Avalara’s Guide to Avoiding Five Common Sales Tax Registration Mistakes
Meet the Authors
⇨ Many companies, especially small businesses, fill out their sales tax registrations incorrectly.
⇨ Organizations should know the thresholds for filing tax registrations in each state in which they do business.
⇨ Companies should ensure they are up to date on their NAICS information and apply for all possible programs to lessen their tax burden.
Managing taxation can be one of the most significant challenges organizations regularly face. Constantly shifting sales tax laws combined with budget constraints for tax teams can make it difficult to know exactly what a company owes. This can open them up to the threat of damaging audits.
Sales and use tax compliance ranked as one of the top regulatory updates that affect the workload of tax teams, according to the SAPinsider 2023 Global Tax Management research report. The report found that 44% of respondents were focused on sales and use tax updates, ranking as the second-highest percentage among all updates.
This can be especially challenging for small businesses, who may not have a sales tax expert on their staffs. Small businesses may not know where they must register to pay sales taxes, yet getting this registration process wrong can prove to be costly.
To help small businesses ensure they are registered properly, the tax experts at Avalara put together a list of five common sales tax registration mistakes that are all too common for small businesses. They also provided helpful tips on how to avoid these pitfalls.
Failing to Register in the Right States
If a company does not register to do business in the states where it operates, it is subject to fines, audits, and other penalties. The key to determining where a company has to pay taxes is to know where it has a nexus. Avalara defines a nexus as “a connection between your business and a taxing authority — a state or locality — that obligates you to collect sales taxes there.”
Enterprises can have a physical nexus based on their location or where they own property. They can also have an economic nexus based on how much business they do in a state. Each state has a different threshold, so companies should be aware of each state’s limit.
Registering in the Wrong States
Some companies register for sales tax in a given state despite not meeting the economic nexus threshold because they are unaware of what that threshold is. This is costly for several reasons – organizations have to pay registration fees, then file in each reporting period, adding to the time burden of filing.
Missing the Streamlined Sales Tax program
The Streamlined Sales Tax program is an effort from 24 states to reduce the tax compliance burden on businesses. Companies may not be aware of the program, but likely qualify in at least one of the states if they do business across the country. You can find a list of the participating states on Avalara’s website here.
Using the Wrong NAICS Code
Companies must classify themselves by industry according to the North American Industry Classification System. These codes are often shifted, split, and updated. Organizations should make sure that they still apply to the same code year over year, and that their code applies to their principal business activity.
Failing to Properly Deregister
As businesses grow and change, they may change where they do business or what category they fall into. As part of this process, they may no longer have a tax obligation in a state where they once did. Businesses must formally deregister in this case, ensuring that they file all proper paperwork with the state in question. Sometimes, businesses may have a “trailing” nexus in a state where they no longer do business. Companies should deregister as soon as they can and ensure they comply with trailing nexus regulations.
The Role of Automation
Keeping up with all of these regulations can be time-consuming and introduces the possibility of human error. Changes can be missed or paperwork can be filed incorrectly. This can be especially difficult for small business owners, who likely already have plenty of other mission-critical tasks to complete. To help fill in the gaps, Avalara offers Avalara Returns for Small Business. The solution offers sales tax automation that integrates into other ecommerce or accounting systems.