The following steps outline key considerations for businesses as they work to comply with the new sales and use tax rules.
Step 1: Determine Whether Your Business Has Nexus
Each state has different nexus rules for determining whether a business has nexus. If a business does not have nexus with a state, it is not required to collect and remit sales tax to the state.
Common Nexus Types:
Step 2: Registration
Businesses need to register for a business license and sales and use tax license for the jurisdictions in which the business has nexus. A business is required to have a business license and a sales tax license to remit tax to the state. Both licenses can be obtained either through a state’s website or by filing a paper form with the state.
Step 3: Determine Taxability
Next, a business must determine whether the products and services the business sells are taxable. Each state has different rules pertaining to the taxability of the products and services sold to residents of the state. Even if a business does not have any taxable sales in a state, if it has nexus, the business must still register for a sales tax license and file a return showing no taxable sales were made.
Step 4: Calculate Tax Rates
When a company determines its products or services are taxable, it must collect sales tax on each purchase. In most cases, the state, county, and city jurisdictions will all impose a different tax rate for taxable items. Therefore, a business must be aware of the jurisdiction rules of each state and local authority. For instance, a company should determine whether a state imposes tax on where the sale took place (origin jurisdictions) or where the product was delivered (destination jurisdictions).
Step 5: Document and Collect Tax
It is important for businesses to add tax rates to invoices and collect tax from customers. After determining the tax rates, a business should include a separate line item on each invoice that shows the tax it is charging its customer. By doing so, the business will be able to quickly identify how much tax it charged, as well as the amount of tax the customer paid and whether the item purchased was exempt. This is very important if the business is audited.
Step 6: Maintain Records
A business should maintain internal records tracking the sales made, the amount of taxable transactions, and the amount of non-taxable or exempt transactions. Each state has their own statutory requirement for how long records need to be retained, and we recommend 4-7 years. Furthermore, a business must keep in its records any exemption certificates a purchaser has supplied as proof the customer’s purchases were not subject to sales tax. This will be important if the business is audited.
Step 7: Complete and File Sales Tax Returns
The last step is to file a sales and use tax return with the state. Some states require an electronic return to be filed from their website. Depending on the state and the amount of sales your business has, deadlines for returns can vary. Make sure you confirm the deadlines with each state via their website. If a return is late, then penalties and interest will accrue.
If your business has nexus and has registered for or filed sales tax returns, you may have sales and use tax liability. However, most states allow a business to voluntarily disclose if it has not complied, and penalties and interest could be waived. Contact your Eide Bailly professional or a member of our State and Local Tax team to learn more.
Take a deeper dive into this Insight’s subject matter.State & Local Tax (SALT)