BDO Indirect Tax News

A company is required to register for sales tax purposes when its activity in a U.S. state meets the physical or economic nexus standards and any other requirements set by the state. Physical nexus can be established by having employees or independent contractors performing services in the state on behalf of the company or by having property and inventory stored in the state. A company can establish economic nexus without engaging in any physical activity in the state if the company's sales activity exceeds a certain threshold (e.g., volume of sales of USD 100,000 and/or 200 transactions), generally measured in the previous or current year. Sales tax registration may also be required for remote sellers that drop-ships products (a transaction where an online entrepreneur sells products it does not store) in situations where an exemption certificate has to be issued or if required by specific industry laws.

While the collection of a company's data on a registration document may seem deceptively simple, the timing of the registration, scope of disclosures, consideration of prior activities and exposure, and compliance readiness may complicate the process. This article summarises common registration inquiries, brings awareness to problematic areas and considerations, and outlines some best practices.

Registration process

Registration for sales tax requires completion and submission of state-specific forms, most of which are available online on the states' department of revenue websites. As part of the registration process, a company should be prepared to provide the following information:

• Contact information, including its name (including the “doing business as” name), mailing address, telephone number, etc.;
• Information about the types of products and services the company sells;
• Date the company began doing business in the state;
• Other registrations with the state;
• Legal entity classification;
• State and date of incorporation;
• Federal Employer Identification Number (FEIN);
• North American Industry Classification System (NAICS) number;
• Financial institution and banking information for payment of the registration fees and future compliance obligations;
• Accounting period year date;
• Anticipated sales into the state, taxable sales and return frequency;
• Information about prior acquisitions (whether the company was acquired); and
• Information about the company's officers, directors, shareholders and other parties responsible for sales tax compliance, including their addresses, date of birth, social security numbers, copies of driver's licenses and passports, dates of taking office, title and percentage of ownership.

Being listed on the sales tax registration as a responsible party carries additional duties and liability. Responsible parties should understand that this designation makes them personally responsible for satisfying unpaid sales tax if it cannot be covered by the business.

Foreign (i.e., non-U.S.) businesses without a FEIN issued by the Internal Revenue Service or officers/responsible parties without social security numbers—information generally required to complete state sales tax registration forms—should be prepared for additional scrutiny during the registration process and be able to provide alternative requested information.

Several states—Alabama, Alaska, Arizona, Colorado and Louisiana—are “home rule” states that allow individual cities within the states to administer their own sales taxes. If a company has nexus in these states, it should ascertain whether it may have additional local registration and compliance requirements.

Addressing prior sales tax exposure before registration

A company that previously had nexus and registration requirements with the state but did not register in a timely manner should:

• Assess its potential sales tax exposure, including interest and penalties that together can add up to 35%; and
• Discuss options with a tax advisor, which may include participation in Voluntary Disclosure Agreement (VDAs) programs, tax amnesties, entering into compromise agreements, or filing past returns and seeking abatement of penalties.

VDAs are designed to promote compliance and benefit taxpayers that discover a past filing obligation and liability that has not been discharged by limiting exposure for retroactive tax liability to a specific set of tax years (typically three to four years) and reducing or abating interest and penalties. In most states, a company is disqualified from the sales tax VDA program if it has already registered for the tax involved or if the tax was collected.

A company with known prior sales tax exposures that chooses prospective registration, rather than registration from the date the company first established physical or economic nexus with the state and does not remediate past liabilities, further exacerbates its compliance obligations. Using data and technology, state and local tax governments are becoming better at identifying compliance gaps and determining when the company should have registered for sales tax. For instance, the authorities can review and match a company's payroll records against sales tax registration to determine whether a remote employee was working or visiting the state. The authorities also obtain data through third-party audits and investigations, which helps to verify and establish a timeframe of a company's activities in the state, including the location of inventory in warehouses, supplier shipping information, customer purchase data and attendance at trade shows. Compliance records of marketplace facilitators can track the volume of sales into the state from a particular remote seller and allow for the determination of whether registration was necessary.

Compliance readiness

Compliance readiness is an important factor in the sales tax registration process. A month after registration, sales tax returns will become due for the prior month of activity (e.g., if the company registers for sales tax as of 1 October 2023, its first return will be due on 20 November 2023). A person with sales tax expertise who will be responsible for filing timely returns must be identified during the registration process.

A company automating its sales tax obligation through the implementation of compliance software tools should make sure that the tools are operational at the time of registration. If a company already has functioning compliance software tools, it should confirm that the new state is included in its future filings. If the compliance software tools are not operating, the returns will have to be prepared and submitted manually.

Recommended best practices

When and how to register for sales tax may not be as straightforward as completing a form. The following non-exclusive list of potential action steps should help companies navigate the complexities surrounding sales tax registration:

• Identify the exact date nexus and registration obligations arose in a particular jurisdiction, considering all of the company’s economic and physical operations in the state.
• Understand the registration process and which forms must be completed. Most states allow sales tax registration to be carried out electronically, which is quicker than hard copy registration sent by mail or fax.
• Certain states do not require a remote seller to register for sales tax if all its sales in the state are exclusively through a marketplace platform. However, if the company begins to have sales outside of the platform and has nexus with the state, registration requirements should be reviewed.
• Be sure the information submitted on the registration form is accurate and that the correct tax is selected (e.g., sales tax, seller's use tax, vendor's use tax, gross receipts tax, etc.). The state may compare the submitted registration against information it already has about the company. Gaps or inaccuracies in information or improperly selected taxes may lead to notices and audits.
• Due to security checks and authentication notifications, perhaps set up and use a generic email address (i.e., tax@company.com) so that various members of the team can access and receive notifications.
• If the company had prior operations and did not timely register and comply with sales tax, the company should evaluate its product and service taxability in that jurisdiction and then quantify its sales tax exposure to the date the registration requirement was triggered. As part of quantification, the company should determine whether its sale may be exempt (e.g., sale for resale, used in manufacturing, etc.) or if its customers have self-accrued and remitted use tax.
• The exposure estimates are used to determine appropriate efforts to mitigate and disclose taxes. Pursuing a VDA or participating in amnesty programs (if available) with tax authorities can significantly reduce the tax, penalties and interest ultimately paid to resolve historical tax liabilities. VDA agreements and amnesty programs can also streamline registration, tax filings and payment of historical tax liabilities. If the period of noncompliance is relatively short, remediation may also be achieved by filing late returns and addressing interest and penalties.
• Be prepared to file returns a month following registration with the state. To be successful from the start, an experienced sales tax professional responsible for the compliance function must be identified, and if compliance software tools are used, they must be properly configured before returns are filed.
• Keep information up to date with the state. For instance, an update should be made when the responsible party listed on the registration leaves the company. If an update is not made, the responsible party may continue to have personal responsibility and liability if sales tax is not paid.

Angela Acosta
Ilya Lipin
BDO in United States