A Step-by-Step Guide to Getting Your Sales Tax Permit

Did you know that 45 out of 50 states—and the District of Columbia—have a state-level sales tax? Whether you’re starting a new business or expanding into new territories, navigating the ins and outs of sales tax permits can be a daunting but crucial step in your business operations.

This comprehensive guide from The Sales Tax People will walk you through the process of obtaining a sales tax permit, from understanding your obligations to completing the registration process and maintaining compliance. We’ll explore the terms you should know, the key steps involved, and best practices for managing your sales tax responsibilities effectively.

Understanding Sales Tax Permits and Obligations

What Is a Sales Tax Permit?

A sales tax permit authorizes businesses to collect sales tax from customers and remit it to the appropriate tax authorities. Also known as a retail license, a sales tax license, a seller’s permit, or a vendor’s license, a sales tax permit is required in most states where a business has established nexus.

What Is Nexus?

Nexus is what authorizes states or jurisdictions to require a business to collect and remit sales tax on its sales and services. Each state has its own criteria for what establishes nexus in the following two categories:

• Physical nexus is established when a business has a physical presence in a state, such as an office, employees, or inventory.
• Economic nexus is established when a business reaches economic thresholds outlined by a state, usually based on qualifiers such as sales volume or number of transactions.

Sales Tax Permits for Multiple States

As your business expands, you are responsible for monitoring your sales activity and evaluating your nexus status. Because nexus thresholds vary by state, it’s important to register for the applicable sales tax permits as soon as you meet each state’s individual threshold.

Why Do You Need a Sales Tax Permit?

If your business has established either physical or economic nexus in a state with sales tax, you are legally obligated to collect and remit sales tax on taxable transactions in that state. Operating without a permit when required can lead to severe consequences, including the following:

• Liability for all unpaid sales tax, including any accrued interest.
• Fines ranging from $1,000 to $5,000 or more, depending on the severity of the violation.
• Additional penalties, which can total around 30 percent of the amount of sales tax due.
• State-based penalties, such as California’s 50 percent penalty for knowingly failing to obtain a valid sales tax permit.
• Criminal penalties in cases of intentional evasion or fraud, which may include the following:
  • Misdemeanor charges resulting in fines and imprisonment for up to one year.
  • Felony charges with fines up to $20,000 and imprisonment for up to three years for more severe cases.

Sales Tax Permit Registration Process

Now that you know the basics of what a sales tax permit is, as well as the when, where, and why you need one, let’s walk through the registration process step by step.

Step 1: Determine Your Sales Tax Obligation

Before you get started, have a clear understanding of what state or states you already have nexus in. Remember that nexus can be physical or economic—and what qualifies as nexus in one state may not qualify in another.

Step 2: Gather Required Documentation

While each state’s requirements may vary, it’s best to have the following documents readily available for any sales tax permit application:

• Federal Employer Identification Number (EIN): Used to provide standardized access to basic information about your business, including tax status, legitimacy, structure, and ownership details, ensuring that your business is properly registered at both federal and state levels.
• Business Name and Address: Used to help tax authorities establish whether your business has a physical nexus in the state, as well as send important tax-related communications, verify compliance, and determine local tax rates and overall tax liability.
• Business Entity Type: Used to properly categorize your business based on varying tax obligations and reporting requirements—as well as the legal structure of your business—and, in some cases, determine how often your business must file sales tax returns.
• Business Owner Information: Used to verify the legitimacy of the application and link the business owner to the tax account, making them personally responsible for collecting and remitting sales tax. Some states may also use personal information to conduct background checks to prevent fraudulent applications or verify the applicant’s tax history.
• North American Industry Classification System (NAICS) Code: Used to accurately classify and regulate industry-specific sales tax rules and regulations, potential exemptions or special considerations based on your industry, and categorization for statistical analysis and reporting of economic data.
• Estimated Annual Sales in the State: Used to determine if your business meets the economic nexus thresholds, assess potential tax revenue, determine the frequency of filings and payments, allocate resources based on the expected volume of sales, and verify accurate reporting and remitting of sales tax over time.
• Bank Account Information: Used to facilitate and streamline the process of automatic tax payments and refunds between the business and the state tax authority. While many states require this information, specific requirements can vary, so it’s always best to check with a particular state’s tax authority for exact requirements.

Step 3: Submit Your Application

Online submissions are generally recommended for faster processing, though some states do still provide a physical option. To register online, follow these steps:

1. Visit the Department of Revenue website for the states you are registering in.
2. Navigate to the “Sales and Use Tax” section.
3. Click on the link to register a business and follow the prompts to complete the application.
   • Many states offer free registration, but there may be a small application fee.
   • While online registrations may provide instant approval in some states, typical processing times range from two to four weeks, with physical applications generally taking longer.
   • Once approved, you’ll receive a copy of your sales tax permit.

By following these steps and being prepared with the necessary information, you can streamline the process of obtaining your sales tax permit.

Maintaining Your Sales Tax Permit

Now that you’ve obtained your sales tax permit, you’ve taken a pivotal step that sets the foundation for your business’s tax compliance. Let’s explore what’s next, best practices for ongoing compliance, and when and how to cancel your sales tax permit should you ever need to.

What to Do After Obtaining Your Sales Tax Permit

1. Understand Your Filing Frequency

Typically determined by your sales volume, your filing frequency may be monthly, quarterly, or annually, so make sure that you’re clear on individual state requirements.

2. Set Up a Record-Keeping System

Implement a system to track all sales, exemptions, and tax collected. This could be through accounting software or a dedicated sales tax management solution.

3. Display Your Permit Properly

Most states require businesses to display their sales tax permit, so ensure that yours is visible to customers and auditors alike.

4. Train Your Staff on Compliance

Make sure that your team is properly educated on the importance of sales tax compliance, including any and all applicable collection and documentation procedures.

Ongoing Sales Tax Permit Maintenance

Business Updates

Promptly report any changes in your business structure, location, or operations to the relevant tax authorities and register for any new physical or economic nexus.

Renewal Requirements

Some states require periodic renewal of sales tax permits. Mark these dates in your calendar to ensure timely renewal, as missing these deadlines can result in delays or penalties.

Compliance Changes

Stay informed about any changes to tax laws and regulations in the jurisdictions where you’re registered. Regularly review your compliance practices to ensure that they’re up to date.

Canceling Your Sales Tax Permit

If your business situation changes, you may have cause to cancel your sales tax permit. This typically happens when any of the following occurs:

• Your business closes or is sold.
• You stop doing business in the state.
• You no longer have physical nexus in the state.
• Your sales no longer meet the state’s economic nexus threshold.

Sales Tax Permit Cancellation Process

Before canceling your sales tax permit, it’s important to determine if changes to your business situation are permanent, or only temporary. If you cancel your sales tax permit in a state and once again trigger physical or economic nexus, you will be required to repeat the registration process.

Just like the registration process, cancelling your sales tax permit can vary state to state.

• Most states will require you to file a final sales tax return.
• Some states may require additional documentation.
• Some states require cancellation within 15 days of selling or closing your business.

If you are unsure about a state’s individual requirements, you can always contact that state’s Department of Revenue for clarification. It’s also important to note that some states require that you keep your sales tax permit even if you no longer have nexus, so consulting with a sales tax expert can help prepare you for any additional, unforeseen challenges or potential penalties.

Maintaining your sales tax permit requires attention to detail and staying informed about your obligations across different jurisdictions. By following these guidelines, you’ll be well equipped to navigate next steps, ongoing requirements, and any changes you may encounter.

Work with the Sales Tax Permit Experts

A sales tax permit is a key element to running a successful business, and understanding your nexus, your obligations, and how to best apply for and maintain your permit will keep you well positioned whether you’re expanding into new markets or optimizing your current operations.With so many variables, the sales tax permit process can be overwhelming. If those complexities are holding you back, The Sales Tax People can help. Schedule a call with a sales tax expert today to discuss your unique business needs and let us help keep your business moving forward!