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What’s the difference between registering your business and registering for sales tax?

Before you can do business in the United States, you have to register your business with the appropriate local, state, and federal agencies. Depending on the location and nature of your business, you may also have to register to collect sales tax. 

If this is all new to you, you may not fully understand the difference between registering a business and registering to collect sales tax. Read on to find out.

What does it mean to register a business in the U.S.?

Registering a business with the appropriate government agencies lets the authorities know a business exists. To operate legally in the United States, a business typically has to be registered, have a business bank account, and file and pay tax as required by law.

When establishing a new business, you need to decide what type of entity that business will be. There are several different business structures, including corporation, limited liability company (LLC), partnership, and sole proprietorship. Business structure can affect registration requirements too.

Do you need to register with the federal government?

For the most part, you need to register with the federal government if you plan to operate a company under any name other than your own legal name. Obtaining a federal tax ID or employer identification number (EIN) also enables you to hire employees and file certain federal taxes. Operating without the necessary business registrations and licenses can get you in trouble.

There are benefits to obtaining an EIN even if you don’t necessarily need one. It can help you get a business loan, for example, and it can help keep your business and personal finances separate. Having an EIN also boosts business credibility, as it suggests you’re on the up and up. 

Federal registration is also usually required for business dealing in federally regulated activities or products, such as alcohol, tobacco, or maritime transportation.

Read How to register a business for more details.

Do you need to register with the state?

Most states require most entities conducting business in the state to register with the office of the secretary of state or another business agency. You’re generally considered to have business activity in a state where you have a physical presence. This includes having employees in the state, either permanently or temporarily. 

As with federal registration, states may make an exception for certain entities operating under the owner’s legal name. And as with registering with the federal government, there are benefits to registering with the state even if not required.

If you are required to register with the state, you’ll likely register with the secretary of state’s office and/or a business bureau. More than one registration may be required. For instance, on top of the state business license, Washington state requires a special license for anyone operating a salon, shop, personal service, or mobile until in the state. 

Never underestimate a state’s ability to regulate business. You may be surprised to learn that some states have even required lemonade stands to obtain a business license. I’m talking about the lemonade stand you might find on a neighborhood street corner, operated by young children on a hot summer day. For reals.

Do you need to register with the city or county?

While you may not need to register with your local government to form your business, cities and counties require many organizations to register for a local business license. The fees for business licenses vary. In the City of Seattle, for example, new general business license fees range from $68 to $3,011.

Some business types require multiple registrations, licenses, and/or permits. For instance, a convenience store may have to get specific licenses to sell alcohol, tobacco products, prepared food, frozen foods, lottery tickets, and so on. 

Read Business licenses: How many do you need, and how do you get them?

What does it mean to register for sales tax?

Registering your business for sales tax is different from registering your business as a legal entity and obtaining licenses and permits to operate in the United States in general, and in a specific state, county, and/or city. Sales tax registration authorizes your business to collect sales and use tax in the state.

Specific tax registration requirements vary by state, like just about everything related to sales tax. In some states, tax registration may be necessary even if you only sell taxable goods or taxable services to customers that are sales tax exempt.

It’s not advisable to collect sales tax from customers without first obtaining a sales tax permit, though this is one of several common sales tax registration mistakes. If you do, you could be held liable for back taxes as well as penalties and interest charges. After all, you can’t remit the sales taxes you collect without first being registered to file sales and use tax returns.

Check out Sales tax registration: What you need to know for more helpful tips.

What is a sales tax permit?

A sales tax permit is a document that authorizes a business to collect sales tax from customers in the state. Sales tax permits go by different names in different states, including but not limited to retail license, sales tax license, seller permit, vendor’s license. More important than the name is that you have a sales tax permit where required, and that you renew your sales tax permit (if necessary) before the expiration date.

Read What are sales tax permits and does your business need one? for more details.

When is it necessary to get a sales tax permit?

Sales tax permits are required in states where you have sales tax nexus — the connection that triggers a sales tax obligation with a state. There are several ways for a business to establish nexus:

  • Physical presence in the state
  • Sales activity in the state
  • Ties to in-state affiliates
  • Referrals originating in the state

Physical presence includes owning or leasing real property, such as a brick-and-mortar store or office. It can also include having employees in the state, permanently or temporarily, or even having inventory in the state.

Establishing nexus through sales activity in a state is known as economic nexus. All states with a general sales tax now have an economic nexus law and require certain out-of-state sellers to register to collect sales and use tax on retail sales, validate tax-exempt sales by collecting an exemption or resale certificate from customers, file returns, and remit sales and use tax to the appropriate taxing authority on time. Your sales and use tax filing frequency typically depends on the volume of your taxable sales in the state.

All economic nexus laws provide an exception for out-of-state sellers with sales in the state that are beneath a certain sales or transaction volume. Economic nexus thresholds range from $100,000 in sales in the current or previous calendar year to $500,000 in sales and 100 transactions in the previous four sales tax quarters. See our state-by-state guide to economic nexus laws for state-specific details.

Remote sellers can also establish nexus through ties to in-state affiliates (affiliate nexus) or referrals originating in the state (click-through nexus). Approximately 30 states have affiliate nexus laws and close to 20 states have click-through nexus laws.

Do all states have a general sales tax?

Most states have a sales and use tax, as do Puerto Rico and Washington, D.C. There are five states with no statewide general sales tax: New Hampshire, Oregon, Montana, Alaska, and Delaware (sometimes called the NOMAD states collectively).

Alaska is an outlier because roughly 100 local jurisdictions in the state levy a local sales tax. Many cities and boroughs in Alaska require remote sellers to obtain a sales tax permit and collect and remit taxes on taxable goods delivered into the state. The Alaska Remote Seller Sales Tax Commission coordinates sales tax collection for remote sales into Alaska.

Bear in mind that while the other four NOMAD states don’t have a state sales and use tax, they have a host of other taxes. Consult with the state department of revenue or a trusted advisor to determine if tax registration is required for your company.

Do marketplace sellers need a sales tax permit?

It depends.

All states with a sales and use tax require marketplace facilitators to register for a sales tax permit if they have nexus with the state. Registered marketplaces must collect sales tax on all taxable goods and taxable services sold through the platform, including those sold by third-party sellers. Consequently, many states don’t require marketplace sellers to obtain a sales tax permit if they only make sales in the state through a registered marketplace.

But some states do require marketplace sellers to register for sales tax and file returns even if they only sell through a registered marketplace. And of course, marketplace sellers must register in states where they have a business location (i.e., physical nexus).

See our state-by-state guide to marketplace facilitator laws and state-by-state registration requirements for marketplace sellers for more details.

Why you should get a sales tax permit before selling taxable services or tangible personal property in a state

States typically require businesses to obtain a tax permit before they begin business or sell taxable goods or taxable services in the state. And as noted above, tax registration may be necessary even if all your transactions qualify for an exemption.

For remote sellers, specific registration requirements vary. Some states require remote vendors to register as soon as they cross an economic nexus threshold. Others give remote sellers a bit more time.

For instance, once they’ve established economic nexus, remote sellers are required to register with the North Carolina Department of Revenue before the next sale of taxable items in the state. But in Maine, a remote seller has until the first day of the first month that begins at least 30 days after they cross the economic nexus threshold to register. Contact the department of revenue if you’re not sure about a state’s sales tax registration requirements.

Unfortunately, some states don’t have clear guidelines for remote sellers. If you know you have an obligation to collect and remit sales tax but aren’t sure how soon you must register for sales tax purposes, it may be best to register sooner rather than later. A department of revenue typically won’t penalize you for obtaining a sales tax permit a bit early (provided you comply with all tax requirements once registered), but they could hold you liable for delaying your registration.

Check out our Know your nexus guide for more insights, or take a sales tax nexus risk assessment to help determine if you’re registered where you need to be.

Get help with business registration and licensing

One of the first hurdles to registering your business is figuring out which federal, state, and local business licenses you need. Avalara can help: Simply fill out our questionnaire to determine your federal, state, and local licensing requirements, then figure out which of our registration and licensing solutions is best for you: Avalara License Guidance or Avalara License Filing.

See our business licenses and permits FAQ.

Get state-specific information about business licenses and permits.

Learn how Avalara can help you with your business registration and licensing needs.

Once registered, Avalara can help you streamline sales tax collection and remittance. Learn more at avalara.com.

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