Stay informed about sales tax regulations, regularly assess activities for registration obligations, and seek guidance from tax advisors to avoid these pitfalls and get business registrations right.

By Connie Zoerink

If a taxpayer is transacting business in the U.S., they will most likely have a state and local tax (SALT) obligation. Sales tax registration is required to comply with this obligation in jurisdictions where business was transacted. When and how to register can be perplexing for the uninitiated, creating potential pitfalls that businesses should be aware of to avoid issues and ensure proper compliance. Here are some common pitfalls we have seen regarding sales tax registrations. 

1.         Registering Late 

Failing to register for sales tax in a timely manner often happens because businesses underestimate the speed at which they reach registration thresholds. Many businesses are not even aware of the thresholds or activities in the state that could create a registration requirement. Late registration can lead to potential penalties. 

2.         Ignoring Nexus 

Nexus is the connection a business has with a state that requires it to collect and remit sales tax. Physical presence nexus and economic nexus co-exist, creating a wide net of compliance obligations. Businesses that fail to understand the breadth of these nexus requirements can end up overestimating or underestimating their obligations in certain jurisdictions. 

Businesses that fail to monitor their economic activities in various states may find themselves unintentionally non-compliant. Economic nexus makes an out-of-state seller liable to collect sales tax in a state once a set level of transactions or sales activity is met. These sales tax thresholds relate to the number of transactions or the dollar value of the transactions, which are set on a state-by-state basis. Every state has different laws and rules making it particularly difficult to track, monitor and implement.

3.         Registering Errors 

Inaccurate or incomplete information on the registration can cause delays, and in some cases, may result in fines or penalties. 

4.         Ignoring Business Activities 

How a business is characterized, or how the business characterizes their activities, matters when is comes to state and local tax. Changes in those business activities can impact sales tax obligations, creating the need to update registrations to avoid non-compliance. 

5.         Ignoring Local Taxes 

Some jurisdictions have local sales tax requirements in addition to state-level obligations. Ignoring local tax registration requirements can result in non-compliance and potential penalties. 

6.         Assuming Marketplaces Compliance 

Businesses often look to an online marketplace provider to cross t’s and dot i’s of sales tax. But what happens when the marketplace is in error and fails to fully collect sales tax? That failure can become the businesses’ cross to bear. So, when it comes to online marketplaces, taxpayers must “trust but verify”, meaning taxpayers must understand their responsibilities and ensure they comply with all applicable tax laws, regardless of what the marketplace provider does. 

7.       Who Does What? 

Lack of communication within a business between the sales, finance, tax and legal teams can lead to the possibility of overlooking sales tax registration requirements. Post-registration, this can lead to a failure to monitor and update exemption certificates and fulfill other administrative duties related to sales and use taxes. 

What’s a Business to Do?

Now that we’ve covered what not to do, here’s a list of items businesses should do when it comes to business registrations.

  1. Be timely! Taxpayers affirm to the date the business started under penalty of perjury.
  2. Complete all information accurately, especially FEINs.
  3. Know the type of business (wholesaler, retailer, contractor, etc.).
  4. Make sure you have “checked” all relevant tax types or have considered them as you register, particularly if the other tax types are triggered when registering for one type of tax (e.g., register for sales tax but not income tax).
  5. Check for the local requirements (city, county, special district, etc.) and the need to file with the Secretary of State.
  6. Find out what compliance obligations you will have and the timing (e.g., filing sales tax returns quarterly).
  7. Do not register if working through a Voluntary Disclosure Agreement or amnesty program as the registration process is completed with these remediation strategies.
  8. Check with a marketplace facilitator if using that as the sales platform to make sure compliance is happening, either by them or you!

Businesses that stay informed about sales tax regulations, regularly assess activities for registration obligations, and seek guidance from tax advisors are best positioned to avoid these pitfalls and the costly consequences of getting sales tax compliance right. Businesses that forget, or ignore, registration requirements may be eligible for a Voluntary Disclosure Program or other remediation strategies. Contact your TaxOps Advisor for more guidance.

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