Risks of Non-Compliance

By Robert Dumas on Tue, Dec 07, 2021 @ 11:00 AM

pexels-lilartsy-1111597 (1)

Rolling the dice with sales tax compliance can backfire in a big way. And there are several examples that take this to the extreme. Keep reading to see some recent sales tax missteps that had big costs.

Tax air-or

New York: A Long Island provider of self-service, coin-operated air machines to inflate car tires has been socked with a $4.25 million penalty for failing to pay sales tax on air-inflation services, as well as for tax avoidance schemes by underreporting sales and paying workers off the books.

The case cites Service Station Vending Equipment Inc. and its owner, William McCabe. “While a few quarters may not seem like a lot at once, over nearly a decade, SSVE and its owner pocketed $2.4 million,” said NY Attorney General Letitia James.

In 1997, SSVE requested an advisory opinion from the New York Department of Taxation and Finance on whether sales from its coin-operated air machines were exempt from sales tax. New York responded that receipts from sales of services rendered by air inflation machines are subject to sales tax. Two decades later, SSVE’s new accounting firm discussed several tax and accounting issues with McCabe, including SSVE’s failure to collect the appropriate amount of sales tax.

McCabe still refused to change his ways. In 2016 and 2017, SSVE and McCabe also hired a firm to lobby the state on two pieces of proposed – and ultimately failed – legislation that would have exempted sales tax on sales from coin-operated air machines.

After whistleblowers prompted an investigation, the NY AG found that SSVE and McCabe evaded more than $2.4 million in sales taxes for services for 2010 through 2018. SSVE and McCabe also evaded income taxes, employee withholding taxes and workers’ compensation payments by underreporting sales and paying workers off the books.

SSVE and McCabe admitted their failure to collect and remit the full sales tax.

An inconvenient truth

Montgomery, Alabama: Two convenience store operators have pleaded guilty to failing to pay sales taxes.

Simon Njuku, 45, of Irondale, Alabama, and Mehryar Nasseri, 44, of New Market, Alabama, each admitted to routinely underreporting their stores’ gross sales to reduce their tax bill. Under state law, businesses must report and pay sales taxes to the Alabama Department of Revenue monthly.

Alabama Department of Revenue investigators found that the pair underreported their sales each month for nearly three years, between January 2016 and December 2018. Njuku underpaid his business sales tax by $20,454.58; Nasseri underpaid by $73,499.82.

They each got three years’ probation, followed by two years’ imprisonment, which the courts can suspend upon completion of probation. They also must pony up full restitution as well as interest and penalties: Njuku must pay $13,765.05 in addition to $20,454.58 restitution; Nasseri must pay $48,815.10 in addition to making restitution for $73,499.82. 

Too hot to handle

Athens, Tenn.: Restauranteur Jesus Sanchez has been arrested in connection with allegedly filing false sales tax returns.

Authorities claim that Sanchez, co-owner and manager of the hot wings eatery Mexi-Wing II, attempted to evade or defeat state sales tax due by filing false returns from March 2015 through November 2017.

He was indicted on one felony count of theft of property over $10,000, three felony counts of filing false sales tax returns and one felony count of tax evasion. Bond was set at $35,000.

Smoke and mirrors

Rocky Mount, N.C.:  Twenty-four people have been charged in a cigarette smuggling and money laundering operation that potentially cost millions of dollars in tax revenues.

A grand jury alleges that the 24 individuals listed in the indictment had been engaged in a conspiracy, beginning in May, to drive large quantities of cigarettes to the Northeast and sell them without paying sales tax. 

If convicted, the defendants face years in jail and potentially hundreds of thousands of dollars in fines.

While many of these instances intentionally avoided their sales tax obligations, it is possible to have similarly large fees and issues when you accidentally misunderstand your sales tax obligations and fail to collect and remit. Don’t get caught by a surprise audit or penalty, make sure you understand your sales tax obligations and comply.

If you think your business may be impacted by sales tax and you haven’t quite figured out how to manage your obligations, contact TaxConnex.  Taxconnex provides services to become your outsourced sales tax department. Get in touch to learn more.

Watch our webinar below to learn more about the risks that come with non-compliance.

New call-to-action

Robert Dumas

Written by Robert Dumas

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.