How well do you comply with sales tax regulatory requirements?
Each of us should eat right and exercise, and every business should collect sales tax, file returns, and remit payments correctly and on time. Yet just as tasty treats and busy schedules can derail healthy choices, varying rules and requirements can make the seemingly simple task of sales tax compliance surprisingly difficult.
There’s no one panacea for sales tax compliance — though sales tax software comes close. Instead, it requires a willingness to get informed, stay informed, and diligently do what needs to be done. The following information can help you succeed.
Nexus: where you do and don’t have it
Nexus is the link between a business and a state that enables the state to impose a tax collection obligation on the business. In other words, if you have sales tax nexus with a state, you’re required to register with the tax authority, collect and remit sales tax, and file sales tax returns.
Nexus used to be largely predicated on physical presence, which made determining it relatively straightforward (though there are exceptions to every rule regarding sales and use tax). However, the Supreme Court of the United States overruled the physical presence rule in its decision on South Dakota v. Wayfair, Inc. (June 21, 2018). Since then, approximately 35 states have broadened their nexus laws to include varying criteria, such as economic activity in the state.
It’s easier than ever to trigger nexus in multiple states, and it’s harder than ever to keep track of evolving nexus laws. This up-to-date chart of state nexus rules can help you find your footing.
Registration: where to start
Once you’ve determined you have nexus with a state, you need to register to do business in that state. Since the process differs from state to state, contacting the state’s tax authority (known variously as the department of revenue, comptroller, tax commission, etc.) is a good place to start.
You may also want to consider registering through the Streamlined Sales Tax Registration System (SSTRS). The Streamlined Sales and Use Tax Agreement is an effort by states to simplify and reduce the costs associated with sales tax compliance, especially for remote businesses. There are currently 23 full member states and one associate member state, and it’s possible to register with all of them with one form. Avalara can help with the registration process.
Efiling: Should you?
Some states require some or all businesses to electronically file and remit sales tax. Electronic filing may hinge on the overall volume of your sales in the state, or the amount of an individual return. Since rules vary from state to state, as is usually the case with sales tax, it’s always advisable to seek advice from the state tax authority or a trusted tax advisor.
Late filing: how to avoid it
Tardiness happens, but it pays to do whatever it takes to ensure you file and remit sales tax on time. For that to happen, you need to keep track of due dates in all jurisdictions where you file — and yes, they vary. Furthermore, your filing frequency can change, as it’s often based on the amount of sales tax you owe. The general rule of thumb: the more sales tax you owe, the more frequently you have to file.
Late sales tax returns and payments can quickly lead to penalties and interest charges that escalate until paid. They also flag your account, drawing the attention of auditors.
On the flip side, some states reward businesses for filing and paying sales tax on time by allowing you to keep a portion of the tax you owe. In other words, sales tax compliance can pay.
Sales tax prepayments: Who must make them?
The prepayment of sales tax is a requirement for some businesses in some states, including California. It’s often dependent on the amount of sales tax owed; for example, in North Carolina, taxpayers who are consistently liable for at least $20,000 per month in state and local sales and use taxes are required to make prepayments. They’re also a common requirement for sellers of certain products, such as motor fuel and tobacco products.
Prepayments may follow a unusual filing schedule, so it’s important to know if you’re required to make them in any of the states where you file, and when they’re due.
Automation: why you should consider it
It’s challenging for businesses, no matter their size, to keep track of sales and use tax collection, filing, and remittance requirements in multiple states. One of the best ways to ensure you get it right is to automate sales tax compliance.
Want to know more? Get the updated Sales and Use Tax For Dummies.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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