Once business owners realize they have sales tax nexus, it is important to understand the registration options that come next. You may have done your research when you first heard about the recent Supreme Court case South Dakota vs. Wayfair that changed United States sales tax law forever. First, you may have looked into what “nexus” means and then learned about the new economic nexus laws that are being enacted across the country. If your annual gross sales or transaction count surpassed a state’s threshold, you probably realized you had nexus with that state. The question left is: what next?
The very first thing a business owner should do before moving forward with sales tax compliance in a state is to make absolute sure the business really does have nexus. The economic threshold laws at first may appear black and white. However, these laws are not as clear as they may seem.
For example, the most common economic nexus threshold is 200 transactions or $100,000 in gross sales. However, states take different positions regarding what constitutes $100,000 in gross sales or 200 transactions. Some states include exempt sales while others specifically exclude wholesale and other exempt sales. If you have a business that makes both wholesale sales and retail sales, you may end up registering in states with which you don’t have nexus if you aren’t aware of what sales count towards these thresholds. Don’t count on states to let you know you don’t need to register. They are happy to take “voluntary registrations” and receive additional tax money from you.
If you are 100% sure you have nexus with a state, then you must decide how to proceed with proper compliance. Unfortunately, many states are unclear on their own procedures for remote sellers to get registered. As such, business owners must be prepared and educated on all avenues available to them. Generally, taxpayers can go one of three routes: (1) register through a special remote seller registration; (2) register through a traditional registration process; (3) apply through a voluntary disclosure program.
1. Apply through a special remote seller registration
Some states have it together when it comes to the recent changes in US sales tax law for remote sellers. These states have not only passed laws requiring remote sellers to collect and remit tax, but they’ve also developed the internal infrastructure to transition these remote sellers into state taxpayers. Such states have published guidances for taxpayer convenience and have landing pages on their website with specific instructions and FAQs answered exclusively for remote sellers. Department of Revenue employees in these states generally are on the same page regarding the intake of these registration applications and there are clear procedures in place for each step of the process.
States such as the ones described above typically have a special remote seller registration process. It is important that remote sellers do not try to register themselves with the state through traditional means when the option of a special remote seller registration is available. Filers through the remote seller program may find the Department to be more lenient on taxes for prior periods during which sellers failed to collect tax.
2. Apply through a traditional registration
States that have passed new nexus legislation but haven’t updated their policies and procedures may direct remote sellers to apply through traditional registration programs. These registrations do not always appropriately apply to the situations remote sellers have found themselves in with the state. While some states have modified their traditional registration application to accommodate remote sellers, many have not. As such, taxpayers are often left unsure how to approach certain parts of these applications. It is not as easy as calling the Department of Revenue in a particular state and asking for an answer to questions as they arise on the application. Unfortunately, it is not uncommon to get different answers from each person you speak with in states that have no clear policies for remote sellers in the books.
As a result, remote sellers must be extremely careful answering questions on their sales tax applications. It is not only the questions that are obviously unclear to be wary about. It is also the questions that may be clear to a traditional, in-state seller but are ambiguous to a remote seller, that must be paid careful attention to. The failure to properly execute these forms could trigger an audit and assessment for back taxes.
3. Voluntary Disclosure Programs
Most states offer voluntary disclosure programs in which taxpayers fess up to the liability they have and the state, in return, generally promises not to audit the taxpayer for past periods on that issue. Each state has a slightly different version of this program, but their goals are the same: to get taxpayers compliant going forward while limiting past liability.
Some remote sellers have applied through voluntary disclosure programs to limit their liability. In certain circumstances, this might make sense in states that take the position their remote seller nexus law goes back farther than a year. However, the majority of these new laws were enacted at the end of 2018 and the beginning of 2019. As a result, most states are directing taxpayers to simply register rather than apply through these programs.
As more business owners educate themselves on the new nexus laws sweeping the nation, it is vital they understand not only how those laws apply to them but also what to do once nexus attaches. How taxpayers approach the registration process could potentially determine whether an audit is triggered and an assessment is issued. Therefore, taxpayers anxious to become compliant should first make sure they are clear on all their options going forward and understand the potential complications that may arise under each.
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.