The importance of Documenting Your Sales Tax Compliance Process
Sales tax compliance is riddled with risk. Failure to comply with the applicable sales tax rules...
|The Basics of Sales and Use Tax Permits|
|Steps Toward Registering for Sales and Use Tax|
|The Importance of Registering for Sales Tax Compliance|
|Understanding the Concepts of Sales Tax Nexus|
|Taxability of Your Products and Services|
|Filing for a State Sales and Use Tax Permit|
|Selected State Requirements for Sales and Use Tax Permits|
|Next Steps in Understanding and Managing Your Sales tax Compliance|
After the South Dakota vs. Wayfair Supreme Court ruling of 2018, it has become even more important for multistate businesses to ensure their proper registration for sales and use tax in every state where they have an economic or physical nexus. Many businesses are overwhelmed with how to manage their sales tax obligations and by the number of applications they must file to comply with various state laws.
TaxConnex, an experienced sales tax compliance service provider, explains the proper procedures for sales tax registration and how companies can coordinate their efforts across the multiple states where they do business.
In most states, a current sales and use tax permit is required if you have met nexus standards that require you to collect and remit sales tax. Only a handful of states do not require businesses to collect any sales tax at the state or local level.
The hurdle for businesses lies in the myriad of sales tax applications for each state. The requirements vary greatly between states, and sometimes the application forms themselves are lengthy and complex. The information most commonly asked for in a sales and use tax permit application includes the date the business first had taxable sales in the state as well as personal information including social security numbers of officers and potentially home addresses and copies of driver’s licenses as well.
In some states you need to be registered for a sales tax permit in order to get a sales tax exemption certificate or reseller certificate.
First, you need to know which types of taxes you will be liable for. Each state has its slate of taxes, including seller’s use tax, sales tax, vendor’s use tax, gross receipts tax, business and occupations tax, and communications tax. Not all states require out-of-state sellers to collect particular local taxes, so it pays to check.
Several states may want to know what your estimated taxable sales or liability may be. The states will use this information to determine how frequently you will need to file.
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.
Depending on your business and the state, you may also be required to register with the Secretary of State (SOS). For some states, the SOS registration is required before you can complete the sales tax permit application. (Consult with your legal department or outside counsel regarding the necessity to register with the SOS in each state.)
Since the South Dakota vs. Wayfair decision mentioned above, the landscape for multistate sellers has changed a great deal. The rules for sales tax nexus have been rewritten, and companies that previously did not have to collect and remit sales and use tax in certain jurisdictions are now forced to do so.
Suppose your company does not collect and file the correct amount of sales and use tax with the state and local governments. If audited, you could be assessed the tax due, plus interest, as well as penalties.
Civil penalties for failing to file returns on time mostly involve paying a percentage of the amount of sales tax that the state considers to be your responsibility. Generally, these fines come in at about 10 to 25 percent of the sales tax due, and they are levied in addition to paying the tax itself.
Criminal penalties may apply if your company knowingly did not pay the sales tax with an intent to evade the payment or have collected sales tax from customers but did not remit the tax to the state.
Before you can determine where you must file sales and use tax returns, you need to understand where your company has physical and economic nexus. Physical nexus most commonly means that your company has employees or a brick-and-mortar facility in the state. Still, it also extends to attending sales conventions, having salespeople or service personnel based in the state, and using warehouse space in the state. The regulations for how physical nexus is determined can vary in some cases by state.
It can be challenging to determine whether your company has physical nexus in a particular state, especially if salespeople or service personnel who do business on your behalf in multiple jurisdictions are involved. Fortunately, businesses like TaxConnex can help you determine your sales tax filing requirements and correctly file your tax returns on time.
Economic nexus is a result of the previously mentioned South Dakota vs. Wayfair case. Economic nexus is based on the number of sales transactions or revenue that your company has within a state. South Dakota set their economic nexus threshold at 200 transactions within the calendar year or $100,000 in total in-state sales for the current or prior year. All states that have a state-wide sales tax have now followed suit and adopted similar requirements, though there are some variations state by state.
Taxability refers to whether sales tax applies to your revenue streams or not. Generally speaking, tangible personal property is taxable, and services are exempt – unless otherwise stated. The “unless otherwise stated” is a critical disclaimer. For example, certain products used in the medical field can be viewed as tangible personal property but are not taxable due to the type of product – there are many exemptions associated with the medical profession. Likewise, telecommunications “service” is one of the most heavily taxed services in a lot of states. Taxability can be confusing with software as well - is Software-as-a-Service taxable? It sounds like a “service” but by mid-2021 nearly half of the states are taxing SaaS delivered software (some have since stopped.)
Most companies have a good perspective on the taxability of their products and services in their home state. Where companies get into trouble is applying those rules to other states as they grow. Taxability differs across states and if you assume all states have the same rules as your home state, you can get into trouble. You can review the statutes yourself; however, sometimes statutes require interpretation, and a sales tax professional can help you draw the right conclusions.
If your products and/or services are not deemed taxable in a state, then you do not need to collect sales tax on purchases and in most cases, you would not need to register for a sales tax permit.
If you have determined you have nexus in a state and your products/services are taxable, your next step is registering with the state for sales and use tax purposes.
Now that you have determined where you must file sales and use tax permits, it is crucial to understand how to obtain them.
The first step that you should follow is visiting the Department of Revenue website for each state in which you require a sales tax permit. Each state has its own set of rules for which companies must file on a temporary or permanent basis. You may be able to apply for a tax ID number and get the process started quite easily, but as you progress through the required steps, you may find that you are tied up in a bureaucratic mess.
For example, not all states use the same terminology for their sales and use tax permits. It may be necessary to search out this information yourself. If you are confused, call the state’s Department of Revenue, or reach out to a sales tax consultant like TaxConnex to make sure you are filling out the correct forms.
Following are a sampling of state-by-state requirements regarding sales tax registration:
In Arizona, the transaction privilege tax license costs $12 per location. Cities may also charge a license fee. These licenses are valid for one year only and are renewable on January 1.
While there is no fee to register for a seller’s permit in California, security deposits may be required to cover the amount of unpaid taxes that may result from a business closure. California will generally require a copy of your driver's license as part of the application process.
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 $50. These licenses are required for each physical location. They are valid as long as the same company operates the business in that location.
West Virginia businesses can register for $30. Transient vendors in the state must post security in the form of a bond, certified check, cash, or letter of credit totaling $500.
Registering for your sales tax permits is just the tip of the iceberg when it comes to managing your on-going sales tax obligations. Once you are registered you are required to collect and remit sales tax from your taxable customers within that state or jurisdiction. This could involve finding a way to calculate the correct sales taxes, responding to jurisdictional notices, managing a tax calendar and filing correctly and timely. There are various options available to manage this process including in-house, outsourcing, software, or some combination of the three.
TaxConnex takes a service-oriented approach to manage sales tax and helps companies understand the requirements and ensures that sales tax returns are filed and paid properly. Get in touch with TaxConnex at 877-893-5304 to start your journey toward compliance.