How do I know if I should be collecting tax in a state?

 

You are responsible for collecting and remitting sales tax to a jurisdiction if you have established substantial presence in the state of delivery. This substantial presence is referred to as nexus. For more information on nexus, visit our What is Nexus? FAQ.

The threshold for this presence differs from state to state and a company’s presence in each state should be examined to determine if nexus has been established. A nexus study can be conducted to determine where a taxpayer has nexus and must register to collect and remit sales tax.

A company clearly has nexus if there is a business location or there are employees living in or working in the state/jurisdiction. But nexus can also be established if employees or agents travel into a state on a temporary basis to solicit sales or perform services. Even attending a trade show can create nexus. Storage of inventory at a third party warehouse can also create nexus – particularly if you use a fulfillment agent to process your orders. Once you have established nexus in a state, you are required to register as a retailer with the state before collecting and remitting sales tax for that state.

Before a company starts collecting tax it must register with the Department of Revenue or Taxation in the state.  Collecting tax without being registered is illegal as sales tax is a trust tax similar to payroll withholding.

In addition to determining where to register, a taxpayer must determine how to register.  The taxpayer needs to determine which taxes it will be required to collect or pay.  Some states differentiate between sales tax, seller’s use tax and consumer’s use tax on both their registration application and return.  For more information visit our What is the Difference between Sales Tax and Use Tax? FAQ How the taxpayer registers can impact the return they are required to file and the rate they are required to collect.

Many registration application forms request an average annual liability.  This information is used to determine filing frequency.  Some states permit less frequent filing if the liability is small.  Large liabilities may require more frequent filing or prepayments.

Read forms carefully when answering the average annual questions. On some forms it asks for tax liability, others ask for sales. If the form asks for sales, you need to determine whether it is asking for taxable sales or gross sales and whether it is asking for in-state sales only.

Most applications also request the date that business began in the jurisdiction. This is used to determine if returns are due for prior periods. If a prior period is listed, expect to receive these returns with interest and penalty notices.  If the company should have registered a while ago, there may be options to negotiate settlement in the state.  One consideration is filing under an Amnesty Program.  You can see if a state has a current amnesty program by visiting our Amnesty Resource.

If a registration form is being filed for a business that has had nexus for some period of time, careful attention must be given to answering the date question. Most forms are signed under penalty of perjury, so an inaccurate date could cause problems.

Registration application forms can be obtained from the Department of Revenue of the jurisdiction.  Forms are available on the state web pages and some states also offer online registration.

The Multistate Tax Commission (MTC) had negotiated a special deal for online sellers that may have sales and income tax obligations from previous unpaid taxes in 25 different states. The MTC put together a special amnesty initiative program for online sellers that ran from August 17, 2017 to November 1, 2017. The program is now over. If you didn’t take advantage of the program but realize you need to evaluate your activities, you can contact us here.

NOTE: On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair. This decision overruled the physical presence rule for sales tax nexus for sales made over the internet, meaning states now have right to require tax collection from online merchants and other remote sellers with no physical presence in their states. Looking strictly at the South Dakota economic nexus legislation that was addressed in this case, South Dakota’s law minimizes the burden on out-of-state sellers. The legislation provides a safe harbor for small sellers: a remote seller must make in-state sales exceeding $100,000 or makes 200 or more separate sales transactions in the previous or current calendar year for the nexus provision to apply. The legislation also ensures that the nexus provision does not apply retroactively.

Many other states have enacted economic nexus legislation, some of it very similar to South Dakota’s legislation. To stay updated on this type of legislation, visit our Remote Seller Nexus Chart and our Remote Seller Resources page to see legislative activity in each state. The Court’s decision leaves a lot of questions unanswered, we’ll be working to give you the latest information on the implications of this case. For more information, you can read our blog on the decision or watch Diane Yetter’s live debrief and Q&A session.

Looking for more information on nexus? Check out the following resources: