The pandemic has prompted many companies to transition to a remote workforce or develop new sales channels, business partners, or suppliers and distributors, all of which can affect sales tax compliance.
One thing a CPA can do is help set your small business clients up for success in 2022 with this end-of-year checklist.
1. Do clients have new sales tax collection obligations?
If your business clients have customers outside of their home state, they could have an obligation to register for sales tax in the states where they reside. The end of the year is a perfect time to check where they have nexus, which is a connection to a state that allows the state to tax a business.
Have your clients developed a physical presence in new states? Nexus can be established several ways, including having a physical presence in a state. In addition to a brick-and-mortar presence like an office, store, or warehouse, physical presence can be established through employees working remotely in a state, or by housing inventory in a state.
Many companies expanded their remote workforce in 2020 and 2021 in response to the pandemic and state stay-at-home orders. Understanding this, several states decided not to count employees working from home in a state solely because of COVID-19 as a nexus trigger.
Some states have let those temporary policies expire while others have amended their policies to reflect a world with COVID-19. If you have employees or use contractors based in other states, be sure to check whether their presence has given a company sales tax nexus.
Having inventory in another state can also establish nexus for an out-of-state company, even if the inventory is held in a facility owned or operated by a marketplace facilitator. California and Washington are two states holding marketplace sellers liable for sales tax based on their marketplace inventory. Although marketplaces facilitators are generally responsible for collecting and remitting sales tax on behalf of their third-party sellers, marketplace sellers may still have an obligation to register and file returns, as well as collect and remit tax on any direct sales in the state.
Furthermore, the supply chain difficulties of the past year have compelled many companies to find new suppliers and distributors or build up inventory stocks. New relationships or storing inventory in different locations can lead to new tax obligations so should be reviewed.
Have sales given your client economic nexus with new states? In states where you have no physical presence, nexus can be established through economic activity. Calculating sales into each state on a regular basis is therefore critical.
Today, your and/or transactions may give your client economic nexus in 44 states, the District of Columbia, Puerto Rico, and some parts of Alaska. In fact, Missouri is the only state with a general sales tax that doesn’t currently enforce economic nexus — and it will do so starting January 1, 2023.
While a simple enough concept, economic nexus can be tricky because all states provide an exception for businesses whose sales remain beneath a certain amount, and each state’s economic nexus threshold is unique. Some thresholds are based on sales only, others on sales or transactions, and two (Connecticut and New York) are based on sales and transactions.
For example, you need to have more than $100,000 in sales or 200 transactions to trigger economic nexus with Washington, D.C., but more than $500,000 to establish economic nexus with California. The specifics of each state’s economic nexus policies can be found in this state-by-state guide to economic nexus laws.
The sales included in each state’s threshold also vary. Florida includes only taxable retail sales of tangible personal property delivered physically into the state, so exempt sales are not counted.
By contrast, Pennsylvania’s threshold is based on gross sales of products and services in the commonwealth — including sales by agents, representatives, and subsidiaries — so exempt sales must be counted. Thus, it’s possible for businesses dealing primarily or uniquely in exempt transactions to establish an obligation to register and file returns.
Some states require businesses to register and start collecting sales tax as soon as they cross the economic nexus threshold (i.e., by the very next sale), so it’s best practice to review sales activity regularly. Still, the end of the year is a good time for a sales-activity audit. You may even discover your client’s sales in a state have dropped below an economic nexus threshold.
2. Check for upcoming changes to sales tax rates, rules, and regulations
Once you’ve established where you have nexus, it’s important to ensure you’re complying with all sales and use tax laws in those states. These are subject to change so should be periodically reviewed and evaluated.
State and local sales and use tax rate changes typically occur at the start of the month or the quarter. Effective January 1, 2022, for example, there will be a bevy of new rates in Illinois and Washington, while Nevada City, California, is getting a new reporting code.
Tax rates for specific products are also subject to change. A temporary sales tax exemption for feminine hygiene products in California is set to expire January 1, 2022, while these products will become exempt from Michigan sales and use tax starting February 3, 2022. Maryland is expected to enforce its new tax on digital advertising services on January 1, 2022.
The list goes on. Sales tax rates, rules, and regulations can change at any time throughout the year, often with little notice. Nonetheless, the end of the year is a good time to see what changes are coming down the pike.
3. Check for expiring exemption certificates, licenses, and permits
Ensuring all necessary certificates, licenses, and permits are up to date is another essential end-of-year task. Although some may be good for the duration of your business (assuming your business doesn’t change), some expire and must be regularly renewed. As per usual, policies vary by state and locality.
Renew sales tax permits and liceses. Alabama requires sales tax licenses, sellers use tax licenses, simplified sellers use tax licenses, and several other tax account licenses to be renewed annually.
Companies must verify and update business information on an annual basis in November or December, after which the Alabama Department of Revenue will issue a new tax license. The deadline to renew state and county business privilege licenses in Alabama is earlier — generally October 31 of each year.
All licensed businesses must renew their Arizona transaction privilege tax (TPT) license annually. Licenses are good from January 1 through December 31 of each year, and businesses that fail to renew a TPT license by January 1 may be penalized.
Colorado sales tax licenses are good for up to two years, but all work on the same two-year schedule. As a result, all active Colorado sales tax licenses will expire December 31, 2021, and must be renewed before January 1, 2022 — even a license obtained in October 2021.
Connecticut also operates on a two-year cycle, yet unlike Colorado where taxpayers must actively renew their Colorado sales tax licenses, Connecticut sales and use tax permits are automatically renewed and mailed to each business at no cost, “as long as your account is active and is in good standing.”
The Connecticut Department of Revenue Services (DRS) won’t renew permits for businesses with outstanding tax liability. Furthermore, DRS fines businesses that don’t obtain or renew a seller’s permit as required, and the fines can add up: $250 the first day, and $100 for all subsequent days a person engages in business without a seller’s permit.
The Indiana Registered Retail Merchant Certificate (RRMC) is also valid for two years and automatically updated for businesses in good standing. An RRMC will expire for businesses with outstanding tax liability or missing returns. Vendor licenses in Indiana are handled by the county clerk’s office.
Your clients may need a separate state license for each business location in the state, or one state license and separate local licenses; there are often local permit and licensing requirements on top of state permits and licenses. Requirements vary by state and locality and should be reviewed annually.
Renew resale and exemption certificates. Like business licenses and sales tax permits, exemption and resale certificates may expire. For example, Maryland exemption certificates for retail sales are typically good for five years, and businesses must apply to renew them. On the other hand, exemption certificates issued to government agencies don’t expire in Maryland.
Arizona resale certificates are generally good for one year, though a certificate will be considered to be accepted in good faith for up to 48 months “if the vendor has documentation the TPT license is valid for each calendar year covered in the certificate.”
Connecticut resale certificates are generally good for two years, though manufacturing exemption certificates in the Nutmeg State usually last for three years. Similarly, resale certificates in Florida typically expire annually, while exemption certificates generally expire after five years.
If your client accepts exemption or resale certificates from their customers, it’s important to have a system in place to validate and renew them as necessary. Automating compliance document management can help.
These are just some of the tasks that should be on any company’s end-of-year checklist, especially small companies that may not yet have established systems for year-end reviews. Any business hoping to expand internationally should also consider global tax issues, of which there are many.
For example, the European Union’s Import One-Stop Shop (IOSS) can benefit U.S. businesses by expediting customs clearance, streamlining logistics, and more. Yet to take advantage of IOSS, a seller may need to work with an EU IOSS intermediary and must collect value-added tax (VAT) at checkout.
Small businesses interested in selling into the EU should understand what IOSS entails before deciding whether to take advantage of what it offers. No longer part of the EU, the United Kingdom has imposed new VAT collection requirements on U.S. companies, too.
A lot of us are looking forward to closing the books for 2021. As you do, set time aside to run through the above steps and consider how your tax compliance obligations could change in 2022.