Top 5 sales tax registration mistakes that small businesses make
This post was updated in July 2023. Read Five common sales tax registration mistakes for small businesses
When you start out as a business selling products to consumers, you will soon take on another line of business as well — collecting sales tax for the state on your transactions with your customers. One of the first things you need to take care of when you start collecting sales tax is registering with your tax jurisdiction for a sales tax permit/sales tax ID.
As a small business, you probably don’t have a resident sales tax expert on staff to guide you through this process, but you also don’t have a lot of time and resources to spend on learning things the hard way. So why not learn from others’ mistakes?
Here are some of the most common pitfalls small businesses can make when it comes to sales tax registration — and tips on how to avoid them.
1. Failing to register in the right states
If you don’t register in the states where you have a sales tax obligation, you run the risk of penalties, fines and audit. In order to make sure you are registered in the right states, you need to know your nexus.
Nexus is a relationship that you have with a state or locality that obligates you to collects sales taxes there. Nexus is always triggered in a state where your business is physically located, but there are plenty of other ways to trigger nexus, including having employees working for you, making total sales above a certain dollar amount, having online affiliates, regularly attending trade shows, storing goods, using a drop shipper or a distributor based there or having branches in a particular state. Learn more about how to determine nexus here.
2. Registering in the wrong states
Registering where you aren’t required to can cost you extra time and money. In addition to paying any registration fees, once you’re registered, you will required to file each reporting period as well. In the vast majority of states, you are required to file even if you haven’t actually collected any sales taxes. This unnecessary burden can be avoided by knowing your nexus and only registering where you have an obligation.
3. Streamlined Sales Tax mistakes
The Streamlined Sales Tax, or SST, is an effort by states to reduce the burden of sales and use tax collection, administration and compliance. In the 24 states that participate, you can use one registration form to automatically register in all SST states. These are Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. Registration with Tennessee is optional.
Registering with the SST can save you time and money if you are doing business or plan to do business in many of the SST states. However, if you are only doing business in a few SST states, it may not make sense to use SST registration.
During the SST registration process, you can indicate that you don’t have any sales in a given SST state, and while you will be licensed, you will not be required to file returns until you have applicable sales. However, if you don’t indicate this, you will be required to file in all SST states, whether you have sales there or not.
4. Using the wrong NAICS code
When you register for a sales tax permit, you must categorize your industry with a North American Industry Classification System (NAICS) code. For example, one commonly used NAICS code is for “internet retail sales.” All internet retailers, regardless of the specific products they sell, register using the same code. You can search for your code on the NAICS website.
It’s important to use the right code because states use this to send you any information you might need to know regarding sales tax in your industry. If you use the wrong code, you may miss crucial updates.
5. Failing to deregister properly
When your situation changes and you no longer have an obligation to collect sales tax in a state, you need to follow a formal process to deregister. This can vary from state to state. Some states may consider you to have nexus for six months or longer after you request to cancel your registration, for instance. Make sure you know the requirements in your state in order to get it done right.
6. (BONUS!) Manually collecting, preparing, and filing sales tax returns
Once you’ve successfully registered, the next step is collecting, filing and remitting sales taxes. For a small business, figuring out the requirements and carrying them out can be a lot of work that takes resources away from the core of your business. Sales tax automation software can help. Avalara Managed Returns integrates seamlessly into the most popular ecommerce or accounting systems, streamlining compliance.
Stay up to date
Sign up for our free newsletter and stay up to date with the latest tax news.