Understanding sales tax permits

You’ve learned what states you have nexus in and you know where your products/services are taxable. Now it’s time to register with the states to collect and remit sales tax. Where to begin?

You complete your sales tax registrations and file them with the departments of revenue or taxation in each state. These registrations are called sales tax permits, sometimes licenses. New York calls theirs a “sales tax certificate of authority.”

After registering, you’re given a sales tax ID number and the authority to collect and remit sales tax in that state. As with nexus and taxability, each state has its own rules for which companies must file. (Many of the software and service providers who claim to manage sales tax for you don’t help with registrations, and if they do it comes at extra cost.)

States often help registrants with FAQs; Oklahoma’s even have a video. In states like Nebraska, Ohio and Washington, among others, you can register using the Streamlined Sales Tax Registration System (SSTRS), and after registering allow about 15 days for states to mail you the state’s registration number and reporting information.

What to prepare for

New York offers a good example of what states typically ask for when you register:

• Your reason for applying

• Contact information for your business (legal name, federal employer ID number, business address, phone number and email address, among other details)

• The type of business

• Bank information

• Owners’ information (most states also have personal responsibility laws concerning sales tax obligations)

Sales tax registration isn’t just cheap – it’s dirt cheap, generally around a couple of twenties at most. It’s actually free in many states like California, Texas and West Virginia.

Some states do require hefty security deposits, though, as in Alabama (they’re “bonds” in North Dakota). Among other states, Nevada’s security formula is especially complicated; Colorado has a refundable deposit. In home-rule states like Louisiana, local jurisdictions may tack on added fees.

The challenges

Generally, you need to pin down several details no matter what tax jurisdiction you’re registering with.

The correct type of tax. Should you register for sales tax, seller’s use tax or consumer’s use tax? As a seller, you will likely register for either sales tax or seller’s use tax.

Some states apply different rates to tax types and some states have different tax returns for different types of tax.

When did you start doing business in the state? All sales tax registrations have this question, wanting to know when to start your sales tax clock. If you register with a particular start date but your plans change and you don’t start collecting until a later time, you should still file a zero due return to avoid a possible late-filing penalty.

Prior period exposure? Before registering in a state, understand if you have any potential prior period tax exposure – such exposure could hamper your ability to mitigate prior-period risk using, for instance, a voluntary disclosure agreement.

Is your registering done? More and more states are requiring businesses to also register with the Secretary of State as part of the sales tax registration process.

Registering with the Secretary of State has separate compliance obligations, including preparing an annual report and maintaining a registered agent in the state for service of process. (A registered agent is someone [a person or company] that receives legal correspondence within the state and forwards this correspondence to your business.) Some states, such as Tennessee, require you to have a separate business license.

Are you done?

Once you have submitted the requested data for your sales tax registration and assuming the state doesn’t have any additional questions or ask for additional information, each state will assign to you a filing frequency. This will usually be monthly, quarterly or annual; some states have semi-annual, bi-annual and other filing frequencies.

Some states, like Pennsylvania, require periodic renewal of sales tax permits. Many (but certainly not all) states’ permits never expire but can of course be revoked.

Registering for your sales tax permits just begins the management of your ongoing sales tax obligations. There are various options available to manage this process including in-house, outsourcing, software or some combination of the three.

Need help with your sales and use tax obligations? Get in touch to learn how we can alleviate the burden and risk of sales tax compliance for you and your business.