When Should You Register with State and Local Taxing Authorities?

We get this question alot! So we decided to re-run this informative blog from April 2016.

“It depends.”

This single question could fill volumes to get to the proper answer. The simple answer is if you have sales tax nexus in a state, then you should register with the Department of Revenue for a sales tax id number and begin collecting and remitting sales tax.

However, there are several other questions you should answer first:

1. When did you first establish sales tax nexus in the jurisdiction? (You may be required to remit prior period returns including tax due from these prior periods.)

2. Are your products/services taxable in the jurisdiction(s) where you have sales tax nexus? (Your products/services may not be taxable. Should you still register? Statutorily – yes. Practically – maybe not.)

3. Are your customers taxable – are they government entities, non-profits, or otherwise exempt businesses? (If they are you need to be sure you have the appropriate exemption certificates.)

4. How much tax exposure do you have from prior periods? (Depending on the materiality of the prior period liabilities, a Voluntary Disclosure Agreement could be beneficial.)

5. Did your customers already self-assess and remit use tax? (This may get you “off the hook” at least partially but I don’t recommend this as your compliance strategy long-term.)

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Something I’ve discovered over the years is that there is hardly ever a “Yes” or “No” answer when it comes to sales tax.

There are always questions that lead to more questions. The decision tree is very complex and can vary based on the risk tolerance of the business. One business may have the same set of facts but due to their risk-tolerance they may make a completely different decision regarding sales tax compliance than another business.

Sales tax is about balancing risk and cost.

How much does it cost to be 100% compliant? Is it worth it to be 100% compliant? I’m not suggesting anyone do anything illegal. But the nuances and levels of complexities across jurisdictions make it practically impossible to be 100% compliant – even if you want to be.

While we may want sales tax to be simple and to have simple answers to simple questions, it’s just not reality. For now, we’ll answer questions with questions. And we’ll continue to throw out the most famous words of every sales tax consultant ...

“It depends”.