Let’s pretend for a minute that you’re opening a new business. Amid all the hard work that entails — finding a storefront, getting merchandise together, designing your logos and other trade dress — there’s been something that you keep putting off: registering with your local revenue department to collect sales taxes.
It could be that it’s a bunch of boring paperwork, or that dealing with taxes at all is unpleasant, or maybe that it’s just confusing, which has led to the delay. But the day is here, and you’ve just gotta bite the bullet.
Well, fear not: we’re here to allay some of those fears and show how you can make registering for sales tax collection, if not fun, at least less daunting.
Get Licensed, Start Paying
The very first step in getting licensed as a sales tax collector is determining where exactly you need to get licensed. For single-location shops, this should be pretty straightforward. But for remote sellers, or businesses with multiple locations, this can get complicated. If you’re in this situation, we highly recommend you read our previous sales tax 101 guide: What’s Nexus, and Where Do I Have It?
If you know all that already, though, we can move on to how to get licensed.
Now, it also has to be said that every state is different when it comes to sales tax licensing. Dealing with the California Department of Tax and Fee Administration is going to be a different beast that dealing with the Texas state Comptroller. Anyone getting licensed should pay careful attention to all of the notices and instructions that a state issues regarding sales tax licensing — it shouldn’t require working through a lawyer, but it might help to take a lawyer’s mindset. (Also, consider looking up the state you’re looking into on our handy “How to File In — “ blog series.)
But there are some common themes that we can talk about.
What Licensing Do You Need — First off, make sure you’re registering for the correct license. State tax departments deal with a number of different tax types and businesses — from general retail tax to motor fuel tax to beverage alcohol taxes. Even within general retail, there can be differences among the tax types; if you’re a brick-and-mortar store, you don’t want to register to pay out-of-state use tax.
Getting the wrong license will mean the state doesn’t know what you’re actually doing. It’ll send you the wrong notices and information; and it won’t recognize you when you file your sales tax returns. At best this would require a lot of effort to fix your license and correct the state’s records; at worst, this could bring painful audits. It’s better (and not too difficult) to just get things right to begin with.
So, know what you’re selling (is it a specialized product with a unique tax?), to whom are you selling (are they sales of final dispensation or are they for resale), and where are you selling (are you located in the same state as the tax department you’re registering with). For the most part, these questions will likely lead you to register for some sort of “Sales and Use Tax” license. But you want to confirm that so that you file the correct form or check the right box.
What Information Do You Need On Hand — When you are registering with the state, it should be no surprise that the state would want to know quite a deal about you. If you go into the registration application cold, though, you’ll likely end up scrambling to scrounge up a bunch of corporate records. Being prepared with all that could save you time and aggravation.
Now, again, states can vary widely in what information they want, so it could make sense to quick review the application form a week or two before you actually fill it out. But here are some of the more common bits of corporate information states will ask for:
- Company info: such as, legal name, corporate name, DBA names, mailing and physical addresses, phone numbers (even faxes still), authorized agents/representatives that the state can contact
- Corporate info: such as, Federal Employer ID Number (FEIN), Social Security Number (SSN), business type (e.g. LLC, partnership, sole proprietor), other account numbers
- The state may also want to have details on your corporate ownership (if applicable); this can include requiring details on any owners, investors, partners associated with your business, including their names, contact information, SSN
- Business info: such as, products or services offered, first date of sales, estimated tax liability (to determine your filing frequency — those who owe more in taxes often must pay more often)
Again, not every state requires all, or even most, of this information. If you’ve already registered with the state in some other capacity (say, registering with the Secretary of State), it’s possible the state would have much of this on hand already. But being prepared up front for what the state requires could mean you avoid a lot of unpleasant delays.
What’s Process Do You Need To Follow — Now that you’re set up to register with the state, you can actually begin registering. Much of this should be fairly straightforward — and outlined by the state’s instructions — but, as with so much of sales tax, function follows form, so it’s necessary to follow the form as set out by the state.
A few things to note here:
- What’s the best way to register? Does the state allow online registration, or does it only offer a paper form? Going digital could save you a lot of time, and make correcting registration information a lot simpler. If paper is the way to go, make sure you’re using the correct form and that you mail it to the right department.
- Is there a cost? Many states won’t charge you to register as a tax collector (after all, they’ll be getting money from you soon enough). Other states, however, do have a fee. It’s usually not much, say $20 for administrative services, but if needed, it’s critical to make sure you pay. Many states, though, do require you to have an active bond (in case you don’t pay, they can claw back some money); while not a fee, per se, this can be an additional burden you should prepare for.
- How long will it take? Tax, after all, is the epitome of bureaucratic work, so we shouldn’t be surprised that it may take some time for your registration to work it’s way through the system. But it can be useful to have an idea of how long it will take. A state may require you to have an approved sales tax license before you can do certain business activities; if it will take a few weeks to get that approval, you should make sure to do it earlier on. (One reason why registering online, where available, could be the way to go.)
What Kind of Follow-up Do You Need To Do — By this, we’re not talking about the actual process of assessing, collecting, and remitting sales tax — that’s a whole can of worms, which we will talk about in future Sales Tax 101 posts. Instead, we mean what kind of follow-up do you need to remain licensed as a sales tax collector.
The key point here, then, is do you ever need to renew? Some states, like Texas, will never let your sale tax registration expire; once you’re in the system, you’re in it for good. Other states, though, will require you to renew your license periodically. The state will almost certainly send you reminders that you need to renew, but it’s very important to be aware whether this could be a problem. You definitely don’t want to find out you’ve been operating under an expired license.
Then, it’s very important to think about updating any registration information. If you move, change phone number, even adjust your corporate ownership, you may need to let the state know — and in some cases (like that contact information), you absolutely want to make sure the state is aware. Knowing how this happens — do you need to mail in a paper form or can you just log into your online account — is critical.
Less common, but still important, is adjusting your tax status. There are certain things you can do to make filing sales tax more manageable for you; for instance, if filing monthly is burdensome, look into whether the state will allow you to become a quarterly or even annual filer. This often depends on how much tax revenue the state expects from you, but it can be extremely helpful, if you qualify.
This also applies if some big changes happen to your business. While not pleasant to talk about, if you end up closing shop, you should make sure to let the tax department know. If you stop filing taxes, but they think you’re still collecting, the state will contact you to ask what’s going on (and not necessarily in the nicest way). Getting ahead of that, and letting the state know that circumstances have changed, and you no longer will be collecting sales tax, could avoid some unpleasantness.
Sales tax regulation can get very tricky, and it always helps to have someone there to support you in dealing with states. We’ve previously discussed the basics of nexus, and today talked about licensing complications. But then comes the issue of knowing what taxes are out there, how to know which rates apply and what to collect, and how to file all those returns. You can expect more articles from us on all these topics in the coming weeks.
Stay on top of sales tax licensing and registrations with Taxify by Sovos.