Costs of non-compliance (part 2)

In part 1, we looked at the mounting financial costs of maintaining sales tax compliance with the thousands of tax jurisdictions nationwide. Now let’s look at how some companies have tried to game the system – and what to do so you don’t have to run that risk.

Rolling the dice

What have companies done to avoid complying with sales tax regs where they have economic or physical nexus?

“Some businesses took an incremental, risk-based approach when selecting which jurisdictions to register with first due to the cost of registering simultaneously in all new jurisdictions where they had nexus,” reads the U.S. Government Accountability Office’s “Remote Sales Tax: Federal Legislation Could Resolve Some Uncertainties and Improve Overall System,” issued late last year.

“One business based in a state without a statewide sales tax told us that it registered first in half of the jurisdictions where it had nexus and paid out-of-pocket for the taxes owed, including penalties and interest for past tax liability; two of those jurisdictions waived the penalties and interest and allowed the business to collect going forward,” the report reads.

“The business told us it then registered a year later with the remaining jurisdictions once it had the time and resources to do so, but at a considerable liability risk given it had already established nexus in those jurisdictions.”

Not all businesses are so lucky, said the GAO.

Some limited the states into which they sell or the amount of sales into some states to avoid some sales tax requirements. Some changed the types of products they sell to make it less complex to comply with remote sales tax requirements; choose to only sell via marketplaces and not in other channels – and some went out of business because in part to remote sales tax compliance.

Speaking of the business cost beyond the taxman, non-compliance can compromise your company’s financial statement – and potentially doom future M&As and capital venture arrangements.

One way that jurisdictions can discover your company’s nexus is through audit – and not just an audit of you. A customer undergoing their own audit might reveal one of your invoices, with the auditor possibly contacting you for a certificate of exemption or other documents. An audit of one of your suppliers could also turn up one of your exemption certificates for something the auditor may think is taxable.

Waiting until the state catches you can usually close the door to mitigation tools for past non-compliance, such as the voluntary disclosure agreement (VDA).

How to prepare

• Yes, there are many many jurisdictions and yes, some of their sales tax rules are unclear and ever-changing. But still, evaluate when you've reached nexus thresholds to ensure compliance. Account for both economic nexus thresholds and physical presence standards. 
• Do not collect sales tax and fail to remit it. That’s fraud.
• Don’t think this problem will evaporate. Though some states are easing sales thresholds, do not be one of those companies the GAO surveyed who hope sales tax regulations will just be temporary.
• Do not wait for the jurisdiction to contact you. Reach out to them and see if they’ll offer a VDA, which will sometimes waive interest, penalties or both and limit the lookback period of your non-compliance.

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.