Most business owners have a general idea of how sales tax works. If you sell something to someone where your business and it’s something that sales tax would be applicable on, than you probably should collect and pay sales tax. But not everybody does those basic things. If you don’t pay sales tax, the state will come after you and they don’t play nice. In fact, a sales tax audit is much worse than an IRS audit.
That first step is to determine where you have nexus. Nexus means connection. If you have sales tax nexus with a state, you’ll need to collect and pay sales tax on sales you make to people in that state. That’s true even if you have a mail order or online business. If the product ends up in that state, and you have nexus, the state can claim you need to pay sales tax.
Step #1: What states do you have nexus with?
Now, this is where it gets complicated. Each state gets to determine what constitutes nexus. You may never have an office or an employee in a state and still have nexus. The state gets to choose what makes nexus. There are two types of nexus: income tax nexus and state tax nexus. You may have one and not the other. There are two tests to determine which states you have which kind of nexus.
If you’re concerned that you might have income tax or sales tax nexus, please Contact Us.
And if you don’t play by their rules, they can bring a judgment against you. Your state may be one of the many that are already in reciprocity agreements with other states. That means you don’t get a day in court. The other state can just sweep your business accounts. If you’re in a state like Nevada that doesn’t have reciprocity, the other state has to file a claim in your home state. But if they can prove you should have paid sales tax, according to their rules, there isn’t much you can do, but pay.
The other problem is that the definition of what’s taxable varies from state to state. Just because something isn’t taxable in your state, it may be taxable in another state.
Step #2: Once you know where you have sales tax nexus, determine what is subject to sales tax in that state.
For example, one of the hot topics these days is digital downloads. If you have an audio program or PDF you sell, that is a digital download. If you have a live coaching program that you record and make available to your clients, you have a digital download. And in these states it is subject to sales tax: Alabama, Arizona, Colorado, Idaho, Kentucky, Indiana, Louisiana, Maine, Nebraska, New Jersey, New Mexico, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia and Wisconsin.
Step #3: Set up sales tax collection in the states for which it is due. Collect and remit.
What if you’ve missed out on collecting sales tax and you realize it now? You need a Nexus Negotiator. We can help with that too. Please gContact Us. to find out how we can help you.