After you’ve done all this work, what do you do when you discover you have created nexus? If you have just established nexus, it’s simple: register with the jurisdiction(s) immediately and begin collecting sales tax. But if nexus was created sometime in the past and you haven’t registered, then you have a problem. Fortunately, you also have some options to consider that may decrease the negative impact:
- Voluntary disclosure is a very good proactive option, provided it’s open to you. In states with voluntary disclosure programs, the usual course is to write an anonymous letter to the state, under the aegis of a third party, describing your activities and their duration within the state. An agreement can often then be reached that leads to a limitation in open years and an abatement of penalties. The Multi-State Tax Commission mentioned earlier runs a national program enabling businesses to enter into voluntary disclosure agreements with multiple states. Whether to pursue voluntary disclosures directly with the state versus through the Multistate Tax Commission requires an analysis of the pros and cons of each. An experienced state and local tax consultant can help you determine the right path for your business.
- Amnesty for uncollected or unpaid sales taxes is also available periodically as states implement amnesty programs. For states participating as members of the Streamlined Sales and Use Tax Agreement, amnesty may be available. Other individual states sometimes offer amnesty programs as well.
- Reach out to your customers and determine if they have either paid the use tax directly to the jurisdiction or qualify for an exemption. If they can certify that the tax has been paid or provide you with a valid exemption certificate, these amounts can usually be deducted from your liability for prior periods. However, relying on your customer to pay the tax going forward is not an option. If you have nexus, you have the obligation to collect the tax.
Be careful about when you start collecting
One thing you do not want to do is start collecting sales taxes prior to being registered with a jurisdiction-it’s flat-out illegal and penalties can apply. In fact, in most states, this is considered criminal fraud. However, some states might let you start collecting the tax once you’ve filed for a voluntary disclosure even if your registration process is not yet complete. In these cases, you need to remit what you’ve collected immediately upon the completion of the registration.
Occasionally you may find yourself in the situation that you are registered with a jurisdiction, but there is no nexus. In these cases, you can contact the jurisdiction and cancel the registration. But it is not a slam-dunk. You can expect to be scrutinized, so make sure you’re correct in your evaluation. In these situations, you can elect to continue to collect and remit taxes as a “voluntary filer” if you think there will be some business despite your lack of presence in the jurisdiction. If the state recognizes the voluntary filer status, there may be a reduced administrative burden such as less frequent filing frequency or simplified rates to apply.