Compliance may seem like an essential business task, but it can be highly time-consuming and complicated for smaller or newer businesses. With the right help, companies can avoid noncompliance and high penalties for late filings.
Staying compliant, whether sales tax, nexus, or income withholding from employee paychecks, is crucial. Here are eight critical steps to ensuring compliance.
Know Your Nexus
A business taxpayer’s state tax filing obligations depend on whether the business has a nexus in a given state. Historically, a company’s physical presence was enough to trigger tax nexus. Today, mass ecommerce adoption and changes to the law have expanded the concept of what qualifies as nexus.
Nexus can be economical, based on a threshold of sales in a state, or physical, created by assets such as warehouses and retail stores. Companies should consider conducting a nexus study before launching operations in new states. A nexus analysis can also help businesses determine the potential for other taxes, such as B&O or franchise tax, or miscellaneous income tax withholding, including sales and gross receipts taxes.
Once a company knows its nexus status, it can register to collect sales tax in the appropriate jurisdictions. Then, it can accurately calculate sales tax on orders using software that considers item taxability and exemptions. Finally, it can quantify outstanding tax exposure by jurisdiction and product and record the amount as an accrued liability in its financial reports.
Know Your Tax Obligations
Businesses have several different tax compliance obligations. They may have to file information returns, report sales tax collected on behalf of the government, or remit withholding taxes from employee paychecks. They must also keep detailed records of purchases, ensure they bear a reasonable relationship to the business’s sales, and use tax liability.
Understanding state tax compliance is crucial for businesses to avoid penalties and ensure adherence to legal requirements. Tools and services like ADP can significantly streamline and simplify this complex process.
Keeping up with regulatory changes is another aspect of compliance that can be difficult. The best way to do this is to attend industry conferences and subscribe to relevant newsletters and LinkedIn posts. This will help you stay current on the latest developments in your area of focus.
As a business grows, so do its tax compliance obligations. For example, if the company expands to new states, it must register with those governments to collect and remit sales taxes. It may also need to track its nexus status, often determined by factors like physical presence, economic nexus, and transaction thresholds. This can dramatically increase the scope of a business’s sales tax compliance obligations.
Know the Rules and Regulations
While many conversations regarding taxes center on the national federal tax system, individuals and businesses must also be concerned about state-level regulations. Understanding your state’s rules and consulting with an attorney familiar with them is crucial to avoiding severe legal problems and financial liability.
State laws often differ from federal ones in many ways, including definitions of taxable income and deductions. In addition, state sales and use, employment, and withholding taxes differ. Some states even have their versions of federal itemized deductions. Tax forms vary, too, from the two-page Form 1040EZ used by most individual taxpayers to thousands of pages for corporations.
Some states tax only residents’ wages, while others impose tax on income from nonresidents or companies organized outside the state. Moreover, some state constitutions limit the state government’s ability to levy taxes.
Get a Sales Tax Permit
Sales tax is one of the more complex compliance issues for businesses because of the multitude of rates and taxability rules across jurisdictions. To be compliant, a company must register for a permit in each state where it is collecting sales tax. This is typically called a seller’s permit or sales tax license.
In most states, the permit registration process is online and requires a business to provide basic information like location, industry, and owners. Some states also require verification of the FEIN, taxpayer number, or North American Industrial Classification System (NAICS) code. It is essential to complete the application to avoid delays entirely.
Businesses must get a sales tax permit in any state where they meet the nexus threshold, whether economic, physical presence or affiliate nexus. However, getting a permit is just the beginning of the journey to sales tax compliance. Businesses must then collect and remit the correct sales tax amount and keep up with filing obligations and deadlines. This is a complicated task for any company, but it can be made easier with the help of software and databases.
Understand the Penalties for Mistakes and Delays
Tax regulatory compliance requires that businesses keep up with state and federal laws and any changes to those laws. If a company isn’t up to speed, it can quickly find itself non-compliant, leading to fines and penalties.
In addition, tax law requires that businesses file various forms and schedules to comply with regulations – including payroll filings, sales taxes, tax-withholding obligations, depreciation and amortization schedules, and more. A complicated system can mean businesses spend 6.5 billion hours annually trying to keep up with tax filings and deadlines.
Many states impose additional requirements that impact a company’s ability to meet compliance obligations, including successor liability rules for closing or selling a business. These rules may require the new buyer to withhold sufficient funds from each sale to cover a seller’s unpaid taxes. Failure to do so can result in significant penalties for the purchaser and the seller. To avoid such risks, companies should consider partnering with a trusted tax service provider to handle all their state and local compliance needs.