Sales tax filing and reporting rules vary between jurisdictions in material ways. Each state has unique filing schedules, forms, payment thresholds and other administrative requirements that can trip you up. Here are some common filing and registration errors and what you can do about them.
1. Not knowing nexus.
The connection between a company and a state, in which the company acts as an agent of the tax authority and collects and remits accordingly, is called “nexus.” In addition to a significant physical presence such as a warehouse or headquarters, nexus can also mean a virtual connection. Large online retailers such as Amazon and Overstock now collect sales tax in states in which they have neither distribution centers nor warehouses.
Whether a company has a sales tax obligation is the crux of the sales tax challenge. There are approximately 11,000 jurisdictions within the U.S. and 100,000+ rules changes annually; that’s a daunting set of variables few manual systems can handle.
2. Failure to register
Once a company determines where they have nexus, they are then required to file and remit sales tax accurately and on time to the applicable jurisdictions. Other than employment and income tax, the most common type of tax requirement is sales tax. If handled manually, companies are required to review individual tax authority sites to find the right registration procedures.
3. Wrong forms
Following the example of the IRS, many states are starting to require electronic filing and payment of tax. Knowing which states have which requirements changes almost daily. Depending on where a company is registered and where they have nexus, they might be required to file electronically for all returns, or some, or depending on the amount of the return.
4. Late filing
Not only is late filing an easy way to incur fines and late fees, the consistent late payment of sales tax obligations can be a red flag for over eager auditors grasping for more revenue on behalf of struggling states.
Depending on the amount of the remittance, states often require multiple filing dates. Some states also offer amnesty for overdue tax liabilities depending on the case. For a list of states with amnesty programs, follow this link.
Return preparation is driven by data, great volumes of which can lead to inaccuracies and oversights, particularly if calculations are handled manually.
It’s critical to review prepayment requirements in all applicable jurisdictions. A number of jurisdictions require prepayment for larger tax amounts (including California, Mississippi, and North Carolina). Some prepayments involve a different filing schedule than regular returns, sometimes more than once a month. Be sure to track these schedules and mark your calendar appropriately!
The best way to avoid these common filing and remittance errors is to automate with a filing and returns management tool such as Avalara Returns.