The first step in sales and use tax compliance is registering to collect and remit tax in the state or states in which your business has a significant presence or connection (nexus). You start to fill out the necessary forms and come upon a head scratcher: the NAICS code that best represents your primary business activity.
If you’ve never heard of a NAICS code before filling out a sales tax registration form, you’re not alone. The six-digit codes are a system of classification. Remember the Dewey Decimal system at your local public library? NAICS codes are similar, except that instead of classifying books by topic, NAICS classifies businesses by industry.
The North American Industry C
lassification System (NAICS) was created in 1997 as part of a joint effort by the governments of the United States, Mexico and Canada. The six-digit codes replaced an older categorization system (four-digit SIC codes) and are updated every five years to reflect new and changing industries. The most recent NAICS revisions took place in 2012; another set of revisions is expected in 2017.
State departments of revenue use NAICS codes primarily for two purposes: compiling statistical data about taxation in different industries, and making sure your business receives any relevant information about new laws, exemptions, or regulations that could affect you. It’s important to identify the right code so that the information you receive is relevant and targeted to your business.
Your NAICS code is easy to find and can be obtained with no additional registration or paperwork from your business. Just visit the NAICS page on the census.gov website, then type in a keyword that describes your business. For instance, let’s say you’re an ecommerce seller, so you use “internet” as your keyword. The site returns 171 results. You’ll see that depending on what kind of internet sales you’re doing, you may have two different codes: 454111 for internet retail sales, and 454112 for auction websites.
Most businesses are able to determine their NAICS code through keyword searches. If the keywords you’re trying aren’t working, you may be able to get your NAICS code from a state taxing authority.
For instance, the state of New York offers an online tool to make NAICS code determination easy. If you are registering to pay sales tax in New York, all you need to do is answer a few step-by-step questions to receive an answer you can use on your registration form.
In some cases, your business may involve more than one business activity. Some states allow you to record a NAICS code for a secondary business activity as well as a primary one. Follow the same steps above to keyword search for the NAICS code for any secondary business activities.
Now that you’ve got your industry code down, put yourself in another tax category: companies who choose Avalara to automate sales and use tax in their ERP, ecommerce or accounting systems. The fastest, easiest and most accurate way to be tax compliant, AvaTax is in a class by itself.
For more practical tips on the topic, read 6 Common Sales Tax Registration and Filing Errors.