As a new business owner, sales tax compliance can be a daunting topic. Getting it right from the beginning is key. We want to help you know what compliance may look like for your business. Here are 6 steps to sales tax compliance that will get you going in the right direction.
1. Know Your Nexus
Start out by asking yourself, do I have nexus?
Briefly stated, nexus is a link or connection to a state that allows that state to impose a sales tax responsibility upon you. Get sales tax right from the get go. There are two types of nexus:
- Economic nexus which gives states the right to force out-of-state sellers to collect and remit sales and use tax if they meet or exceed a state’s economic threshold.
- Physical nexus is when your business has a physical presence in a particular state.
2. Determine Taxability and Responsibility
Product or Service Taxability
- Taxability laws vary from state to state. Every state that imposes sales tax has different categories that may be taxable or exempt from that sales tax. This is important information to help you avoid under or over-collecting sales tax from customers.
Whose Responsibility is it to Collect and Remit Sales Tax?
- This is important information when determining your tax responsibility. If you sell through your own channels, then you probably have the responsibility for collecting and remitting state sales tax where you have nexus. If you sell through a marketplace facilitator, they are most likely responsible for collecting and remitting the sales tax.
3. Register in the States You Have Nexus
You must register for a sales tax permit before you begin collecting sales tax in the states you do business. We recognize it can be confusing but this step simply cannot be skipped.
First, you must determine whether or not you need a sales tax permit in each state. If you have reached nexus thresholds in a state, then you may need to register. If you have nexus and you sell taxable items, then it is recommended to get registered. A comprehensive article written by Tax Valet about state registration has listed out fees per state and items you may need to have to register. This list can vary depending on the state.
- Federal tax ID, typically called the EIN, issued by the IRS
- Knowledge of your business entity structure
- Business owner information
- North American Industry Classification System (NAICS) number
- Start date in the state where you will be permitted
- Your estimated yearly/quarterly/monthly tax liability or gross sales
- Your business address
- The names, titles, home address, and Social Security numbers of the proprietor, partners, or principal officers (mandatory)
- Any former entity Information
- The addresses for all locations where you will collect sales tax
- Some states will also require copies of Articles of Organization/Incorporation, Certificate of Trade Name, driver’s licenses or passports.
4. Determine How To Calculate Sales Tax
All of your sales taxes are shown in percentage format. To find an amount of sales tax, you would multiply the cost of a certain item by the states or jurisdictions sales tax rate to find the total cost and amount of sales tax to charge. For companies with small scale sales tax responsibilities, keeping track of sales tax amounts and rates may be as simple as keeping track on an excel sheet.
However, if your business has larger, broad-range sales tax responsibilities you may find a software program more accurate.
Sales tax automation can provide accurate tax rate calculations and taxability determinations for transactions. Here are some resources that may be a good fit for your business.
5. Establish a Filing Process
Once a business starts meeting sales tax nexus thresholds outside of just your state you will find that you have to now collect, file and remit sales tax in numerous states. Which can be quite a tall order. To complicate things, you must act promptly to remain compliant.
To keep compliant you have 3 options. You can:
- Manage everything in-house; figure it out on your own
- Co-source; do some of it on your own with a little outside help
- Out-source your tax compliance to a sales tax professional
While these are all viable options, we are going to dial in on the top benefits of outsourcing. A lot of times we find that people are afraid to outsource this aspect of their business. Relinquishing control can make people leery. If this is you, here are some benefits to outsourcing that may put your mind at ease.
6. Take Action
At Peisner Johnson we are here specifically to help your business succeed. The key to successful sales tax compliance is education. Knowing the sales tax laws of your state and jurisdiction and knowing where you have nexus can be an overwhelming endeavor. We can make certain you are maintaining compliance in the states you may have sales tax obligations. With us you have unlimited phone and email support to help manage errors found in data and help manage notices. We help you track your nexus and much more. We have a dedicated sales tax professional who will be on your account who you can turn to when sales tax issues arise or an audit turns up.
If sales tax is keeping you up at night, find peace of mind and a good night’s sleep with a “What’s Next Call.” It’s free and we will help you find a better sales tax process that you can feel confident about. We would be honored to work with you.