LUTZ BUSINESS INSIGHTS
sales tax registration 101
Stacy watson, tax & consulting shareholder
Starting a business can be easy. Knowing how to make sure that you are in compliance with state and federal laws is a little more difficult. You probably already know that you need to register to collect sales tax in your state when you set up shop, but what may be less clear is that you could have to file for sales tax in other states as well. This blog will help you understand when you should register for sales tax and how to do it.
What is Nexus?
Nexus is a word that means “connection.” In the world of sales tax, nexus means a connection between your company and a state. The word implies that your business has a connection with a particular state and, therefore, needs to collect state sales tax on any goods sold there. That means that if your company has a physical presence in the state, such as where you employ people or where you store inventory, you would have nexus. This includes the state where your business is located, but it may also include other states. For example, Amazon collects state sales tax in its home state as well as the states where it has warehouses or distribution centers.
Nexus also includes economic nexus under the new Supreme Court ruling in Wayfair If a state has adopted the economic nexus standards of $100,000 in sales or 200 transactions in to a state in a 12 month period, the company may have economic nexus.
About Sales Tax Nexus
That might all seem straightforward – but wait!
Technically, you should start collecting state sales tax the first time you make a sale in that state. However, you should not collect sales tax without first registering. It is actually illegal to do so and you could face a fine if you charge state sales tax without first registering your business in that state.
DO NOT try to file in every state and just collect sales tax as a matter of course. When you file your sales tax registration, you automatically create nexus in that state. Now, you will have to keep collecting sales tax in that state as long as you are in business AND you will have to file returns for each of those states. So, only file for sales tax registration in states where you actually have nexus, otherwise you will be wasting your time and money.
Registering for Sales Tax
Before you register your company to collect sales tax, review the state’s requirements for registration:
What is the nexus standard for the state?
Different states have different definitions which may include physical as well as economic parameters.
Does the company meet the requirements of the nexus standard?
Next, look at whether your company meets those standards. You may not have to file in all the states where you think you should.
Are the products or services you provide taxable under the state statute?
Pay attention to which products and services you provide too. Some are not taxable by certain states.
If the sales items are not taxable, does your company have a Use Tax liability?
Also, remember that you could be subject to Use Tax. This is a special tax you would have to pay if you bought something in a different state that your company will use in the state where it is located, you may have to pay sales tax on that item.
Deciding to Register for Sales Tax
Once your company has nexus and decides to register, you will need to keep a few things in mind:
- Most states allow online registration;
- Depending on the amount of tax to be collected, your company may be able to file annually, quarterly or monthly; and,
- After sales tax registration, your company should review your operations to see if any other state registrations are required such as secretary of state, income tax, unemployment.
In a nutshell, there are a few things you need to know about sales tax registration:
- Companies can be required to pay sales tax to a state even if they don’t collect it but should have collected the tax.
- You can file a sales tax registration in any state, but you may not need to register in every state.
- Collecting sales tax in every state is unnecessary for many companies.
- You need to register for sales tax in any state where you have nexus.
Overall, registering for sales tax can be confusing. If you need help determining nexus or figuring out which registrations your company needs, contact us today. We can go through your books and help you complete all of your required registrations.
ABOUT THE AUTHOR
STACY WATSON + TAX & CONSULTING SHAREHOLDER
Stacy Watson is a Tax and Consulting Shareholder at Lutz with over 20 years of experience in taxation. She has in-depth experience in providing state and local, income, franchise, sales, use and escheat taxes.
AFFILIATIONS AND CREDENTIALS
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA in Accounting, Creighton University, Omaha, NE
- Junior Achievement Heartland Family Services, Past Member
- St. Stephen the Martyr, Various Boards
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