Compliance with sales tax regulations in all US states is complicated enough, but what happens if you discover that you have not been collecting and remitting sales tax in states where you have sold? In this case, a “retroactive” sales tax registration may be necessary.
This article provides an overview of retroactive sales tax registration, the concept of nexus, effective registration dates, reporting historic sales, and the role of Voluntary Disclosure Agreements (VDAs). Additionally, it outlines potential penalties for late sales tax registration, filing, and payment.
Nexus refers to the connection or presence a business has in a specific state, triggering the obligation to collect and remit sales tax. Economic Nexus is established when a business exceeds the sales thresholds set by each state.
Retroactive Sales Tax Registration
When a business realizes it should have collected sales tax retrospectively in a state, it must register for sales tax retroactively. This involves registering as if the business had been collecting sales tax from the effective registration date, which is the historical date when nexus was established. The effective registration date is typically determined by factors such as the date the business started conducting taxable activities in the state or the date it reached the nexus threshold.
Reporting Historic Sales and Paying Sales Tax
Following retroactive registration, the business is obligated to report all historic sales made in the state and pay sales tax on eligible transactions. This requires compiling sales data from the effective registration date to the present and calculating the corresponding sales tax. Accurate reporting and remittance of the owed sales tax are essential for compliance. This process is often referred to as “Back-dated returns.”
Penalties for Late Registration, Filing, and Payment
States have the authority to penalize businesses for late sales tax registration, filing, or payment. Penalties may include monetary fines, interest charges on overdue taxes, and potential legal consequences. These penalties typically include a fixed penalty for late submission (e.g., $50 per filing), penalties for late payment as a percentage of the tax liability (e.g., 10% of the tax owed), and interest on late payments. To avoid penalties and maintain good standing with taxing authorities, businesses must proactively address their sales tax obligations.
Voluntary Disclosure Agreements (VDAs)
In some instances, states offer Voluntary Disclosure Agreements (VDAs) to businesses that have not been collecting sales tax but wish to rectify their compliance. VDAs provide a means for businesses to voluntarily disclose their past sales tax liabilities and reach an agreement with the state to resolve any outstanding issues. Under a VDA, the state may waive certain penalties and limit the look-back period for assessing owed taxes.
Retroactive sales tax registration is a process that businesses may need to undertake upon realizing they should have collected sales tax in specific states. It involves determining the effective registration date, reporting historic sales, and paying sales tax on eligible transactions. VDAs offer a voluntary path for businesses to rectify their compliance, while penalties can be imposed by states for late registration, filing, or payment of sales tax. By understanding and fulfilling their sales tax obligations, businesses can ensure legal compliance and maintain a positive relationship with taxing authorities.