Sales tax compliance can sometimes feel like a never-ending game of Whac-A-Mole, especially if you're a business operating across various states. Tax obligations can seem to pop up left and right, leaving you feeling perpetually on edge. But navigating sales tax doesn't have to be a knee-jerk exercise; there are ways to bring order to the chaos.
Once you've nailed the “where, when, and how” of sales tax, it gets easier. Step one: Identify where you must collect sales tax. Step two: Secure the necessary license to do it right. Step three: Promptly remit it to the appropriate tax authority.
In this post, we'll place our focus on step two – guiding you through when and how to obtain a sales tax license and explaining how it can effectively keep your business on the right side of tax regulations.
Sales tax is a consumption tax that the government levies on the sale of goods and services. It is typically a percentage of the total purchase price and is added to the cost of an item or service at the point of sale. When a consumer purchases a taxable item or service, they pay the sales tax along with the purchase price.
The responsibility for collecting and remitting the sales tax usually falls on the seller, such as a retailer or service provider. The seller collects the tax from customers and holds it on behalf of the government before remitting it to the appropriate tax authorities.
A sales tax license, also known as a sales tax permit, sales and use tax permit, seller permit, etc., is an official document - a license - issued by a state or local tax authority that gives a business the authority to:
- Conduct taxable retail sales
- Collect sales tax from customers
This sales tax is then remitted by the business to that state tax authority.
In the United States, most states impose a sales tax on the sale of tangible goods and certain services. The exceptions are Alaska, Delaware, New Hampshire, Montana, and Oregon. However (yes, a meta exception, if you will), in Alaska, while the state itself does not impose a sales tax, numerous municipal governments within the state have their own sales tax regulations.
So, if your business falls under the purview of sales taxes in Alaska, you must contact the respective local municipal authorities to understand and comply with their specific sales tax requirements.
Why is acquiring a sales tax license/permit essential?
Acquiring a sales tax permit enables businesses to adhere to tax regulations, ensuring the accurate collection and submission of sales tax to the government. Now, the procedures and prerequisites for obtaining such a permit differ across states, and you are responsible for applying for the permit through the relevant tax authority in a certain state or local jurisdiction. But by staying compliant, you can steer clear of nasty tax surprises and avoid those hefty penalties.
The good news is that sales tax collection is not an arbitrary exercise; you are required to collect and remit sales tax only if your business meets certain criteria in a given state. These criteria largely involve what you sell and where/how you sell it.
Not all goods/services are subject to sales tax. Each state has its own unique set of sales tax exemptions, which can be based on:
- Type of property being sold:
- There are product-specific exemptions for essential items like food, clothing, prescription medicines, and medical (prosthetic) devices.
- Some states may apply lower tax rates to these exempted items.
- Purchaser’s identity:
- Sales to the federal government or its agencies are exempt from sales tax. Similarly, sales to a state and its agencies or nonprofit charitable, religious, and educational organizations are often exempt from sales taxes.
- Use to which the property will be put:
- Exemptions to support specific industries (e.g., agriculture, manufacturing, etc.)
- Incentives for activities promoting the public good (e.g., industrial development, expansion, or pollution control)
Well, for a state to impose taxes on a business, there needs to be a “sufficient” connection (whether physical or economic) between the state and the business. If this connection - or nexus - exists, the state can tax the business. For example, if a business operates a retail store in Florida, the tax nexus is established due to the physical presence of the business in the state. As a result, Florida can tax that business.
So, how is nexus established?
As mentioned earlier, when a business has a physical presence in a state, it establishes a sufficient connection or nexus for tax purposes, which means that the state can tax that business. The criteria for physical nexus may vary from one state to the next but are generally defined by the following factors:
- Employing someone in the state
- Owning physical property in the state
- Renting or leasing physical property in the state
- Storing goods for sale in the state
- Providing goods or services to residents of the state
- Temporarily being present in the state for business purposes, such as setting up a pop-up shop or attending a trade show
Economic nexus is established based on economic factors, which include the following:
- Sales revenue
- Transaction volume
- Number of customers
States set specific economic thresholds. When a business meets these thresholds, it is deemed to have economic nexus and becomes subject to the state's tax laws and obligations, including the collection and remittance of taxes.
Affiliate nexus arises when an out-of-state business entity has an affiliate in the taxing state. States that have “affiliate nexus” laws assume a nexus obligation when there is a connection between an in-state entity and an out-of-state entity that are related, commonly owned or controlled (affiliated), and share certain business characteristics.
Since the affiliation means that the out-of-state entity is "present" in the taxing state, it will have to collect and remit sales tax. Important factors for establishing affiliate nexus include:
- Common ownership
- Selling similar products under the same name
- Involvement in sales-related activities
In situations where an out-of-state retailer lacks physical presence in a specific state, click-through nexus can still be established if they have an in-state affiliate and meet certain criteria.
Click-through nexus laws come into play when an in-state individual or business refers customers to an out-of-state online retailer in exchange for a commission or other consideration. This could involve sharing links, codes, discount coupons, or engaging in marketing and advertising programs.
For example, if an in-state entity guides customers to an online retailer's website from another state and those customers make purchases, it creates a click-through nexus. In such cases, the out-of-state seller becomes responsible for collecting and remitting the relevant sales tax.
Once nexus is established, the next step is to procure a license. But how soon do you need to register? Well, that depends on the state’s law; the timeline differs from one state to another. Some states require businesses to register and start collecting sales tax as soon as they reach the nexus threshold. Conversely, some states provide businesses with a grace period before registration becomes obligatory.
Some states may mandate obtaining a temporary or occasional sales tax permit if you conduct infrequent or temporary sales within their jurisdiction.
In Utah, for instance, temporary sales activities are often categorized as “special events.” These include one-time events or those lasting no more than six months, where taxable sales take place, such as fairs, festivals, conventions, and similar occasions.
Sellers who opt to take part in these special events are required to acquire a temporary sales tax license from the Utah State Tax Commission; in such cases, the license's validity is limited solely to the listed event.
While sales tax compliance can be a relative breeze for businesses operating in a single state, online sellers don’t have it as easy. As you saw earlier, nexus can be established in many ways, so if you are a business operating online, chances are you are subject to the sales tax requirements of various states.
If you do meet the nexus criteria of various states, you will be subject to those states’ sales tax requirements, meaning you must apply for multiple licenses and stay up to date on each state’s sales tax laws.
Typically, a marketplace facilitator refers to an organization that enters into contracts with marketplace sellers to facilitate the sale of products through a marketplace, e.g., Amazon. This facilitator is typically responsible for listing products and directly or indirectly handling customer payments.
In all states with sales tax and the District of Columbia, marketplace facilitator laws have been enacted. These laws mandate that facilitators (both domestic and foreign) with nexus in a state must collect and remit sales tax on behalf of retailers who sell through their platforms. Some states require marketplace facilitators to notify sellers of the fact that they will collect and remit sales tax on the sellers’ behalf.
Certain states also require marketplace sellers to report the amount of sales tax collected on their behalf by the facilitator and file sales tax returns, even if the amount is zero.
First things first: You need to get a sales tax license in each state where you meet the nexus criteria. To apply, you will need to visit each state’s Department of Revenue website. Also, registration is free in some states, whereas in others, a registration fee may apply.
Generally, here are the steps to follow:
- Collate vital information:
- Visit the relevant state’s Department of Revenue website
- Navigate to the “Sales and Use Tax” section of the website
- Click on the link to register your business
E.g., to apply for Michigan’s sales tax license, you can visit its Department of Treasury - Taxes page.
The SSUTA is an initiative that was established in 1999 by a group of states. This agreement simplifies the process of sales tax registration and brings some uniformity in terms of the “streamlined” states’ sales and use tax systems. Currently, 24 states* have passed laws to conform to the Streamlined Sales and Use Tax Agreement. The SSUTA could have the following implications for businesses:
- Simplified tax calculations
- Simplified tax filing processes
- Reduced compliance costs
The states are Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee (which is an associate member state), Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.
You can easily register on the Streamlined Sales Tax Registration System (SSTRS) for these participating states. Upon registering, you will have to create individual accounts with each state. However, you will need to register separately if you have sales tax obligations in any state that doesn’t conform with SSUTA.
In certain states like California, sales tax permits remain valid for the entire duration of your business ownership. Colorado sales tax licenses are typically valid for a two-year period and expire at the conclusion of every odd-numbered year. Even Connecticut sales tax permits are valid for two years and are automatically renewed and, typically, sent to the business at the end of that period.
Given how these rules differ from state to state, you will need to check the requirements for each permit that you hold.
Deregistering, too, is a state-specific process. For instance, some states have in place what is called a “trailing nexus,” which complicates matters a bit. If trailing nexus applies in a state, you will be required to collect and remit sales taxes for a certain period even after your business ceases to meet the nexus criteria. For example, in Washington, once the sales tax nexus is established, it remains in effect for the rest of the current calendar year and the entire subsequent calendar year. So, sales tax obligations apply till the end of that period.
Also, when it comes to deciding whether you should deregister or cancel your sales tax license, there are several factors to consider. For instance, you must evaluate whether future business potential could lead you back to that same state, in which case you would have to register for a permit all over again. In more clear-cut circumstances, such as the closure of your business, deregistering would be an obvious choice.
Another requirement to keep in mind is that so long as you hold a sales tax license, you have to file returns even if no sales were made during the period for which the return is filed.
Given the complex considerations involved and the specific rules that each state follows, you should consult with a tax advisor before making the decision to deregister or cancel your sales tax permit.
- Sales tax compliance for businesses operating across states can be challenging, but understanding the "where, when, and how" of sales tax is crucial.
- Obtaining a sales tax license or permit is essential for businesses to conduct taxable retail sales and collect sales tax from customers.
- Sales tax is a consumption tax levied by the government on the sale of goods and services, added to the purchase price at the point of sale.
- Sales tax exemptions exist based on the type of property sold, the identity of the purchaser, and the intended use of the property.
- Nexus is the connection that establishes a sufficient presence in a state for tax purposes, and it can be based on physical presence, economic factors, affiliate relationships, or click-through activities.
- Online sellers may have to comply with sales tax requirements in multiple states if they meet the nexus criteria in those states.
- The process of applying for a sales tax license involves visiting each state's Department of Revenue website and registering by providing relevant business information and, in some cases, paying a fee.
- The Streamlined Sales and Use Tax Agreement (SSUTA) simplifies sales tax registration for businesses in participating states.
- Sales tax permits may have varying validity periods, with some states requiring periodic renewal.
- Deregistering or canceling a sales tax license involves state-specific processes and considerations, and consulting a tax advisor is advisable before making a decision to deregister.
Understanding nexus and its implications for sales tax collection and remittance is a crucial exercise that every business must undertake. By identifying where and when nexus arises, businesses can fulfill their tax obligations and ensure sales tax compliance across state borders. With a solid sales tax compliance strategy in place, your business can stay compliant and succeed in a multi-state environment.
Fincent: Your Business's Personal Financial Wizard - From Bookkeeping to Tax Filing