Sales Tax Registration – What Is It and Why Do You Need To Do It?

Post-Wayfair, it has never been more important to understand your sales tax registration obligations. States across the country are enacting remote seller nexus legislation, which is creating nexus and registration obligations for many more sellers.  If you’re making sales, chances are good that you will need to register to collect and remit sales tax in multiple states.

But there’s a problem: Every state’s sales tax registration process is different. Some state registrations don’t take long to complete and don’t require too much information. Some are hopelessly long, with page after page of information required. And there are often stumbling blocks along the way. For instance:

• Do you know what date business started in the state? (a very important question that most every state will ask)
• How frequently will you file sales tax returns in the state – monthly, quarterly, annually?
• Did you know that you will likely need to share your personal information, such as your officers’ social security number, home address and personal phone number?

And these are just some of the most basic pieces of information you’ll need to provide during the registration process. There are dozens more questions you’ll need to answer, and it’s essential to answer them correctly.

For instance, the date that you select for business having started in the state is used to determine if sales tax returns are due for prior periods. If a prior period is listed, you can expect to receive these returns plus interest and penalty notices.

Why Is It So Important to Register for Sales Tax?

Despite the challenges that come with registering for sales tax across the states, it is imperative that you don’t bury your head in the sand. Since the U.S. Supreme Court’s decision in South Dakota v. Wayfair redefined the rules for what constitutes sales tax nexus, the states have wasted no time going after remote sellers making sales into the state.

As of September 2019, nearly every state that has a sales tax has enacted economic nexus legislation. Don’t know what economic nexus is? Here it is in a nutshell: When a state enacts an economic nexus threshold – typically $100,000 in sales or 200 sales transactions in a year (but it does vary state to state) – you are required to register for sales tax if your sales into that state exceed the threshold.

If your company makes online sales, there is a very good chance that you are making taxable sales into many different states. That means you would need to look at your sales in each of those states to determine if you have crossed those states’ economic nexus thresholds and are therefore required to register.  If you don’t make “online” sales, that doesn’t mean this doesn’t impact you. These new rules apply to every type of business!

Let’s illustrate how economic nexus legislation can create registration obligations for you with an example:

Economic Nexus and Registration

Your company makes online sales into multiple states, one of which is Arkansas. In 2018, your company made $250,000 of gross sales into Arkansas. Are you required to register to collect and remit sales tax in Arkansas? Here are the facts:

• Arkansas enacted economic nexus legislation, effective July 1, 2019.
• The economic nexus threshold for Arkansas is $100,000 in gross sales or 200 sales transactions.
• For purposes of the economic nexus threshold, the measurement date is the previous or current calendar year.

In this example, since $250,000 of gross sales were made into Arkansas in 2018 (the previous calendar year), your company has exceeded one of the economic nexus thresholds ($100,000 in gross sales) and  would be required to register as of July 1, 2019 to collect and remit sales tax in Arkansas.

The States Are Getting More Aggressive

You may say to yourself: “Ok, so I’ve passed the economic nexus threshold and have nexus. I’m still not going to register. Let the state come and find me.” There are many reasons why you shouldn’t take this approach. Here are just a few:

1. The states have gotten increasingly aggressive in finding out-of-state sellers who are required to register in the state. How are they doing this? They have a lot of tools at their disposal, including data analytics, the use of purchased data, web searches and more. It’s a new era and state audit departments are getting more sophisticated in how they track down sellers with nexus in the state.
2. In the wake of the Wayfair decision, some states have subpoenaed Amazon to provide the state Department of Revenue with lists of third party sellers who have inventory in-state. Some of these states are California, New York and Washington, among others. If you make sales through a marketplace provider like Amazon, chances are good that the states are looking for you.
3. If you are required to register and haven’t done so and you get audited for the period in question, you’ll get hit much harder than if you had registered in the first place. Not only will you be liable for the sales tax due, but you will likely get hit with big interest and penalties as well.

It’s this last bullet point that is crucial in understanding why registering to collect and remit sales tax is so important. If you are required to register in a jurisdiction, it is better to be proactive and register before the state finds you. If you don’t register and the state tracks you down, they will look upon you much less favorably. And the interest and penalties due on unpaid tax can be staggering. By taking charge of your sales tax registration obligations, you can avoid paying these unnecessary costs.