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Sales Tax Compliance
The Sales Tax Process (Registration through to Returns)
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Sales tax obligations apply to all sellers, regardless of business size - or business model. Therefore, whether your business is large or small, and whether you operate from a bricks-and-mortar location - or through an on-line shopping cart - you must follow the same sales tax rules. Additionally, sales tax rules apply regardless of order method; whether an order is received in person, called in by phone (or mailed or faxed) or electronically submitted through an e-commerce shopping cart. (See also Internet Taxation section.)
Registration: Any seller (or retailer) making regular sales of taxable property is required to register to collect sales tax in any state in which they maintain a substantial "physical presence" - also referred to as nexus. (See also Nexus section for clarification of nexus issues discussed in this section). In some states it can be a criminal offense to operate without being registered (which depending on state can include a seller's permit, license or certificate of registration) and for that reason it is important to register prior to making your first sale in a jurisdiction. It is also important to be aware that some states have local jurisdictions which may have their own sales tax requirements - and may require separate registration and compliance activities.
Collection: If the seller/retailer makes a sale into a state in which they are registered, they are required to collect sales tax on any taxable sale delivered to that state unless a valid exemption is applied, applicable to the purchasing entity or the nature of goods. (See also Exemptions section). This process can be complicated by the fact that the taxability of goods or services can vary by type, as well as by jurisdiction. (See also Taxability section). Some states offer useful bracket schedules to show how much tax should be calculated. Additionally, a variety of computerized solutions are available to ease the sales tax compliance process. For information visit the Sales Tax Institute's Sales Tax Rates page.
Reporting & Remittance: Reporting requirements can vary by state. However, states will generally provide you with reporting and remittance instructions at the time of registration. Once registered to collect sales tax in a state, taxpayers generally are required to file tax returns on the frequency defined by that state. Reporting may also be necessary even if no liability exists for the period. In such situations, a zero tax due return may be required. Regardless of your business size - it is imperative that you maintain accurate books and records regarding your sales tax liabilities - and maintain that information for the period of time as required by each state. Given the complexity of sales tax law (and the associated risks and penalties). it is important that you understand your compliance obligations and when necessary seek the assistance of an experienced tax professional.
If the business does not have nexus in the state and does not collect the sales tax, the item may still be taxable. It is the purchaser's legal obligation to remit the use tax directly to the state where they are using the item if it is taxable. However, just because the customer may have the ultimate liability for the tax in these situations, it does NOT relieve retailers from their legal obligation to collect the tax when and where they have nexus.
If you are shipping to the state where you are located, you are required to collect sales tax on the full sales value of any taxable order (whether the customer is in your state or elsewhere) unless a customer from another state can provide you with valid exemption documentation for your state.
If you sell and ship taxable goods or services to customers located in other states that impose a general sales tax, then you must determine whether you have established nexus in that state. If you are deemed to have nexus, then you are required to collect that state's tax on all taxable transactions into that state. If however, an out-of-state customer comes to your state location, to pick up the goods, you would charge your state's sales tax.
If your customer is reselling the items you are selling to them, then they will need to provide an acceptable resale (exemption) certificate in order to purchase the items without tax. (See also Exemptions section.)
Drop ship transactions (see also Drop Shipment section) can also be considered purchases for resale (and therefore exempt from sales tax) - although this is NOT always the case. If the product supplier/shipper is shipping the order directly to a state in which they are not registered (and/or do not have nexus), then the supplier/shipper does not have an obligation to collect sales tax for that state. However, as often happens, drop ship taxation becomes complicated when the supplier/shipper is registered in the ship-to state - but the retailer is not. In such cases, the supplier/shipper is obligated to collect tax from the retailer on the drop ship transaction unless the retailer can provide valid drop-ship exemption documentation (which varies by state). This is an issue which both retailers and suppliers/shippers need to consider.
When multiple addresses are involved in a transaction, there can be some confusion as to which state sales tax to charge - also referred to as the sourcing of the sale. Generally, sourcing is determined by where the transfer of possession from the seller to the customer (or the customer's agent) occurs. This is generally the state in which the ship-to (or delivery) address is located. If another address is listed (i.e. for purchase order or for billing/ invoicing purposes) it is not relevant unless there is a situation where no other physical address is available. When the sale occurs within a single state (the ship from and the ship to are in the same state), the sourcing for local taxes needs to be determined. Most states follow destination sourcing - the tax rate to use is the ship to location. However, some states follow "origin" sourcing rules. This means that the tax rate that applies on instate sales is the seller's location or ship from (or order acceptance) location.
Therefore, if the item is shipped to the customer, tax applies for the delivery state. However, the seller should only collect that tax if they are registered to collect tax in that state. Alternately, if the customer picks up the item at the seller's location, tax should instead be collected for the seller's state, unless the purchaser can provide a valid resale or exemption certificate for the seller's state.
When you collect sales tax and fail to remit it (or remit in incorrectly), this can be considered fraud and subject to substantial penalties (and even imprisonment). If you determine that you have a prior period liability, most states offer the opportunity to enter into settlement agreements which are typically referred to as Voluntary Disclosure Agreements (VDA's). It is recommended that a third party (such as an experienced accountant, consultant or lawyer) assist with at least the initial approach to negotiate the terms. States also periodically offer Amnesty programs where taxpayers can resolve any prior period liabilities. For a list of all current, future and some past amnesty programs visit the Sales Tax Institute Amnesty page.
If you require assistance regarding sales tax issues, YETTER is available to provide a broad range of services. Please call Diane Yetter at 312-701-1800 to discuss your requirements. The Sales Tax Institute also offers classes which review sales tax basics - through to advanced issues and best practices. Register for the Sales Tax Institute Online Course ("Introduction, Definitions and Nexus") to learn more about this challenging topic.
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