Estimating Your Sales Tax Exposure

Is one of your New Year’s resolutions to make sure you’re complying with sales tax in 2024?

If you’ve determined nexus to exist for your business and understand that your products or services are taxable, but you’ve yet to comply with sales & use tax rules. You could be at risk for heavy penalties and fees depending on your sales tax exposure. What is sales tax exposure? How do you estimate your exposure, how do you rectify it and move forward to compliance?  

 
Sales and use taxes collected on behalf of the government are considered government funds upon collection. Failure to remit taxes collected to the appropriate jurisdiction is considered a criminal offense – the parties thereto connected (including corporate officers) or contributing to the offense could face fines in excess of 50% of the tax amount…and prison. 

To start the process of mitigating your non-compliance, it’s best to first determine your full sales tax exposure. The analysis of prior period exposure should encompass all periods where the company had nexus and taxable sales but wasn’t in compliance. 

Generally, if a company is not registered in a state for sales tax purposes, there is no statute of limitations. This means states have the authority to assess the sales or use tax as far back in time as it was applicable. However, in most states, the administrative policy is to “look-back” only 7 years in determining prior period liability for an unregistered business. 

There are two primary reasons to estimate the prior period sales tax exposure: 

1. The data will assist in determining a mitigation strategy; and  
2. If you are publicly traded, you are required to disclose the sales tax exposure on the financial statements if it meets the reportable criteria/thresholds. 

Precise quantification of prior period liabilities can involve contacting customers in order to determine whether exemptions apply or whether the customer has already paid the tax directly to the state. There’s potential for this to be quite the difficult process, but by first identifying your prior period liabilities you are able to better set a plan on how to mitigate and correct them going forward. 

To gain an estimate of your liability/risk, you can use our  free business sales tax calculator  tool, but to get the most accurate data it is best to talk to a sales tax expert. 

By going ahead and estimating your sales tax exposure and starting the process to mitigate your previous non-compliance, you could right yourself before an audit occurs.  Contact TaxConnex to help mitigate your sales tax burdens and start a compliance process that takes it all off your plate. You can also download the eBook below to understand what your options are for mitigation in moving towards compliance.  

https://www.taxconnex.com/ebook-sales-tax-risk-mitigation-your-need-to-know-guide