Sales and Use Tax FAQs - Risk and Liability

When it comes to managing sales tax compliance, for most businesses there are really three ways you can do it.

1. Attempt to manage everything in-house
2. Outsource sales tax compliance
3. Do nothing and roll the dice.

So what happens if you attempt to manage the process in-house but lack the expertise and bandwidth to manage it effectively? Or what if you do nothing and decide to roll the dice? What are the risks associated with non-compliance? We’ve compiled some of the top questions we get from clients on the risk and liability of sales tax non-compliance. What type of business risks are there if my business does not comply with the sales tax laws in other states?

The risks and penalties that your business could be subject to start with an analysis of whether your company has nexus with a particular state.  If nexus does not exist, then the state has no jurisdiction over your business and has no ability to compel you to pay any type of tax.

On the other hand, if your business had/has nexus with the state in question, then that state can use any means at its disposal to enforce the tax liability against you.  This can include assessments against your business, the levy of any property in the destination state, filing collection suits in court, using collection agents to collect the debt, or using the courts in the home state to enforce a valid legal judgment from the courts in the destination state.

If your business is ever contacted by another state, be responsive and pay attention to all the dates and deadlines in the notices.  If your business has nexus in the destination state, that state has the same authority to enforce assessments and judgments against your business as your home state does. 

What can I do if my company should have collected sales tax from customers but did not?

The first step in analyzing this situation is to carefully evaluate whether nexus existed between you and the state where the sale took place. If nexus did exist, carefully examine the transaction to determine if the transaction was subject to sales tax.  If you conclude that nexus exists and that the transaction is taxable, the next step may be to contact major customers to determine if they paid use tax on those transactions.  In most interstate transactions, the purchaser and the retailer have an equal responsibility for the payment of tax on the transaction.

If customers have not accrued the tax, you may consider billing your customer for the tax that was not charged.  This strategy is almost never used for taxes more than a few months delinquent since the loss of a customer of such an issue could be far more damaging to the business than the payment of tax directly by the company.

Under audit, non-registered businesses can be assessed tax for many years for the past due taxes.  A few states limit the look-back to seven years, but other states will go back much further if they suspect fraud or some willful negligence.  In addition to the tax, states will impose interest which averages 12% a year and penalties which can be 25% of the tax due. To avoid such an economic hit, many states allow unregistered taxpayers to come forward under a "voluntary disclosure program" that will limit the look-back period to three or four years and usually has a provision to abate the penalty.  These are best done through an intermediary such as a CPA who can approach the states anonymously.

Is there any risk to the corporate officers for the company's failure to collect and remit the sales tax owed?

Most states have statutes that hold corporate officers or other "responsible parties" personally liable for the sales or use tax that was not collected.  In some cases, states impose severe criminal penalties for officers who collect tax but do not remit the tax collected. 

So, why is sales tax collected considered a liability? The reason being is that this liability attaches to the officer and can be enforced through the lien, levy, and sale of the property to satisfy the debt.

What sales tax risks does my company have if I acquire another company who may not have been in full compliance with their sales tax responsibility?

Under certain situations, an acquiring company can be held responsible for past due taxes. This is commonly referred to as "successor liability".  That is, the acquiring company takes on the same risk and liability that the target company had.  Acquiring the assets of an entity does not prevent this liability from attaching unless specific statutory procedures are followed.  In many states, notices of bulk sales must be filed before a business can be sold.  Further, purchasers may be required to withhold certain amounts of the purchase price until an audit has been done of the target company. 

It should be noted that provisions in purchase contracts that attempt to limit the liability of the purchaser for unpaid tax are ineffective and not binding on the state.  Any time a business is acquired, careful diligence should be conducted to identify and quantify the sales and use tax risks of the company. 

What is a VDA?

A voluntary disclosure agreement (VDA) is a legal means for taxpayers to self-report back taxes owed for income, sales, property, and other taxes.

What are the main benefits of a VDA to my business?

In exchange for voluntarily reporting the tax due, states generally grant a waiver of penalty and a limited look back (generally 3-4 years) potentially reducing the tax due significantly as compared to an audit.  If a business is not registered for sales tax and is audited, the state can assess tax due, penalties and interest from the time from which taxable sales first occurred.  This could be 5 years, 10 years, or more.  Thus the benefit of the limited look back period of 3-4 years allows a business to eliminate the risk associated with the older periods.

*If you had previously collected sales tax but failed to remit, you must pay all that has been collected (even beyond the look back period) but the penalty would still be waived. And in extreme cases, the penalty could be in excess of 50% of the tax amount… and could be considered a criminal offense!

If you have more questions or would just rather pass on the responsibility of sales tax to someone else, reach out. With TaxConnex, sales tax is all on us. Looking for more frequently asked questions? Check out our FAQ page.