Sales Tax Fundamentals
Get up to speed on the basics of sales tax
So You Haven’t Registered in a State Where You Have Nexus…
byMarch 16, 2022
If your e-commerce business has enough sales to achieve economic nexus in a state, but you haven’t yet registered for a sales tax license, you’re not alone. Tax experts are often asked about the optimal time to register for a sales tax license, which you can learn more about here. But there’s another question worth exploring, and that is, “What does a company do once it has already hit nexus, but hasn’t registered with a state?”
We spoke with two sales tax specialists (and trusted TaxJar partners) who counsel companies about these decisions on a regular basis: Co-Founder and President Mike Espenshade and VP of Operations Kyle Morgan at Hands Off Sales Tax (HOST). These are the main ways e-commerce businesses often tackle this issue.
First, some background on nexus
Before a landmark Supreme Court decision in 2018 (South Dakota v. Wayfair), states could only require retailers to collect sales tax in the state if they had some kind of physical presence (an office, store, or inventory) stored in a state. As a result of the ruling, states can pass “economic nexus” rules or laws. Now, if a remote seller exceeds a certain amount of revenue or transactions in a state, it has economic nexus and must collect, remit and file taxes in the state.
Why your company might be in this situation, and a way forward
Espenshade and Morgan say that companies approach them weekly with issues surrounding registration and nexus. They’ve seen everything from large merchants with both physical and economic nexus for years that haven’t been compliant, to retailers that are only now learning about the implications of nexus from the Supreme Court case. No matter your situation, there are two major paths forward to compliance.
But before that can take place, the HOST experts believe it’s a good idea to understand your company’s potential tax liabilities. “Many times, our first step is a nexus study,” Morgan says. “We get the clients data all the way back to Jan 1, 2017, because that’s the lookback period for the economic nexus laws.” He says that TaxJar is a tool often used to assist with pulling sales data because of its reporting capabilities.
After looking at the sales data, Morgan says they can determine in which states a company should have registered, and determine any estimated liabilities and penalties associated with registering on a suggested start date. That’s when HOST suggests two different ways of handling sales tax registration in states where your company already has nexus.
Option #1: Sign a Voluntary Disclosure Agreement
Voluntary Disclosure Agreements (or VDAs, if you want to speak sales tax more fluently) are a way for companies to work with a state to pay back any prior sales tax obligations as a result of physical and economic nexus liabilities that were not paid.
There can be significant financial benefits to signing a VDA with a state. “VDAs agree to a limited lookback period if you establish nexus [in the present],” Morgan says. “Most lookback periods are 3-4 years. This is beneficial if you’ve had physical nexus [for some time] – for instance, if your business had an employee in the state 10 years ago, a VDA would certainly make sense because the state would only look back 3-4 years.”
If a company hasn’t been collecting and remitting sales tax while having nexus, there’s a possibility the state could levy significant financial penalties. But when a company voluntarily discloses those sales, a VDA could take that option off the board. “With some states, getting a penalty waiver or forgiveness is significant and substantial,” Morgan says. Combined with a limited lookback, a company could end up avoiding paying penalties for failing to register, and only pay sales tax on sales in the last few years.
At the end of the VDA process, a company will be set up for compliance in the future. “If the client comes to us and we do a VDA for them, they’re going to walk out with an executed VDA, their online accounts set up and their registration process completed in full in order for them to file on an ongoing basis,” Morgan notes.
Option #2: Backdate Registration
If your business has had nexus in a given state but has not registered yet, the other option is to backdate registration, as in, register for a sales tax permit around the time you achieved nexus. Because there are financial implications to taking such an action (detailed below), we recommend consulting with sales tax experts before attempting this.
There are two main reasons why a company may choose to forgo a VDA and instead decide to backdate their registration – it’s less expensive and it doesn’t take as long. First, let’s tackle the cost aspect. Morgan says that penalties will most likely be assessed if a business backdates a registration, and as we noted earlier, a VDA includes a penalty waiver. So why is it less expensive than a VDA? “Executing a VDA is a much more time intensive process than backdating a registration, which is the reason for the higher cost,” Morgan notes.
A VDA could take between 3-6 months on average and usually requires submitting an application to the state and connecting with the state’s VDA representative to provide them with sales data, whereas backdating typically takes between 2-4 weeks and does not require that level of back-and-forth with the state, he explains.
Automation can help
Sales tax compliance doesn’t have to be a pain point for growing companies. That’s why we built TaxJar. Our sales tax platform will help you track your nexus requirements and automatically calculate the accurate amount of sales tax for every item, in every state. Our platform also compiles orders from all your e-commerce channels into one palace, giving your team access to real-time reports and ensuring you are prepared for growth. And with TaxJar’s AutoFile, our platform can prepare and file an accurate return along with your remittance. Get started with TaxJar with a free 30-day trial.