Navigating Sales Tax: The Pitfalls of Under-Collecting and Over-Reporting
When it comes to audits, under-collecting sales tax may appear to be the most dreaded outcome. However, the solution is not to collect sales tax in every instance to avoid under-reporting. In reality, if you are not authorized to charge and collect sales tax, it is imperative not to do so. Over-reporting can be equally detrimental to your business, resulting in a negative audit outcome, the need to refund sales tax to customers, and potential damage to your professional relationships and reputation. Understanding the appropriate instances to collect sales tax is crucial for successful business operations.
Get the Facts
You must calculate, collect, and remit sales tax in every jurisdiction where you have nexus. At this point, you may have a physical nexus or economic nexus. When you reach the threshold for economic nexus, you must register to collect sales taxes. You may be responsible for collecting those taxes the day after you establish economic nexus, or not till the following year. It depends on the state.
Unfortunately, sales tax law is always changing, so even what you know to be true today could be different tomorrow. Because of this, many companies turn to automatic sales tax software and outsourcing options.
The Golden Rule Of Sales Tax
The central principle of sales tax is nexus. Nexus is, first, the “physical presence” a company has within a state. Business activities that establish nexus vary from state to state but include a physical building of some kind, certain types of employees, and our particular business practices.
However, if you gain revenue from a state, you may have economic nexus even if you don’t have physical nexus. When the Supreme Court made the Wayfair decision that allows states to make their own definitions of nexus, they made it clear that they don’t want businesses to have to collect sales tax if they have just a small economic presence in a state. States therefore set limits. In many states, any company that makes $100,000 in sales or 200 transactions establishes economic nexus.
The details are up to the states.
As a business owner or financial employee, it is your responsibility to determine where and how your business has nexus in the states where you are doing business. If you determine that you do not have nexus then you are not responsible for collecting sales tax in that state. In short: no nexus, no sales tax.
Sales Tax Permit Registration
Once you have determined where you have nexus you must register for a sales tax permit. States require that you get a sales tax permit before you begin collecting sales tax. To register for a sales tax permit, go to your state’s Department of Revenue website or call.
In some states, the tax permits are free, while in others you will be required to pay a fee to secure one. Once you’ve registered, the state will tell you where and how often you should file a sales tax return. It may be monthly, quarterly, or annually. It is important not to skip this step. Some states consider the collection of sales tax without a permit to be illegal. Sales Tax DataLINK’s tax experts are here to help. If you have a question about nexus or if you are collecting the right amount of sales tax contact us and find out.
We can also assist you with a Nexus Review to identify the jurisdictions where you have sales tax compliance obligations, or with the actual registration. Call 479-715-4275 to discuss your needs.
