How to Correct Previous Non-Compliance with Sales & Use Tax

It’s the end of the year and as we all start to think about our New Year’s resolutions, it’s also a good time to start thinking about correcting any sales tax missteps your business may be facing.

Maybe you’ve just figured out that you have nexus and were non-compliant without realizing it, or maybe you’ve been rolling the dice and crossing your fingers you won’t get audited but your liability is growing and you’re ready to make a change – no matter your situation, if you have established nexus, are selling a taxable product or service into multiple states and aren’t complying with sales and use tax laws - you have the potential to owe quite a bit in penalties and interest if caught.

But, what’s the best solution to correct your previous missteps?

For businesses that find themselves out of compliance and have historical tax exposure one of your options for mitigation may be entering into a voluntary disclosure agreement (VDA) in certain states. VDAs provide companies the opportunity to come forward, in most situations anonymously, via a third-party. They report taxes owed in exchange for a waiver of penalty and a limited look-back period. This limited look-back period can be very advantageous if the company owes taxes for five, six, seven years or more, as the VDA will generally allow the company to pay either three or four years of tax due. Taxes older than the look-back period are forgiven.

The first step in the VDA process is to submit either an online or paper application. The states’ response to the VDA application will vary. In some states the taxpayer will receive a formal agreement to be executed and returned along with a registration form for a sales and use tax account, the disclosure calculation representing the tax due (or the returns depending on the state), and a check for the total tax due, plus interest. In a few states, tax payers must also complete a nexus questionnaire, which the state uses to formally qualify the taxpayer for the VDA program.

Other potential options for mitigation include:

• Refund tax to your customers - This option should only be considered when a business has concluded that sales tax nexus does not exist. Collecting sales and transactions tax and not remitting to the jurisdiction can be considered a criminal offense and could subject the officers of a corporation to criminal prosecution.
• Prospective registration and compliance - Depending on the materiality of the tax exposure, prospective registration and compliance may be the most logical business decision.
• Remit taxes collected or tax liability accrued on a current or prospective return - The business will remain at risk for penalties and interest under audit.
• Amnesty – On occasion a state will offer an amnesty program. These programs are similar to a VDA except that there usually isn’t a look-back period. Another primary difference between amnesty and a VDA is that registered taxpayers can participate in amnesty. The purpose of amnesty is to generate revenue for the state while also accelerating collections of outstanding liabilities already assessed against taxpayers. Amnesty programs have a short life span – sometimes 3 months.

Any business selling into multiple states can run a huge risk related to non-compliance. Let TaxConnex help you comply and stay on top of this ever-changing tax environment for you. If you believe you have sales tax exposure, contact us to learn how we can help.

If you’re looking for more tips as we close out the year, listen to our webinar from November on creating your End of Year Sales Tax Checklist.