When to Register for Sales Tax
One of the most frequently asked questions we receive here at STM is “When should I register for sales tax?” The answer is one we use quite often - it depends! This is a very specific question that requires a lot of information to fully answer. You not only need to understand sales tax concepts but also your business and/or personal risk tolerance. It is essential to understand and evaluate these things so that you can answer this question for yourself and ensure you are appropriately compliant with the states.
The Simple Answer
As our founder Mike Fleming has said, “Sellers should register whenever there is nexus, what they sell is taxable, when exposure is material, and a marketplace is not collecting.” Let’s break this down:
Nexus
Determining your nexus footprint is going to be the first step in deciding when to register for sales tax. If you have nexus with a state, it might be time to register with that state for sales tax. If you do not have nexus with a state, there is no need to register with that state for sales tax.
Now you may be wondering, “What in the world is nexus?” Nexus is a link or connection with a state that must be present before a state can require you to collect and remit its sales and use tax. Nexus can be created in many different ways, both physically and economically. Here are some common ways to create a physical nexus footprint, but there are others.
Ownership of real property in a state (warehouses, factories, offices, etc.)
Ownership of personal property in a state (machinery, equipment, etc.)
Leasing of real property in a state (stores, warehouses, etc.)
Leasing of personal property into a state (machinery, equipment, products, etc.)
Use of independent sales representatives or manufacturer’s representatives in a state
Use of sub-contractors in a state for repairs, maintenance, installations, etc.
Travel of employees into a state to conduct sales, training, deliveries, installations, repairs, etc.
Maintaining an inventory in a state, whether consigned, stored, or carried by sales representatives
Delivery of property in seller-owned vehicles
Telecommuting employees or use of a home office
Most states also have an economic nexus, which requires remote sellers to collect and remit sales tax to a state if their sales into that state are over a certain threshold. For example, in Indiana, sellers who have either $100,000 in sales or 200 transactions into the state are required to register. Each state has uniquely defined its economic nexus threshold, what items are included in that threshold, how to calculate your sales, etc. Check out our free economic nexus chart for more information.
Taxability
The next step in deciding if it is time to register with a state is to determine if what you sell is taxable. Each state has its own rules as to what is taxable and what is not. For example, candy in Colorado is generally subject to sales tax; but in West Virginia, candy is generally exempt from sales tax. Some states make it even more complicated - for example, in Iowa, candy is taxable unless it contains flour, then it’s exempt! As you can see, this can be extremely specific and difficult to understand. If you have nexus with a state, and what you sell is taxable in that state, it may be time to register with that state. If you have nexus with a state, but what you sell is not taxable in that state, there is no need to register with that state.
Materiality
Materiality is a concept we have recommended businesses consider when deciding on a registration timeline. It is not something that the states have stated, but we believe it is a good business practice to use common sense when deciding if it is time to register for sales tax in a state.
The states generally believe that you should register once you have nexus or cross an economic threshold. However, if the cost of compliance exceeds the back tax, penalty, and interest, this may not make good common sense for some businesses.
This is what you should consider when determining what is material to you: your risk tolerance, profit margins, and capital reserves. The answer to this question will be different for everyone.
Marketplace collections
Finally, the last thing to consider when deciding if it is time to register for sales tax in a state is whether or not a marketplace is collecting for you. If you are selling through a marketplace, such as Amazon, Etsy, or eBay, sales tax may be collected and remitted for you. If this is the case, you will need to consider each state’s legislation, and whether or not they still require you to register. That information can also be found in our economic nexus chart, which can be accessed here.
Deciding when to register with a state for sales tax is a combination of understanding sales tax concepts and understanding your business. We hope this helps guide you through the decision, but if you require further assistance, please feel free to reach out to us here!
By: Briana Wagner
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.