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’s tax authority 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 should 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 (e.g. Amazon FBA).
On June 21, 2018, the United States Supreme Court made its decision in South Dakota v. Wayfair, Inc. and overruled the traditional physical presence rule as a necessary requirement for nexus and collection requirements on a remote retailer. In states with economic nexus, such as South Dakota, exceeding a dollar sales or number of transactions threshold on sales into a state can create nexus without having physical presence. For more information about the Wayfair decision, read our news item. For frequently asked questions about the decision, including questions about collection, visit our Wayfair FAQ page.
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 will be required to collect or pay. Some states differentiate between sales tax, seller’s use tax and consumer’s use tax both on 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 the 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 very 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 Sales Tax Amnesty Programs By State Chart.
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.
In the fall of 2017, the Multistate Tax Commission (MTC) negotiated a special deal for online sellers that may have had 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. You can also visit our Sales Tax Amnesty Chart to find a list of states with active sales tax amnesty programs.
Looking for more information on nexus? Check out the following resources:
- Learn about nexus and other important concepts with our Sales Tax 101 webinar on-demand
- Download our 5 Things to Understand about Your Nexus Footprint whitepaper.
- Download our Important Concepts in Sales Tax Administration whitepaper.