6 common sales tax registration and filing errors
Sales tax registration and filing rules are unique to every state
Sales tax filing and reporting rules vary between jurisdictions in material ways. Each state has unique filing schedules, forms, payment thresholds and other administrative requirements that can trip you up. Understanding these common sales tax registration and filing errors will help your company avoid costly penalties and fines and ultimately strengthen the bottom line.
Here are some common filing and registration errors and how you can help your clients address them:
1. Not knowing where your business has triggered nexus
Identifying where your company has nexus gives you a leg up on the competition.
Whether a company has a sales tax obligation is the crux of the sales tax challenge. There are approximately 12,000 jurisdictions within the U.S. and 100,000+ rule changes annually; that’s a daunting set of variables few manual systems can handle. The connection between a company and a state, in which the company acts as an agent of the tax authority and collects and remits accordingly, is called “nexus.”
Nexus can be triggered by a physical presence in a state, such as a warehouse or distribution center, or a virtual connection, such as a remote relationship with a vendor or online advertiser. Some large online retailers now voluntarily collect sales tax in states in which they have neither distribution centers nor warehouses.
Determining where a business has nexus is complex, especially for businesses selling into multiple states. A nexus study can be a worthwhile investment to ensure compliance.
2. Failure to register your business to collect sales tax
Knowing where, when, and how to register to pay tax is crucial.
Once a company determines where they have nexus, they are then required to file and remit sales tax accurately and on time to the applicable jurisdictions. Other than employment and income tax, the most common type of tax requirement is sales tax.
Sales and use tax obligations and filing requirements can confuse even the most knowledgeable tax analyst. Additional registration is required in states in which these entities transact business. Business registration is required in most states for organizations formed as a corporation, nonprofit organization, or a limited-liability partnership. For businesses selling into states participating in the Streamlined Sales Tax (SST) project, one form can be used for all participating states. However, in some cases, states may require additional forms to complete the sales tax registration process. For businesses selling into non-SST participating states, or into only a few SST states, individual registration rules and requirements can be found on the individual state sites.
Sales and use tax registration differs from state to state. One form may be used to register in the 24 states participating in the Streamlines Sales Tax (SST) project; however, in some cases, even SST states may require additional forms to complete the registration process. Registering to sell in non-SST states or only a handful of SST states requires additional steps, with added complications.
3. Filing the wrong sales tax return forms and formats
Keep a list of states that currently require e-filing and that might institute similar requirements this year.
Following the example of the IRS, many states are starting to require electronic filing and payment of sales tax. Knowing which states have which requirements is challenging, as requirements change frequently. Depending on where your client’s company is registered and where they have nexus, they might be required to file electronically for all returns, or some, or depending on the amount of the return.
In Indiana, all business tax forms must be filed electronically. In New York, e-filing is only required for businesses with broadband Internet. As more states move filing and remittance online, your clients can go to individual state sites for information, or turn to you for the expertise they need to stay compliant.
4. Missing sales tax filing deadlines
Identify changes to state filing schedules, as well as tax amounts that might trigger prepayment or a different filing schedule.
Late filing is not only an easy way to incur fines and late fees; the consistent late payment of sales tax obligations can be a red flag for over eager auditors grasping for more revenue on behalf of struggling states.
States often require multiple filing dates, depending on the amount of the remittance. They also frequently make allowances made for companies that consistently demonstrate accuracy and timeliness. Some states also periodically offer amnesty for overdue tax liabilities.
5. Remitting the wrong amount of sales tax
Reconcile transaction records with sales tax payable accounts.
Return preparation is driven by data, great volumes of which can lead to inaccuracies and oversights, particularly when calculations are handled manually.
Be sure to check the prepayment requirements in applicable jurisdictions. A number of jurisdictions (including California, Mississippi, and North Carolina) require prepayment for larger tax amounts. Some prepayments involve a different filing schedule than regular returns, and some prepayments are due more than once a month. If your clients are required to make prepayments and remit sales tax in multiple jurisdictions, they could end up managing multiple filing schedules. Encourage clients to adjust calendars accordingly!
6. Failure to automate sales tax compliance
Of course, one of the best ways to stay on top of filing, registration and remittance is to utilize automated systems. Avalara Returns for Small Business is one such option. Returns for Small Business helps ensure end-to-end automation of your clients' sales tax compliance process. In addition, it ensures the right amount is remitted to the right taxing authority at the right time, dramatically shrinking the time client companies spend on sales tax return processing.