Costs of non-compliance (part 1)

What a major issue for your remote business these days... Constantly changing regulations. Tens of thousands of tax jurisdictions coast to coast, from the biggest states to the tiniest municipalities and everywhere in between. All wanting you to calculate, collect and remit the precise amount of sales tax if you have nexus there.

Can all those tax authorities really all keep up with your obligations? Should take a chance that a jurisdiction will never catch you? What happens if they do?

What to expect

First is the new cost of complying.

The U.S. Government Accountability Office (GAO) reports that one business with some $40 million in gross receipts incurred a cost of almost $250,000 beyond taxes owed due to an error in software code. The business reportedly identified the error that resulted in a sales tax underpayment to multiple states over roughly a year. One employee had to spend an estimated 80 hours to find the error and prepare documentation.

Another business told the GAO that it incurred $1,500 in monthly compliance costs to remit less than $500 in sales taxes; still another spent $2.25 in compliance costs per $1 of sales taxes collected across 33 states over a 39-month period.

“As long as theWayfair ruling stands, the Congress ought to step in and give small businesses some relief,” said Sen. Ron Wyden (D-OR), chair of the Committee on Finance that last year examined the impact of

Maybe someday. In the meantime, what happens if you do get caught in non-compliance?

Punishments can range from assessments, penalties and liens to use of collection agencies or referrals for criminal action.

Let’s say you are selling a product and/or service in a jurisdiction that you have nexus in but are not taxing your customers. In the first year your company’s sales total $10 million and grows 20% annually over the next three years (totaling $36.4 million in sales). With an average sales tax rate of 8%, that’s more than $2.9 million of tax you should have collected.

Add to that an additional penalty and interest assessment and your total exposure is more than $3.8 million.

There’s no statute of limitations for unfiled returns, by the way.

And a word about interest:recently reported. In the Northeast, for example, interest rate changes for 2023 include New York jumping from 8% to 11% and Pennsylvania from 3% to 7%. States like Wisconsin are already well above that.

“As interest rates increase, the cost of non-compliance rises. It is important for every business to be aware of the impact of interest rate increases on the total liability,” the Institute reported. “Although states typically don’t compound interest in their calculations, the rates add up when the look-back period is 36 months or more."

Next time, we’ll look at what companies have done to take care of their sales tax obligations and what you can do to prepare to meet those obligations before they become a problem.

Check out part 2!

Let TaxConnex help you comply and stay on top of this ever-changing tax environment. Contact us to learn about the latest developments in sales-tax nexus and what they mean to you and your company.