It’s been almost seven years since the Supreme Court’s South Dakota vs. Wayfair decision opened the door for remote sellers’ sales tax obligations in almost every state. In that time, online businesses need to get sales and use tax registration right has only intensified.
Many businesses can now feel overwhelmed with managing sales tax obligations and by the number of applications they must file in every state where they have an economic or physical nexus. What should you do first?
Assess your e-Commerce footprint
You must register in states where you have nexus.
Economic nexus is based on the number of sales transactions or revenue that your company has within a state. After Wayfair, for instance, South Dakota set their economic nexus threshold at 200 transactions within the calendar year or $100,000 in total in-state sales (the latter is a transaction threshold, which more states are eliminating). All states that have a state-wide sales tax have now followed suit and adopted similar requirements.
The more-established nexus, though, is physical nexus, which many companies neglect in these days of burgeoning eCommerce. Your company can create physical nexus by having employees – including, potentially, remote employees – or a brick-and-mortar such as an office in a state. You might also have physical nexus by having salespeople or service personnel based in a state or even warehoused inventory (a complication for vendors who have inventory warehoused across the country by marketplace facilitators like Amazon).
Whether you have economic nexus depends on the taxability of your products and services in a state. Tangible personal property (TPP) is generally taxable and services are generally exempt – unless otherwise stated. For example, certain products used in the medical field can be viewed as TTP but are not taxable due to the type of product. Services don’t incur sales tax in many states but do in some. Is Software-as-a-Service (SaaS) taxable? It sounds like a “service” but many states tax it as TPP. Taxability can, if you haven’t guessed already, differ greatly state to state.
You may also need to estimate your taxability when registering in some states that use your estimate to calculate your filing frequency.
Registering
Sales tax registrations are completed at the department of revenue or taxation in each state. As part of the registration, you are provided a sales tax ID number and are granted the authority to collect and remit sales tax in that state.
There are a myriad of sales tax applications across the states, and sometimes even within each state. Some states require you register as well with the Secretary of State, sometimes even before you can complete the sales tax permit application. Streamlined Sales Tax member states also allow you to register via the created the Streamlined Sales Tax Registration System (SSTRS).
You need to know which types of taxes you will be liable for. Kansas, for instance, has many different varieties of “sales” tax that might apply to a remote seller. Each state has its menu of taxes, including seller’s use tax, sales tax, vendor’s use tax, gross receipts tax, business and occupations tax, communications tax and, in some cases, local taxes. Don’t overlook at tax that applies to you, but don’t register for what you don’t need to collect and remit, either.
A sample of states’ latest requirements, fees and other details show how registering can vary:
- In Arizona, the transaction privilege tax license costs $12 per location. Cities may also charge a license fee.
- California has no fee to register for a seller’s permit in, though security deposits may be required.
- The Ohio vendor’s license costs $25 and must be purchased for all fixed places of business. The state has made the license free for out-of-state retailers making taxable sales within the state.
- South Carolina retail licenses cost a non-refundable $50. A Retail License may also be required for remote sellers who meet certain requirements.
- In West Virginia, registration may be done through the remote seller simplified registration process at the West Virginia Tax Division webpage or through the SSTRS.
Information commonly requested on an application includes the date your business first had taxable sales in the state as well as personal information, including Social Security numbers, addresses and other information for responsible parties of your company (generally senior executives who will be held personally responsible for non-compliance).
Finally, many states require that your company file and pay sales taxes electronically. In some cases, sending in a paper return can lead to a penalty. This will require setting up your e-file credentials for each state.
Why register at all?
It’s important to note that you should not immediately register in a state without understanding if you have any potential prior period tax exposure. Registering in a state often takes away some of a taxpayer’s ability to mitigate prior period risk through a voluntary disclosure agreement, for example. But if you’ve already gone through the process of understanding your exposure and mitigating risk where possible, registration is your next step.
Further, if your company does not collect and file the correct amount of sales and use tax with state and local governments, an audit can assess the tax due, interest and penalties. Fines for non-compliance can be as much as 25 percent of the sales tax due in addition to paying the tax itself. Criminal penalties may apply if a state proves that your company knowingly evaded payment or collected sales tax from customers but did not remit the tax to the state.
Failing to register is simply not worth the risk – but be careful to register properly.
TaxConnex can explain sales tax registration and how your company can coordinate efforts across the multiple states where you do business. Get in touch to learn more.
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