Sales tax registration is a complex process that tends to confuse many taxpayers. But for businesses with a sales tax responsibility, getting registered is the only path to compliance. In this post, we demystify the registration process by answering six of the most common questions.
Sales tax registrations are essential to compliance.
And while there are a number of paths for getting compliant and dealing with unpaid taxes – like VDAs, amnesty programs, negotiations, audits – you won’t be compliant in a state until you complete your registration.
Unfortunately, many businesses are collecting tax but are not actually registered. This is a huge problem because most states consider this fraud. To get compliant and avoid legal and financial penalties, you’ll need to get registered to collect and remit the sales tax.
Here are the six most common questions we get asked about doing just that.
How Do I Register?
Despite all of the confusion, registering is a fairly straightforward process that requires only five steps:
- Prepare your application
- Submit to state
- Start collecting tax
- Receive a registration number and filing frequency
- Maintain ongoing compliance
In the rest of this post, we’ll break down these steps in detail, as well as answering common questions about the registration process.
How Do I Know If I Should Register?
Your business should register for sales tax as soon as you have sufficient nexus – or footprint – in a state.
There are two types of nexus to look out for:
- Physical nexus is when your business has a physical presence in a particular state. (Think inventory, employees, offices, etc.)
- Economic nexus 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.
When you meet either of these conditions, you’ll need to register to collect and remit sales tax in that state. And you’ll need to conduct this review and registration process for every state where you do business. For larger businesses, that could be as many as 45 states and Washington D.C.
How Frequently Do I Have to File Returns?
After completing the registration, the state will issue you a filing status that determines how frequently you will need to file your sales tax returns.
There are four main filing statuses:
It’s important to note you have to file a return every period, whether you collected any taxes or not.
The only exception to this is a ‘fifth status’, known as occasional or casual filing. Used by states like Louisiana and Colorado, businesses with this filing frequency only have to file returns when they have taxes to remit. So, if you didn’t collect any sales tax in a given month, you don’t have a filing requirement. While this status is very convenient, it’s also pretty rare.
So what filing status should you expect?
Generally speaking, most businesses end up with a monthly or quarterly filing status. But the way each state assigns filing statuses varies.
Many states have a tiering list for filing frequency on the registration form. This means that your filing frequency is defined by your total taxable revenue in that state.
Other states like New York and California issue a quarterly filing status to all new taxpayers. After 12 returns, the state conducts a review to determine your filing frequency going forward.
It’s also possible to request a different filing status in many states. Less frequent filings benefit both taxpayers and states because it reduces costs and administrative work.
What Information Do States Require for Registration?
States tend to require a lot of information on their registration application. Many taxpayers are surprised by how much information – both business and personal – that they have to share. The main reason is that states want to know who’s going to be the responsible for compliance.
While each state’s requirements will vary, most registration forms will require the following information from your owner or compliance officer:
- Home address
- Social security number (for domestic businesses)
- Copy of Passport (for international businesses)
- Driver’s license (depending on the state)
How Long Do Registrations Take to Process?
As a general rule, expect states to take about 2 weeks for registrations in the U.S.
Registrations from international sellers tend to take longer. This is because they have to submit a number of paper registrations. We’ve seen international registrations take up to three months to process.
That said, once you submit your registration form, you’re at the mercy of the state. The duration depends on how long it takes them to process the application.
And now that most state employees are working from home, we’ve seen a slowdown in the processing of registrations.
The processing speed also varies state to state. In some states you can register online and hear back within a day or two. Sometimes, it’s instantaneous.
In other states, and for international sellers, things prove lengthier and more difficult.
The good news is that states are starting to streamline the registration process for remote sellers. So in the future, this process should become faster.
When Should I Start Collecting Tax?
This question confuses a lot of taxpayers. Should you start collecting when you submit the registration, or after the state processes the registration?
What gives many taxpayers pause is that the law says you can’t collect if you’re not registered. As we reviewed earlier, this is often considered a felony.
Fortunately, this complex question has a simple answer.
In nearly every case, you should start collecting sales tax as soon as you submit your registration form.
Suppose, for example, you submit your registration at the beginning of the month and the registration is processed at the end of the month. The state is still going to require sales tax for that entire month.
To start collecting sales tax, you’ll need to configure the settings in your ecommerce, enterprise planning, and invoicing systems. This process is fairly straightforward but gets easier if you use marketing automation and/or a sales tax specialist.
Once you start collecting, you should also fill out a paper form and remit the sales tax on a monthly basis until the state processes the registration. This ensures you don’t incur any penalties or interest because of slower processing.