Penalties for non-compliance
States have the right to legally demand all historic taxes you should have paid to them, and they can add ruinous penalties on top of that.
Each US state has the right to impose its own penalties. In most cases, this will be levied as a percentage of the tax you owe, with interest applied as well.
For example, New York will penalise you 10% of the tax due for the first month plus 1% for each additional month or part of a month. California will also whack you with 10% of the tax payable, but they also reserve the right to charge a “Collection Cost Recovery Fee”, which is at their discretion.
In addition to the financial penalties that can be payable, there are other ways non-compliance can impact your business negatively, including:
- Your website could be shut down by the state
- You will fail a due diligence analysis if you ever sell or list your business
- It will create irreparable reputational damage
- Your product could be banned in the USA
3 steps to sales tax compliance
- Register for a sales tax permit
If consumers in different US states buy your products online – whether it’s a physical good or something digital – you’ll probably have sales tax exposure in some of those states, depending on your business model and how much you sell.
Once you have analysed your Nexus obligations, you will identify the states where you have physical nexus or have crossed the economic nexus thresholds. You will then need to apply with the relevant state for a sales tax permit. Each state has their own registration process, but it will generally involve completing a detailed registration form and providing supporting documentation about your business, supply chain, and products.
- Set up sales tax collection on your shopping cart and start collecting
Once you are registered for sales tax in a state, you will have to start charging sales tax on eligible sales made to that state. Depending on your website setup and which eCommerce platform or payment solution you use, you will need to configure your site to charge an accurate tax rate at checkout.
For all sales delivered to a customer in a state where you are registered, you will need to add the relevant sales tax (which will be reported and paid over to the tax office when you file your returns)
- Report and file sales taxes collected
States will require you to file a monthly or quarterly return, where you report all the sales you made to their state. The tax returns are filed electronically using the relevant state tax office’s filing portal. They will calculate how much tax you owe, and this will need to be remitted before the specified deadline.