Not-so-serious guide to use tax registration

Hey there, fellow tax aficionados! Are you wondering if you need to navigate the wonderful world of sales and use tax registration in another state to serve your clients?  Well, you’re in for a treat because we’re here to break it down for you, Sales Tax Sisters’ style.

When should your clients register to collect use tax in a certain state? Grab your favorite snack and let’s dive right in!

The scenario

Your client has a small business selling the finest handcrafted, glow-in-the-dark garden gnomes. They’ve been shipping gnomes all over the country, and business is booming! But here’s the twist: Each state in the United States has its own rules and regulations for sales and use tax.  So do they need to register to collect use tax in a certain state? The short answer: maybe. The long answer? Well, grab another snack and let’s break it down.

The nitty-gritty details 

Let’s say the gnome empire is based in sunny Florida, where they’re already registered to collect sales tax. Life is simple there. The company collects the appropriate sales tax from their Florida customers, sends it to the Florida Department of Revenue, and lives happily ever after.  But then they start getting orders from customers in New York. The Empire State has its own set of rules and tax rates, so to navigate this potential gnome-sized tax nightmare, they might need to register to collect New York sales and use tax. But how do you know for sure?

The threshold test 

Whether a business must register to collect a jurisdiction’s sales and use tax is dependent on multiple factors. Each state has something we like to call a “sales and use tax threshold.” This is like the point where sales cross the line from “I don’t need to worry about sales and use tax” to “I need to register, like, ASAP!” States use these thresholds to determine whether out-of-state sellers—such as the gnome business—need to register to collect sales and use tax. For example, New York’s threshold might be $300,000 in annual sales or 100 transactions. So if the gnome sales in New York equal or go over these numbers, it’s time to whip out the registration forms. When you get close to the thresholds, start planning to register. There are registration deadlines!

Economic nexus 

Economic nexus—sounds fancy, right? It’s not as complicated as it seems. Basically, economic nexus means that a business has a significant presence in a state, even if they don’t have a physical store in that state.  So if the gnome empire reaches the threshold, they’ve got economic nexus in that state. They need to register and start collecting use tax.

The Amazon factor

Here’s where things get even trickier. Let’s say they’re not just selling gnomes on their own website, but are also using a big online platform such as Amazon or Etsy.  Some states are hip to this game, enacting laws that say if sales are made through these platforms, those sales count when determining if you’ve reached the threshold. For example, if you’re selling your gnomes through Amazon FBA (Fulfillment by Amazon), they handle a lot of the logistics for you. If you have inventory in the state, then boom—you’ve got physical nexus. Physical nexus means you register to collect sales tax and the economic thresholds no longer matter.

The voluntary registration option

Feeling overwhelmed with all this sales and use tax stuff with thresholds and physical presence? Guess what? Clients can always choose to voluntarily register for sales tax in a state, even if they haven’t hit the threshold or aren’t using a big platform. This might sound counterintuitive, but it can actually make life easier. If clients are close to being required to register, and register early, they won’t have to worry about playing catch-up later. It’s like buying your gnomes umbrellas before it starts raining—always a good idea! I would voluntarily register only if I were close to achieving nexus and fully expected to be required to comply.

The sales tax dance 

You’ve figured out that your client needs to register to collect sales and use tax in a certain state. Now what? They must collect the right amount of tax from their customers. That means they must figure out the tax base, the applicable sales and use tax rate, add it to the product price, and keep track of the money separately. It’s like hosting a gnome party and making sure you collect enough tiny party hats for all your guests! Then, they’ll need to file regular sales and use tax returns with the state—usually monthly, quarterly, or annually, depending on the state’s rules.

Consequences of not registering

We’ve had our fun with gnome humor, but here’s the serious part: not registering to collect sales and use tax when a business is supposed to can lead to some not-so-fun consequences. States can hit businesses with the tax plus penalties, interest, and fines. Plus, if the correct amount of sales and use tax is not collected from customers, businesses might end up paying the difference out of their pocket. Ouch!

Wrapping it up 

So does your client need to register to collect sales and use tax in a certain state? It all boils down to a few factors, including where the business is located, hitting the activity thresholds determined by the state, having economic or physical nexus, selling through big online platforms, or choosing to voluntarily register.

Remember that it’s always better to be on the right side of the taxman. So keep an eye on the gnome sales and be ready when the time comes! And if you’re ever in doubt, don’t hesitate to reach out to a tax professional or the state’s revenue department. They’ll help you navigate the gnome-infested waters of sales tax with a smile.