Sales Tax Permits 101 – A Guide for Small Businesses

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All businesses are required to register for a sales tax permit—also known as a sales tax license, seller’s permit or vendor’s license—before collecting and remitting sales or use tax in a state.

By Gail Cole

However, not all businesses are required to collect sales tax in all states. So how do you know if you need a sales tax permit? How do you get one if you do, and how much will it cost? Do you need a sales tax permit if you only make exempt sales? Do you need a sales tax permit if you’re a marketplace seller?

There’s no one answer to these questions. What triggers a need for a permit in one state might not in another. However, there are some general rules of thumb:

Who needs a sales tax permit?

The key to determining whether your business needs a sales tax permit is nexus, or the connection between your business and a state. If you have nexus with a state, you need a sales tax permit. If you don’t, you don’t.

Determining where you have nexus has never been simple because state sales tax laws, rules, and regulations vary. Ascertaining nexus has become even more challenging since the Supreme Court of the United States issued its seminal sales tax ruling in South Dakota v. Wayfair, Inc.

Physical presence nexus may seem straightforward, but many businesses establish it without realizing it. Connecticut law requires you to obtain a sales tax permit if you’re in the state for one day to attend a trade show and you make a sale. In Massachusetts, you have to register as a vendor if you participate in an event where you hope to make sales, even if you don’t make any. And so on. No two states are alike when it comes to determining physical presence nexus.

The Wayfair ruling further complicates nexus determination. The Supreme Court found the physical presence rule to be “unsound and incorrect,” thus authorizing states to require out-of-state sellers with no physical presence in the state (remote sellers) to collect and remit sales tax. It should be noted that having a physical presence in a state still triggers nexus; it’s just no longer the only way to create it.

Since Wayfair, 43 states and Washington, D.C. have adopted economic nexus laws or rules that base a sales tax collection obligation solely on a remote seller’s economic activity in the state. Most of these states allow an exception for small sellers, but what qualifies as small enough for the exception varies.

For instance, to establish economic nexus in California, a remote seller must have more than $500,000 in retail sales of tangible personal property delivered into the state in the current or preceding calendar year (including sales by affiliates). In New York, the threshold is more than $500,000 in gross sales of tangible personal property and at least 100 transactions. In South Dakota, it’s more than $100,000 in sales or at least 200 transactions of tangible personal property, electronically delivered property, or services in the state in the state in the current or preceding calendar year.

The first step to determining where you have economic nexus is to develop an understanding of economic nexus laws and calculate your sales in all states where you sell. If you determine your sales into a state create nexus, you must obtain a sales tax permit.

How do you get a permit?

Registering for a sales tax permit starts with finding the state tax authority. If you don’t know the name of the tax authority in a specific state, an internet search for that state’s department of revenue should lead you to it.

Some state tax authority websites are easier to navigate than others. For example, you can find a  Sales Tax Permit Application on the home page of the Texas Comptroller, but it takes a few clicks to find the Sales and Use Tax License Applications Forms on the Wyoming Department of Revenue site.

The specific permit(s) needed to do business in a state typically depends on the state and the type of business. The permit for an occasional seller may not be the same as the permit for a permanent business, or one with more than one location in the state. Moreover, businesses dealing in certain products, such as alcohol, tobacco, or marijuana, will likely need an additional permit than sellers of books or clothing. If you’re not sure which permit you need, give the tax department a call.

You’ll have to divulge certain information to register, including the legal name of the business, the date it was formed, and your projected monthly taxable sales. Some states require online registration and most encourage it, but most also allow businesses to submit a paper registration.

Online registration can be completed in mere minutes, while a mailed paper application may take two months to process. Once in hand, in-state businesses are required to display the sales tax permit in a conspicuous place. There may be different requirements for remote sellers.

It’s important to note the expiration date of a sales tax permit. Sales tax permits don’t expire in California, and they’re renewed automatically in Texas; however, businesses need to renew sales tax permits in Colorado, Pennsylvania, and many other states. Sales tax permits must always be kept up-to-date.

How much does a sales tax permit cost?

The cost of a sales tax permit varies. As of this writing, it’s free to obtain a sales tax permit in California, Florida, Illinois, Pennsylvania, Texas, and certain other states. However, a sales tax permit will cost you $10 in Rhode Island, $25 in Ohio, $50 in Arkansas and South Carolina, and $100 in Connecticut (though it’s free to register through the Streamlined Sales Tax Registration System (SSTRS) in SST-member states). Licenses to sell different products, such as alcohol or tobacco, are generally in addition to and more than a regular sales tax permit. These costs are subject to change, so don’t bet your sales tax permit on the prices listed here.

Is a permit necessary if you only make exempt sales?

Businesses with physical presence nexus in a state, including those making exempt sales only, need to register with the state tax department. Likewise, a remote seller that has economic nexus with a state generally needs to obtain a sales tax permit in that state even if all its sales into the state are exempt.

Some state economic nexus thresholds are based exclusively on taxable retail sales. This is the case in Colorado, so a remote seller that only makes exempt sales in Colorado is unlikely to establish economic nexus.

Other states, including Hawaii, include exempt sales in their transaction count. Thus, a business that makes exempt sales but no taxable retail sales into Hawaii can establish economic nexus with the Aloha State. Once you have economic nexus, you typically need to register for a sales tax permit no matter what you sell.

Vermont is an exception. If all your sales into Vermont are tax-exempt under Vermont law, and none of your sales in the state could be taxable, then “there is no need to register for a sales tax account” according to the Vermont Department of Taxes.

Do marketplace sellers need a tax permit?

Businesses that sell through a marketplace typically need a sales tax permit in states where they have nexus, just like any other vendor.

However, the marketplace seller isn’t always responsible for collecting the tax due on marketplace sales. More than 35 states have passed laws requiring the marketplace facilitator (i.e., Amazon, eBay, Etsy, etc.) to collect and remit the tax due on all sales made through the marketplace; other states are likely to follow suit.

These laws can make it more difficult for a marketplace seller to determine where it needs to obtain a sales tax permit. It depends in part on whether the seller is remote or based in the state, and if it makes sales through multiple channels or only through a marketplace(s) that collects and remits sales tax on its behalf. No matter what, the requirements vary from state to state.

States usually require all sellers with physical presence nexus — including marketplace sellers that make sales through multiple channels and those that only make sales through a collecting marketplace — to obtain a sales tax permit.

The rules are less clear for remote marketplace sellers. Those that sell through multiple channels are typically required to register if they have economic nexus with the state: They need to collect and remit tax and file returns for sales made through their ecommerce store, even if a marketplace facilitator handles tax for their marketplace sales.

If you make sales through a marketplace, you need to understand how marketplace sales fit into economic nexus thresholds. Some states require remote sellers to include all sales into the state when calculating the threshold; in other states, remote sellers must exclude sales made through a collecting marketplace.

A lot of work goes into determining where you need a sales tax permit if you’re a remote seller…. and that’s just the start of sales tax compliance complexity. Equipping yourself with the wherewithal to deal with these complexities is the first step toward sales tax compliance and maximizing your efficiency as an e-commerce seller.

Gail Cole has been researching and writing about sales tax for Avalara since 2012. She has a penchant for uncovering unusual tax facts and endeavors to make complex sales tax laws more digestible for experts and laypeople alike. @cole_gl

Sales tax stock photo by Bartolomiej Pietrzyk/Shutterstock

The post Sales Tax Permits 101 – A Guide for Small Businesses appeared first on SmallBizDaily.

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