You’ve determined nexus to exist for your business and understand that your products or services are taxable, but you’ve yet to comply to sales & use tax rules. What’s next?
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 exposure:
The data will assist in determining a mitigation strategy; and
If you are publicly traded, you are required to disclose the 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 calculator tool, but to get the most accurate data it is best to talk to a sales tax expert.
While sales & use tax may not be top of mind during this time of uncertainty with Covid-19, it may be a good time to go ahead and look at your exposure. Many state and local governments are being very lenient with penalties and even pushing back many due dates, but that doesn’t mean they won’t come knocking at your door when things clear up. By going ahead and estimating your 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 of your plate.