by state. Some state that an online retailer has sales tax nexus when they gross more than a dollar amount in a state, while some states require that retailers gross more than a dollar amount and hit a sales threshold (such as 200 sales into the state in a year.)
Only 1,000 orders per month? Be on the lookout for economic nexus
Online retailers with 1,000 orders per month (or 12,000 per year) are estimated to have economic sales tax nexus in 48% of the 28 states that take order volume into account when determining economic nexus.
When order volume hits 10,000 orders per month (or 120,000 per year), a business is estimated to be exposed to economic nexus liability in all 28 states that take order volume into account when it comes to determining economic nexus.
Assuming a $100 average order value, companies in the $1 million to $10 million dollar annual revenue range will now find themselves with sales tax liability in at least half the states with an economic nexus order threshold. That’s 14 to 28 states where a business may have newfound sales tax liability.
Revenue Thresholds are More Forgiving… But Not by Much
Luckily for some lower-volume e-commerce sellers, some states have either abolished their older number thresholds or never had an order number threshold to begin with. These states simply state that an e-commerce business that makes above a certain dollar amount in sales in the state now has economic nexus.
Once a company hits $5 million in annual revenue, they are now estimated to have sales tax nexus in 33% of all of the 44 states plus Washington DC that currently have economic nexus on the books. (The six states without economic nexus laws are Delaware, Florida, Missouri, Montana, Oregon, and New Hampshire.)
In other words, an e-commerce business with $5 million in annual revenue is likely to have sales tax nexus in at least 15 states.
Once an e-commerce business reaches $50 million in annual revenue, they statistically hit full exposure and would be required to collect sales tax in all 44 states (plus DC) with an economic nexus law.
Future vs. Current Sales Tax Liability
These numbers can help you determine how much sales tax liability your e-commerce business will be exposed to as you grow.
And, of course, take these numbers as the averages that they are. If your e-commerce business sells snow shovels, you may not make many sales in states where it rarely snows.
That’s why it’s so important to know in which states your business currently has economic nexus.
And TaxJar is here to help. Our Economic Nexus Insights Dashboard shows you in which states you have already reached economic nexus.
The TaxJar Economic Nexus Insights Dashboard will also show you when your business is nearing economic nexus. (For TaxJar Professional customers and above, we’ll even send you an email alert when that happens. Handy!) That way, you can get prepared by registering for a sales tax permit and setting up sales tax collection in your new nexus state through all of your sales channels.
According to US census data combined with state economic nexus laws:
Ready to automate sales tax? Ready to see where our business has sales tax nexus? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.