Now more than ever, businesses are finding that they need to obtain sales tax ID numbers in the states in which they are doing business. But how, exactly, do businesses go about getting a sales tax ID? Since the Supreme Court of the United States held in South Dakota vs. Wayfair that states could require businesses to collect and remit tax when certain economic nexus thresholds are met, sales tax law has changed dramatically across the country. Taxpayers are eager to comply to avoid future audits and assessments, but many small business owners may not have obtained a sales tax ID since they first opened their business decades ago. Not only may owners not remember the process of obtaining a sales tax ID in their home state, but they may also be clueless on how to get sales tax IDs in other states. Below is a step by step guide to assist taxpayers in obtaining the sales tax IDs they need in a post-Wayfair world.
Identify What to Register For
You may already know that you require a sales tax ID with a state. But what kind of sales tax ID do you need to apply for? Also, what other taxes may you be required to pay in addition to sales and use tax? Taxpayers may not realize until after they’ve gone too far down the registration process that they are on the hook for much more than sales tax as a result of their application for a sales tax ID.
To start, business owners should be aware that there are different kinds of sales tax registrations depending on what state you are dealing with. The above-mentioned Wayfair case concerns primarily remote sellers. Such sellers typically operate within one, or a few states, but make sales across the country. Generally, such sales are facilitated by the internet, or third-party marketplaces such as Amazon or Ebay. Under new, economic nexus laws, such retailers are required to collect and remit in the states in which they do business if such sales surpass state-defined economic thresholds.
What Kind Of Sales Tax ID Do You Need?
To facilitate the process, some states have created special Remote Seller Use Tax registrations. While they may go by different names, the concept is the same: the remote seller is responsible for collecting their customers’ use tax and remitting it to the state. While sales tax and use tax are complimentary taxes, it is still a different registration such taxpayers will have to apply for. At the end of the registration, taxpayers may not receive a sales tax ID but rather a use tax collection identification number or some other sort of designation with the state.
Alternatively, other states encourage remote sellers to apply through a traditional sales tax registration program. While the process may seem simpler, taxpayers may encounter confusing questions on their applications that fail to accurately describe or reflect their business. Traditional sales tax registration applications likely are contemplating a seller physically located within their state and are not modified to accommodate the different facts applicable to remote sellers. If such questions are left blank, it could result in the application being bounced. Alternatively, if a confused taxpayer answers an ambiguous question incorrectly, it could result in an assessment. As a result, it is vital for taxpayers to carefully fill out these forms and consult with a professional when necessary.
What Kind Of Taxes Will You Need To Register For
It may not be as simple as registering to obtain a sales tax ID number with a state. In fact, it may not even be as simple as one application per state. Some states require remote sellers to first register with their secretary of state and obtain a business license with the state prior to applying for a sales tax ID number. Only once the business license is granted can a remote seller then apply for a sale tax identification number.
In addition to a business license, some states will require lengthy applications to see if you qualify to pay other taxes within the state. Such taxes could be the more obvious ones, such as corporate income tax. However, other states have unique taxes on certain industries, such as alcoholic beverages and tobacco, gambling, soda, or other taxes that can vary state to state. In addition, some states have passed strict environmental taxes that may apply to an industry, products that use specific materials, or services that cause or potentially bring harm to the state’s land, water, or air. These unique taxes not only vary state to state, but also vary locality to locality. Therefore, it is important for business owners to understand what types of unique taxes their sales may be subject to in different taxing jurisdictions and register accordingly to pay them.
Once you have determined that you need to register with a state, the obvious next step would be to register with the states for which you require a sales tax ID number. The applications vary dramatically from state to state, ranging from a one-page North Carolina registration to a large packet from Pennsylvania. However, there are certain tricky questions that are prevalent amongst applications that taxpayers should understand the full consequences of.
Applications will ask you in a variety of ways for the date at which you began doing business with the state. Many taxpayers are under the misconception that the date they put here is irrelevant for purposes of their registration, and that they will only be required to collect and remit from the date at which they apply for or receive a sales tax ID number. While this may seem like a logical conclusion, it unfortunately could not be further from the truth.
What states are effectively asking when they pose the question “what is the start date of your business within the state” or “what date did you begin making sales into the state” is how far back they can go in collecting unpaid taxes. In fact, it is not uncommon for states to issue, along with your brand new sales tax ID number, an audit going back to the start date you filled out on the registration form.
So what is a new registrant to do? Unfortunately, there is much debate in the tax community and amongst the states over what the appropriate response is to the “start date” question on sales tax registration applications. The categories of responses to this generally fall into three categories: (1) put the date of the first sale into the state, regardless of how many years, or decades, back that date is; (2) put the date on which the economic nexus legislation became effective; (3) put the date on which the application is filled out. There are pros and cons to each of these paths, but with the states unclear or uncertain in the proper tax treatment of remote sellers in the wake of Wayfair, it ultimately comes down to what business owners feel the most comfortable doing.
As mentioned above, putting the date at which the first sale was made into the state is risky business. While it may be the most conservative answer you can put on the form, it is not quite accurate in the sense that at the time of that sale, it was likely not subject to tax if you did not have physical presence in the state. Therefore, it was not your first taxable sale into the state. Some states will specifically address whether they are looking for your first taxable sale while others leave it ambiguous. Regardless, putting the date of your first sale ever into the state puts your business at risk for an audit, or even an assessment, back to the date of that very first sale.
The second option of putting the date at which the state’s economic nexus legislation became effective is a more moderate approach to the issue for remote sellers. The theory behind this position is that none of your sales were taxable until the law became effective that imposed tax on transactions by remote sellers. Once that date passed, you made your first taxable sale into the state if you met the threshold established in that state.
The third approach of putting the date at or around which you are submitting the application is surely the most aggressive position. While there is no clear answer from states about this approach, there is an argument for its use. For practical purposes, putting this date is convenient when it is the start date of when you begin collecting and remitting within the state. It is effectively telling the state “I am starting to collect and remit from this date and you can expect to receive taxes accordingly.” If the states want you to pay taxes for an earlier period during which you were not collecting from your customers, this approach effectively puts the burden on the state to come after you directly for that money rather than offering it to them on a silver platter.
In the aftermath of dramatic sales tax law changes across the country, many DOR representatives will informally instruct you over the phone to take this third approach although it may not technically be the correct date requested on the form. From their perspective, they are gaining a new taxpayer who will collect and remit taxes to the state, therefore increasing the state’s revenue going forward. Rather than put the time and resources into hunting down back taxes they may not be entitled to, they will simply accept the revenue windfall going forward. Of course, no state has formally taken this position and DOR employees, even at the same state, can vary on what they believe is the right date. However, putting the date of registration is generally the most favorable approach for taxpayers and with some support for it, many taxpayers are eager to pursue this path.
Ultimately, with conflicting information coming from confused states, there is no clear answer on what the “start date” is of your business activities in the state. Rather, it is up to the taxpayer decide which date they are comfortable putting. The earlier the date, the more likely an audit or assessment will be issued. Meanwhile, later dates may be challenged by aggressive states under audit down the road.
If you think the burden of registering in all the states with which you have nexus is a burden, get ready for the disaster that is local tax registration. Many states have local taxing districts with “home rule,” meaning that they administer their own taxes. These can be counties, cities, special districts, even parishes if you’re in Louisiana. Often such local taxes are higher, and sometimes even more than double, the overall state sales tax rate you’ve registered to pay to the state taxing authority. The result of an error regarding local taxes can be more devastating than an error regarding state tax registration, and many taxpayers are still completely unaware that they need to register for them!
For example, State A’s sales tax rate is 3%. Meanwhile, Home Rule County B imposes local sales tax at a rate of 5%. In total, Taxpayer’s sale to Customer is subject to 8% sales tax. If Taxpayer is only registered with State A, they are probably only collecting and remitting 3%. Home Rule County B, as a home rule county that administers its own taxes, can audit Taxpayer for the 5% sales tax owed to the locality. Because Taxpayer is not registered with Home Rule County B, the county may be able to audit Taxpayer since the beginning of its business to assess taxable sales into the locality. Depending on the Taxpayer’s sales volumes, they could potentially owe Home Rule County B more local taxes than they owe sales taxes to the entire state.
As a result, it is vital for taxpayers to be aware of all the local jurisdictions in which they make sales and the cost/benefit of registering in these localities. It may be too much of an administrative burden on a mid or small size business to register in every locality, and they may prefer to pay tax if assessed instead of incurring the compliance cost going forward. Alternatively, if sales are concentrated in a particular home rule locality, it may make sense to register there while not in other localities.
Getting a sales tax ID number is not as simple as one might think in a post-Wayfair United States. Overnight, taxpayers have gone from functioning under a somewhat reliable, albeit flawed, sales tax scheme to an entirety ambiguous one. Worse, states are more aggressive than ever in their demands on taxpayers while simultaneously providing little guidance to them moving forward. Taxpayers who have realized they need to get a sales tax ID number in numerous states should anticipate a time consuming, transitional period as they navigate the nuances of each state’s new tax laws and all the uncertainty that goes along with them. 2018 changed how businesses will operate forever. However, it will likely be the decisions of 2019 and 2020 that determine what exposures a business will face in the decades to come.
Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.