Should You Collect Sales Tax without Nexus?

For many of us, under-collecting sales tax seem like the worst case scenario when it comes to an audit. So is it better to collect in every instance, so as to keep from under-reporting? Well, no. If you’re not permitted to charge and collect sales tax, you can’t. Over-reporting is just as harmful to your business. Your audit will still go poorly, you have to remit the sales tax back to your customers, and both your professional relationships and reputation may be damaged. Knowing when to collect sales tax is key when running a business.

Get the facts

You must calculate, collect, and remit sales tax in every jurisdiction where you have nexus. At this point, you may have 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, 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.

Image courtesy of Adobe

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