Sales tax compliance questions often start with a review of a company’s sales tax nexus footprint. TaxConnex frequently works with direct marketers to assist them with their sales tax compliance. As a first step, a direct marketer should review where they have distributors or sales agents.
These distributors will generally result in sales tax nexus for the direct marketer. As a result, a direct marketer can quickly find themselves with a multi-state sales tax compliance obligation.
Managing the cost and risk of compliance can be tricky. Should you register immediately upon signing up a distributor? Should you wait until you make a sale? What if you register and start collecting, but you’re only collecting a few dollars per-month in tax? Unfortunately, once you have registered, the state is going to look for a monthly return. You may be lucky and get assigned a quarterly or annual filing frequency but often times you have to demonstrate a history of minimal tax collections before you can petition for a reduced filing frequency.
As with most sales tax questions, this is a question of risk and cost. I have often seen companies wait until they make a sale before registering in a jurisdiction. They’ll go ahead and collect the sales tax, then register, and remit the sales tax collected on the first return. You need to be careful in this situation that you’re not holding the states’ money and not remitting it. The safer play is to register as soon as you establish sales tax nexus. The downside is that you’ll be subjected to regular return filings regardless of whether you have sales and regardless of the amount of tax collected.
Any thoughts on when you should register for sales tax purposes?