Five common sales tax registration mistakes for small businesses
When you started your business, you may not have realized that you’d also be taking on a second role: collecting sales tax on behalf of one or more states. Yet like it or not, collecting and remitting sales tax is a reality for businesses. And before you can collect sales tax from your customers, you have to register for sales tax and obtain the necessary sales tax permits and ID numbers.
As a small business, you probably don’t have a resident sales tax expert on staff to guide you through this process. It’s also likely you don’t have a lot of time and resources to spend learning things the hard way. So why not learn from others’ mistakes?
Here are some of the most common sales tax registration pitfalls that can catch small businesses — and tips on how to avoid them.
1. Failing to register for sales tax 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. To make sure you’re registered in the right states, you need to know where you have nexus.
Nexus is a connection between your business and a taxing authority — a state or locality — that obligates you to collect sales taxes there. There are several ways for a business to establish nexus, including through ties to in-state affiliates. Perhaps the most common ways for a business to create nexus today are through economic activity or physical presence in a jurisdiction.
Physical nexus is established through a physical tie to a state, so you’ll always have nexus with the home state for your business and with states where you rent or own real property. But you can also establish physical presence nexus outside your home state: Having employees, storing inventory, or participating in trade shows or other events in another state can give you physical nexus and an obligation to register then collect and remit sales tax.
Bear in mind that rules governing physical nexus vary from state to state. For example, physical presence in Washington state “need only be demonstrably more than a slightest presence.” Connecticut requires you to obtain a sales and use tax permit if you plan to make sales at a trade show in the state even if for only one day. And you’re required to register for a California seller’s permit if you take orders while participating in a convention or trade show in California.
Economic nexus impacts businesses with no physical presence in a state, also known as remote sellers. You’ll establish economic nexus and be required to register for sales tax with a state if your sales in that state meet or exceed the state’s economic nexus threshold.
Every state has a unique economic nexus threshold. Florida’s threshold is $100,000 in taxable sales of tangible personal property in the previous calendar year. New York’s threshold is $500,000 in sales and 100 transactions of tangible personal property in the immediately preceding four sales tax quarters. The Illinois threshold is $100,000 in sales or 200 transactions in the preceding 12-month period. You can find state-specific details in our state-by-state guide to economic nexus laws.
In some states, you’re required to register for sales tax as soon as you cross the economic nexus threshold and start collecting sales tax on the very next transaction. Other states give businesses a bit more time, and unfortunately, some states don’t specify how quickly a business needs to register after establishing economic nexus.
2. Registering for sales tax in the wrong states
Registering where you aren’t required to register can cost you extra time and money. In addition to paying any registration fees, once you’re registered, you’ll be required to file each reporting period. In the majority of states, you’re required to file a sales tax return even if you haven’t made any sales or collected any sales taxes. This unnecessary burden can be avoided by knowing your nexus and only registering where you have an obligation.
3. Not taking advantage of the Streamlined Sales Tax program
The Streamlined Sales Tax program, 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, businesses can use one registration form to automatically register in all SST states.
SST member states 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. Tennessee is an associate member state, so registration is optional.
Registering for SST can make sales tax compliance in SST member states much more streamlined and less burdensome, especially for businesses with a high volume of sales into multiple SST states. Additionally, businesses that qualify as volunteer sellers can avoid the standard fees for registration, transactions, and filing in SST member states when they use a Certified Service Provider like Avalara.
Click here to learn more about SST requirements and benefits.
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.
Note that NAICS codes can and do change over time. For example, one commonly used 2017 NAICS code, 454110 – Electronic Shopping and Mail-Order Houses, was split and distributed across 42 different retail trade industries in 2022. One reason for this change could be that the former NAICS code for online stores, 454110, was determined to be unintuitive and “one of the more difficult for online retailers and ecommerce sites to identify.”
You can search for your code on the NAICS website, where you’ll also find NAICS FAQs.
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. Per the New York State Department of Taxation and Finance, “The NAICS code you choose should be the one that most closely relates to your principal business activity.” If you use the wrong code, you may miss crucial updates.
5. Failing to properly deregister for sales tax
When your situation changes and you no longer have an obligation to collect sales tax in a state, you must follow a formal process to deregister. This can vary from state to state.
Due to a concept known as “trailing nexus,” a state may require you to maintain your sales tax permit and file returns well after you make your last sale into the state. Although they can’t require a remote business to hold a sales tax permit indefinitely once all nexus-creating activity has ceased, states can enforce trailing nexus for weeks, months, or even years.
Trailing nexus often works a little differently for physical presence nexus than it does for economic nexus.
If an out-of-state seller were to spend a few days in Michigan to conduct activities to maintain its market in the state, for example, it would have physical nexus with Michigan beginning on the second day of contact and would have to file sales and use tax returns for the remainder of that month and for the next 11 months.
Yet if a remote seller were to establish economic nexus with Michigan, it would need to continue to file returns “until an entire calendar year passes in which it does not meet either of [Michigan’s] economic thresholds.”
Most states require remote sellers to collect tax in the year following a year in which the business meets an economic nexus threshold, regardless of their sales volume in the state that following year.
Here’s more information about deregistration for remote sellers.
6. (BONUS!) Manually collecting, preparing, and filing sales tax returns
Once you’ve successfully registered your business, 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 Returns for Small Business integrates seamlessly into ecommerce or accounting systems to streamline the returns process.
Avalara can also simplify sales tax registration by preparing the necessary forms and paperwork, filing it with the appropriate tax authorities, and paying state-level registration fees. Learn more about Avalara for Sales Tax Registration.
This is an update to a post first published in 2016.
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